Why 4 per cent annual growth will be great news for China

With faster wage increases resulting from a smaller but more productive workforce, the long-awaited consumption miracle will become a reality

PUBLISHED : Monday, 07 October, 2013, 12:00am
UPDATED : Monday, 07 October, 2013, 2:14pm

The business of forecasting the mainland's economic growth rate is a bit like a game of bingo.

The analysts who have to come up with a forecast have a pretty good idea that the official growth rate of the mainland's gross domestic product this year will be somewhere in the vicinity of 7.5 per cent. It might well be a little more, say, 7.6 or 7.7 per cent. It could even be a little less, perhaps 7.4 per cent.

Depending on their own personal views - and of course on their sophisticated mathematical models - investment bank economists take their best stab at what the actual number will be.

Then the National Bureau of Statistics in Beijing comes out with its official figure. The lucky analysts who guessed right pat themselves on the back.

Those who got it wrong shrug off their failure and sharpen their pencils for the next round of the game.

Of course, with only one quarter of 2013 to go, predicting this year's growth rate is relatively easy. With few pointers to go on, guessing next year's is far trickier. Beyond 2014, few analysts are brave enough even to try, except by getting a ruler and extrapolating recent growth rates into the future.

In some ways, their reluctance to make long-term forecasts is surprising, because many of the forces that will determine the mainland's future growth rates are clearly visible today, locked in and irreversible.

In Tomorrow's World, published earlier this year, demographer Clint Laurent outlines four factors that will drive growth over the next 20 years: the size of the mainland's labour force, workers' skills, rural migration and changes in workers' productivity.

Knowing the age profile of the population, we can be sure how the size of the workforce will develop. Last year, 22 million young adults reached working age. With the recent decline in fertility rates, by 2032 that number will have fallen to just 12 million.

Factor in a decrease in the propensity to work as young adults spend longer in education, and the employed workforce is set to shrink from 760 million last year to 626 million in 2032, a decline of 18 per cent (see the first chart).

The new workers will be better-educated, and so more productive, than the workers of today. But there simply won't be enough of them to sustain rapid growth. Between now and 2032, Laurent estimates that output per worker will climb by almost 50 per cent. To maintain annual growth at 8 per cent, it would have to rise by more than 100 per cent.

Migration from the countryside won't help. An astonishing 75 per cent of country-born 30-year-olds have already moved to the cities. As a result, rural areas have been hollowed out of young adults. Last year, there were just nine million 15-year-olds in the countryside. By 2032, that will have dropped to four million.

Putting those figures - the number of workers and productivity per worker - together, Laurent calculates that over the next 10 years, the mainland's average annual growth rate will slump to 4.1 per cent, dropping further to an average 2.7 per cent in the 10 years after that.

That might sound like bad news, but it's actually rather encouraging.

Although overall growth will slow, the mainland's smaller but more productive workforce will be able to command faster wage increases. As a result, Laurent estimates that real household incomes will grow at 6 per cent a year, which means in real terms they will triple by 2032.

That means the number of urban households making more than US$15,000 a year will shoot up from 78 million now to 198 million in 20 years' time (see the second chart).

What's more, with few dependent children, they will be more inclined to spend lavishly on discretionary goods and services.

So although the mainland's growth miracle may stall, its long-awaited consumption miracle will still materialise. Bingo!