Arthur Kroeber, Managing Director of GK Dragonomics and Editor of the China Economic Quarterly shared, in a breakfast seminar co-organised by IsCham Beijing, the German Chamber of Commerce and the Swedish Chamber of Commerce, his opinions on where China is headed, economically in the years ahead and what the Chinese government could do to stay on its current track of rapid growth.
Kroeber strongly believes that China still possesses the potential to sustain a 7-8% average real GDP growth annually over the next decade. Coupled with Beijing’s recent introductions of various productivity-boosting policies, the Middle Kingdom looks poised to replace the US as the world’s largest economy by the year 2020.
Kroeber also mentioned that there are five common misconceptions that the public generally share about China’s economy that should be clarified.
1 – China is a huge investment bubble waiting to pop.
Kroeber stated that while it’s true that China is currently receiving massive amount of foreign investment funds, her capital stock is still relatively very low. China’s current per capita capital stock is actually at less than half of what the US was at in the beginning of the Great Depression when Wall Street crashed in October 1929 and is only about a fifth of Japan’s at the beginning of its bust in the year 1990.
Compared to the figures of many other developed countries, China is struggling in this department and in fact, requires even more investments just to keep up with these countries. He added that China’s investment efficiency is, in aggregate, well within the normal range.
2 – A housing bubble is building
Kroeber has a different view on the current housing situation in China, though he does not deny that it’s a problem, especially in the more urbanised parts of the country. Kroeber feels that there is a shortage of homes, despite what many believe as a housing bubble. Out of China’s urban population of 225 million, only about 150 million are properly housed and instead of constructing more low cost houses to address the issue, China is opting to erect more high-end accommodations in its place.
3 – China has too much debt
Kroeber feels that Beijing’s debt is still at a manageable level, even after the recent introduction of a stimulus package. Although the average local government’s debt increased significantly from 17% of GDP in 2008 to 36% in 2010, it has not produce any significant adverse effects on the economy due to the dramatic shrinking of the contingent liability from bank NPLs. In addition, unlike the US and Europe, most of the debts incurred by China are used to finance the setting up of infrastructures to further boost its economy.
4 – Consumer purchase rates are falling
Kroeber pointed out that critics have been too fixated on the fall of the private consumption portion of China’s GDP and overlooked the accelerated growth in real per capita consumption during the same period of time. China’s fall in consumption ratio is no different to that of other Asian countries after undergoing rapid industrialisation.
5 – China is at risk of falling into the middle income trap
Kroeber justified the opposite by citing examples from a few North-East Asian countries where the typical catch-up growth slows down at 55-60% of US GDP. With China only at 20% of US GDP, it will take another decade or two before its period of fast catch-up growth ceased. Plus, there are no convincing evidences to suggest that China is falling into the middle income trap.
However, Kroeber also highlighted some challenges that China might face in its pursuit of economic superiority. A rather major one would be the deteriorating size of its population. Apart from that, China can no longer just leverage on the boom of global economies like they did in the past because of the increasingly bleak world financial conditions. Kroeber suggests that China should continue its efforts to improve productivity, and that Beijing will need to introduce policy reforms in China’s housing and financial sectors.
So, the question remains – will China live up to its expectations of being the next big thing? Or will it fizzle out in the face of competition? At this point in time, the answer could very well be determined with a simple coin toss. But one thing’s for sure, if China’s government fail to make the necessary changes, its explosive growth will slow down and ultimately come to a halt.
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