While it is commonly accepted that China’s runaway
economy has to slow down to be sustainable, there is increasing concern that
its current loss of steam masks a host of structural problems which may spell
the beginning of the end of the so-called “China Dream”. The cover article of The Economist (27 July) shows a
front-running China caught in the mud. An analysis of Thompson Reuters asks if China would follow Japan’s past slide into
“economic coma”.

A July 2013 update on China's economy is provided by the UK's Foreign and Commonwealth Office publiation "China Economic Focus 2013".Download China Economic Focus_ July 2013

There
are many questions amidst the uncertainty. First, could China slow down below
the magic 7% growth threshold and yet avert disaster? Professor Michael Pettis
of Peking University thinks what matters is not the overall growth rate but private
consumption expansion and economic restructuring.Click here James O’Neill, former
Chairman of Goldman Sachs Asset Management, opines that China’s decade ambition
of 7.5% growth seems achievable after all. Click here Perhaps the real question to be
asked is whether and how China can re-balance the economy from export and
investment towards sufficient household consumption.

The
answer may become a little clearer by examining the following data. According
to China’s National Bureau of Statistics, from 2011 to the third quarter in
2012, consumption contributed to 55% of China’s growth with investment
accounting for 48.8% and net exports, 4.3%. Click here A report of the Mckinsey Quarterly shows that urban consumers, those with $9,000 –
$34,000 household income, have grown from 4% of urban population in 2000 to 68% in 2012.
China is now the world’s
largest e-commerce market, according
to the McKinsey Global Institute Click here. The Brookings Institution expects China’s
consuming middle-class to jump from 12% of population to 70% by 2030. Click here

In fact, over the past 20 years China has enjoyed by far the
highest average growth rate in household consumption of any major economy. However, consumption remains barely over 35% of GDP in 2011,
less than half of the share in the U.S. This paradox is due to the even faster
growth of capital investment. China’s dynamic consumption growth is borne out
by the fact that in 1990 China accounted for just 2.9% of total global
household consumption, but by 2010 the share was 7.4%, ahead of the respective
share of Germany, UK, France and Italy, according to a report of the Brussels Institute of Contemporary
China Studies Click here.
  

The reality is that with wage hikes
and better access to healthcare and other social provisions, China is
witnessing momentous growth of a surging middle-class with rapidly rising discretionary
income. This is happening in the largest and faster urbanization drive in human
history, with third and fourth-tier cities in inner provinces taking the lead. More jobs and economic opportunities
inland would help the critical hukou (household
registration) reform needed to end
the social and economic marginalization of some 240 million rural migrants by
luring more of them back to their left-behind families.

The second and related
question is whether with declining exports, China will be able to generate
sufficient jobs to generate the rise in consumption. Although official
unemployment rate stays around 4.1% for the last decade, this hides a mixture
of huge layoffs in unskilled jobs, high unemployment amongst an annual supply
of 6.9 million university graduates offset by a tight market in service jobs, a
growing trend of having to hire older workers, and rapidly rising private-enterprise
job opportunities in the inner provinces, according the Ministry of Health and
Human Resources Click here. Although demand
for labour in the second quarter this year declined by 2.8 % (167,000 jobs)
compared with last year, there are still 107 jobs for every 100 job seekers,
with western and central provinces more undersupplied than the eastern
industrial heartland.

The third question is whether China will be able to transcend
low-value-added production towards an economy built on innovation and
proprietary technology. There is still a long way for China to populate the
commanding heights of the world’s top brands. Only a few Chinese brands are
making their mark globally. Nevertheless, according to the World Intellectual
Property Organisation’s latest report, for the first time, China now tops
the world in the filing of patents, trademarks and industrial designs.Click here The
Royal Society shows that within this year, China is set to overtake the United
States in the number of citations in scientific literature. Click here What is more, with
massive financial resources, China is beginning to acquire some of the world’s
top brands.

The fourth question is whether China will be able to reform its
repressive financial system and state sector to achieve more efficient capital
utilization. The reform of the financial and state-sector gravy train is
perhaps the last hurdle jealously guarded by vested interests that holds back
China towards advanced country status. The recent credit squeeze imposed by
Beijing on local governments’ borrowing shenanigans and the abolition of the
lending-rate floor for banks, albeit baby steps in themselves, are nevertheless
a clarion call to arms. According to a World Bank report blueprint endorsed by
the State Council’s Development Research Centre, state-owned-enterprise
reform is at top of the agenda. Click here The early breakup of the mammoth Railways Ministry
is a sign that vested interests are not unshakeable.

The fifth question is whether China will be stifled in pollution
before the country achieves a higher-income economy. Out of sheer necessity,
China is pushing rapidly ahead with a green strategy. In less than a decade,
the country is leading in a number of renewable energies. According to the
Chinese Academy of Sciences (*),
fossil energy will drop from 92.7% of total energy demand to 80% by 2020 and
45% by 2050. Renewable energy is to rise from 6.7% to 16% and nuclear energy from
0.7% to 4% by 2020, thereafter to 45% and 10% respectively by 2050. Under the
current Five Year Plan (2011-15), energy intensity per GDP input is to reduce
by 16%, and CO2 emission by 17%. China seems to be on track with these
self-imposed targets. In an age of resource scarcity and climate change, there seems
no alternative to green development for a large country as China.

(*) 
Science
and Technology in China: A Roadmap to 2050, Chinese Academy of
Sciences, Science Press Beijing, Springer Heidelberg Dordrecht London New York,
2010, Table 3.1, p.42

The sixth question is whether China will be able to rid itself of
corruption and improve its governance. There is now a raging nationwide campaign
to fight corruption. Many senior heads are beginning to roll and the entire
bureaucracy is being kept on its toes. The new leadership is trying to set an
example of down-to-earth, no-nonsense, frugality and is holding party
secretaries to account for people-based governance. 

Last
but not least, even if China can escape the middle-income trap, the question is whether China could
become a more responsible stakeholder in the world order. China is the largest
contributor of peace-keeping force amongst permanent members of the UN Security
Council, chairs an anti-piracy coordination committee, plays a crucial role in
the six-party talks on North Korea, and most recently hosted separate meetings
in Beijing with Israeli leader Netanyahu and Palestinian leader Abbas. Commensurate
with its rising status in the world. China is likely to embrace a greater role
in the global commons.

In sum, to maintain sustainable growth and to
overcome the middle-income trap, there are still many mountains to climb. China
is already making a number of strides and the prognosis is largely positive.
The pudding, nevertheless, remains to be tested.