Outlook on the Chinese Economy - Recovery from the Crisis and the Challenges
February 03, 2010
Mr. Long Ke
Senior Fellow, Economic Research Center, Fujitsu Research Institute
I was born and grew up in Nanjing. About 30 years ago, when the then leader Mr. Hu Yaobang visited Japan, he proposed Prime Minister Nakasone to “promote friendship between Japan and China by inviting 3,000 young Japanese to China.” Nanjing decided to accept 800 Japanese youth in 3 years time. This coincided with my graduation from high-school. I was assigned by the university to major in “Japanese,” although I applied for the “Faculty of English.” This was because the country needed Chinese who could speak Japanese, besides English, German and French. After many twists and turns, I was given a chance to study in Nagoya, sister city of Nanjing. I experienced various culture shocks, the most striking of all being the Japanese I learnt in Nanjing was not understood in Nagoya.
Two weeks ago the National Bureau of Statistics of China announced the 2009 economic growth rate. Its preliminary figure was 8.7%, a remarkable achievement exceeding the government goal of 8%. The IMF forecasted 5% growth rate last year around this time, which could have triggered recession and chaos. What I keep hearing from business people in Beijing when I visit there every month is that the real growth rate easily exceeded 9%.
Why does China maintain such a high growth rate? The answer is economic “swelling,” which raises some concern to me. China is attracting global attention on an unprecedented scale. Major cities are experiencing real-estate-bubble. This economic swelling is fostered by excessive investment, accounting for 44% of the Chinese GDP today, propelling the Chinese economy. Fixed capital coefficient for last year, which combines capital investment, real-estate investment and infrastructure investment, marked a growth of 30%. All these figures indicate a real growth rate of over 13%.
Foreign demand decreased, on the other hand. Trade surplus marked 300 billion dollars in 2008. Although the surplus dropped to 196.1 billion dollars last year, it is still a huge imbalance. Small domestic consumption is generating this large trade surplus. Public social security system had collapsed by reform, so Chinese parents are trying to depend on their “one child” by saving up for them and investing in them, which shrink the domestic market. Saving rate now accounts for 52% of the annual gross national income. Saving rate in Japan peaked in 1965 with 20%, and is around 6% today, according to the Japanese Ministry of Finance. Close studies on the basic pattern of Chinese economic growth indicate continuing economic growth for some time with high saving rate.
Now, let me draw my conclusion by illustrating various risk factors surrounding the Chinese economy. Economic growth is forecasted to exceed 10%, provided that sound policy will be maintained. Then China will surely overtake Japan.
Let me point out some uncertain factors. The first factor is an alarming “disparity between urban and rural areas.” Inhabitants of rural areas are restricted from moving by the 1958 “Household Registration Control System.” This system is likely to change gradually, yet it will take time. The second factor concerns energy and the environment. How to supply enough energy to sustain economic growth in China and India, with a combined population of 2.3 billion, is a pressing issue. Energy-saving was identified as the most pressing issue during the COP10 conference in Copenhagen last December.
I am often invited to speak on “environmental business in China,” and I tell that three restrictions must be overcome to bring real environmental improvement, which goes beyond simply introducing environmental technology or equipment. Firstly, majority of the people must realize the necessity to change the environment, thus “switch to a different set of values.” Secondly, “restriction set by the current system” must be addressed, thus allowing legal measures to be taken against companies causing environmental destruction.
Lastly, the largest risk factor is “credibility yet to be established.” Market economy must be based on sound credibility. China is losing its value and traditional cultures, including Confucianism, Mencius, and Taoism, which have long been sources of our mental support. After the Great Cultural Revolution, “money” became the value standard for judging others, and today, “money worship” has taken over China. How to correct and improve this is the greatest challenge.
Now, let me predict when the current growing Chinese economy will slow down. I personally think 2012 will be the major turning point, as a political shift is scheduled and Xi Jinping is likely to replace Hu Jintao. Also, all the public and capital investment works in the present cycle will be completed by 2012. Growth rates will slow down, unless new projects start up. The issue of nonperforming loans, the negative legacy of excessive investment to date, will become a risk factor. GDP per capita has exceeded 3,000 dollars in China, yet there is still a wide gap between the rich and the poor. I personally think change will be brought when the poor decide to take action to catch up with the rich.
Future measures must take into account these three risk factors.