Attention-grabbing headlines about China’s economy usually split into two camps: those declaring imminent collapse or those heralding China’s immunity to danger. For many years analysts in the former camp have declared the end of China’s rise, with repeated predictions of a hard landing that has yet to materialize.
The catalyst of such doom-and-gloom stories changes – stock market volatility, a demographic time-bomb, surprising SOE bankruptcies, hidden debt in state-owned banks – but the sensationalism lingers. Noisy rebuttals are aired frequently, many based on the premise that because analysts have so frequently been wrong about China’s economy, they must be wrong again. Enter Arthur Kroeber, founding partner and head of research at Gavekal Dragonomics. His book, China’s Economy: What Everyone Needs to Know, is a refreshing, pragmatic and balanced analysis of China’s economy that cuts through these divisive headlines.
At the crux of China’s Economy is the argument that China’s growth model in the reform era since the late 1970s – very simply, to increase its capital stock and put resources to better use – has for the most part been well-suited to China’s economic situation, but that this model has run its course. The solution, Kroeber says, is “to shift away from a growth model based mainly of the mobilization of resources to one based mainly on the efficiency of resource use.”
In the early reform period most of China’s massive labor pool was tied up in low productivity subsistence farming, and any investment in capital stock such as machinery, factories or infrastructure resulted in significant contributions to GDP growth. Thus for the first two to three decades of reform, US$3-4 of new investment created about $1 of GDP growth. Following the global financial crisis, this rate began to decline, and by 2013 it required more than $5 of investment to produce a dollar of growth. But there is more to the story. For most of the reform era, growth occurred from roughly equal parts capital accumulation and productivity gains. But following the financial crisis, gains from productivity dwindled to about a quarter of GDP growth and further declined to merely one-sixth by 2012. This may be the most significant indicator that China’s initial period of achieving growth by putting its massive labor resources to use through heavy investment is over, and it must now enter a phase dedicated to increasing the efficiency of those resources.
Throughout the book, Kroeber regularly dispels common myths and corrects over-simplified analyses. In exchange, he offers a more nuanced understanding of the predicaments facing China’s economic mandarins. For example, in his chapter on consumption, Kroeber provides an alternative perspective from those common in recent headlines. Although gross fixed capital formation grew from 27% of GDP in 1981 to 46% in 2010 – “the highest figure ever recorded for a major economy” – while household consumption fell from 53% to 35% during the same period, this was an appropriate path for an economy in China’s position. This goes back to the fact that the major task for China during the first few decades of reform was to install the necessary capital to put its massive labor force to more productive work than the subsistence farming that dominated the pre-reform era.
Although consumption in China fell significantly as a share of GDP, especially in the wake of the financial crisis – when the government flooded the economy with investment-focused stimulus spending – this was largely a consequence of the massive amount of capital-intensive growth, which led to investment outpacing consumption and thus claiming a larger share of GDP. Nonetheless, average per capita spending grew far more quickly than in more advanced economies, and at 7% average annual growth from 1990 to 2013, nearly twice as rapidly as India, the next fastest-growing large economy. This “explosive growth” resulted in a fivefold increase in consumer spending during this period. Kroeber’s analysis concludes that although China’s current household consumption rate of 36% of GDP is low compared to the 50-65% rate of most major economies, “China’s low figure does not indicate that consumption is weak; in fact it is quite strong. What it mainly shows is that China’s investment boom was unusually large.”
The concluding chapter discusses what China’s growth means for the world. Asking whether or not China’s growth model can be used as a blueprint for other developing economies, and if China’s success has lent any credibility to the ability of authoritarian governments to lead successful development campaigns, Kroeber points to a series of favorable conditions that assisted China throughout its rise. Coming in the wake of high growth by neighbors such as South Korea, Japan and Taiwan, Chinese leaders were already equipped with a workable template for industrial growth. Furthermore, with Hong Kong established as a major shipping port and global trading hub, China could easily integrate much of its manufacturing exports into existing global trade routes. Finally, China’s manufacturing boom occurred alongside a global surge in international trade, allowing China unprecedented access to cheaper and larger trade networks. Thus, not only have China’s unique circumstances made it unlikely that a China development model can succeed in other developing countries, but continuous state intervention has also prevented greater efficiency gains that could have been realized if more privatization was allowed.
Throughout the book, Kroeber regularly deconstructs commonly held assumptions about China’s economy, making them more accurate and meaningful. While many of his ideas will be familiar to those who follow China’s economy, he brings new and necessary light to these topics and a depth and breadth rarely found in the international business media.