It isn't so many years since I used to berate the denizens of
the financial markets for their lack of interest in the economy that had
so much influence on ours: China. How things have changed. So has
China.
After averaging growth of 10 per cent a year for 30 years,
China's economy is now struggling to achieve its reduced target of 7.5
per cent. The financial market participants' role has been to watch on
with concern.
And this week comes news that, though the
International Monetary Fund sees China coming close to target this year,
it expects it to slow to 7.1 per cent growth in 2015 and slow further
in following years.
More surprisingly, the fund says that China
should slow down to give it a chance to work on its big problems,
rapidly growing debt and a rapidly contracting real estate market.
Fumble those and growth could be even lower.
But while so many of
us have been so focused on China's difficulty maintaining its rate of
growth, we've lost sight of how big it is and how fast it's still
growing compared with the rest of us.
Compared, say, with the
world's biggest economy, the United States. Except that, according to
the calculations of Euromonitor International, China will overtake the
US this year. That's when you compare the two economies using
"purchasing-power parity", which makes allowance for the fact that one
US dollar buys a lot more in China than it does in the land of the free.
With
China biggest and the US second, then come India, Japan, Germany,
Russia and Brazil. We come in at 17th, not far behind Indonesia. The
world certainly is changing.
Of course, the Chinese and American
economies remain very different. China is big because of its much bigger
population - 1.4 billion versus 300 million. Its income per person
remains a fraction of America's. A not unrelated fact is that the US's
productivity (measured as gross domestic product per worker) is more
than nine times higher than China's.
And the two countries'
industry structure is also very different. Agriculture contributes 10
per cent to GDP in China but just 1 per cent in the US. But get this: it
accounts for almost a third of the workforce, compared with just 1.4
per cent in the US.
Manufacturing makes up 30 per cent of
China's GDP, but only 13 per cent of America's. That tells us a lot
about why China's rise, and the growth in its exports of manufactures,
has affected so many other countries as well as maintaining downward
pressure on world prices.
But the biggest difference between the
two economies is their relative emphases on consumption and investment.
Euromonitor International estimates that this year private consumption
will account for 68 per cent of GDP in the US, compared with 37 per cent
in China.
Here, however, we get to the really important news: the
Chinese authorities have embarked on a process of "rebalancing" the
economy, increasing consumer spending and domestic demand and reducing
the roles of exports and investment in heavy industry.
The
Economist notes that consumer spending has already begun its expansion,
with its share of GDP rising from less than 35 per cent in 2010 to more
than 36 per cent last year. And this year it has accounted for more than
half the growth in GDP.
A big reason for stronger consumer
spending is rapid growth in wages. Get this one: over the five years to
2013, real wages in manufacturing rose by about 2 per cent in the US,
but by 45 per cent in China. As always happens, the benefits of economic
development do flow eventually to ordinary workers.
This strong
growth in consumption involves faster growth in the services sector, with
manufacturing's share of GDP having peaked at almost a third in 2007.
This
structural change means people following the ups and downs of the
Chinese economy ought to be following a different set of indicators, as
Peter Cai of China Spectator noted last week with help from Guan
Qingyou, an economist at Minsheng Securities.
Cai says the main
reason Chinese policymakers care so much about the rate of growth in GDP
is their belief that the economy needs to grow by at least 7.2 per cent
to absorb 10 million new entrants to the labour market each year.
But
this correlation has been breaking down since 2010. Slower growth in
GDP has not led to weaker job creation. Gaun suggests this is because
the expanding services sector has a greater capacity to absorb new job
seekers.
More fundamentally, China seems to be approaching its
"Lewis turning-point", where a developing country runs out of its supply
of surplus rural labour. This would also help explain the rising real
wages.
Financial market participants focus on the growth in
"industrial production" (manufacturing, mining and utilities) as a
predictor of GDP growth, and on the manufacturing PMI (purchasing
managers' index) as a predictor of industrial production.
But Cai
says the strong correlation between industrial production and GDP is
breaking down because the services sector is growing a lot faster than
the industrial sector. Last year, for instance, the services sector
contributed 47 per cent of the annual growth in GDP, whereas the
industrial sector contributed less than 40 per cent. So, it's better to
focus on the services sector PMI.
A big problem for China-watchers
is that you don't know how much faith to put in official statistics.
Earlier in his career, Premier Li Keqiang let it be known that he, too,
had his doubts. So he focused on railway freight volumes, electricity
consumption and bank lending as offering a better guide.
Now
others have developed a "Li Keqiang index". But here, too, Guan argues
that its reliability has declined, because of changes in the structure
of industrial electricity use and changes in financing. China is
changing.
