Unbalanced economic growth in China - bring it on, says one expert

Commentators often express concern that economic growth in China is unbalanced, with an investment-driven model that has generated vast trade surpluses and growing inequality. But one associate thinks these fears are overblown.

One apparent imbalance, the concentration of industry and therefore wealth in the coastal regions, is, he insisted, "the key to China's success", says Yukon Huang. Reuters

Commentators often express concern that economic growth in China is unbalanced, with an investment-driven model that has generated vast trade surpluses, growing inequality and a dramatic decline in household income as a share of GDP.

Yukon Huang, a senior associate with the Asia programme of the Carnegie Endowment for International Peace and a former World Bank director for China, notes that even the country's premier, Wen Jiabao, has admitted as much.

Yet Mr Huang believes such concerns are overblown. He regards many so-called imbalances as strengths that have helped to make China's economy the world's second largest.

One apparent imbalance, the concentration of industry and therefore wealth in the coastal regions, is, he insisted, "the key to China's success" as it "increased labour productivity" significantly and so allowed the country to outcompete others as a manufacturer.

"Even if wages doubled, China would still be competitive for another five years or so," he said.

Probably the key issue cited as illustrating unbalanced growth is the way investment as a proportion of GDP is extremely high, while household consumption as a fraction of GDP has fallen heavily to about 35 per cent.

It is the opposite to what is needed if China is to achieve the much talked about shift in its economy to one that is dependent on domestic consumption, rather than on the external demand that has created vast trade surpluses and huge foreign exchange reserves.

"Is unbalanced growth as a share of GDP a problem?" Mr Huang said.

Japan, Taiwan and South Korea all saw consumption as a share of GDP decline, he said, while the same shift was seen in the United States between 1930 and 1950 - and it helped to make the US a global superpower.

The reasons why household income, and therefore consumption, have fallen as a share of GDP indicate why this tailing off is not a bad thing, Mr Huang said.

As China continues to urbanise and people move from the countryside into the cities, the share of income as a proportion of the wealth people generate falls. Yet the actual money individuals are earning keeps growing.

Mr Huang noted that a farmer might get to keep 90 per cent of the money he or she generates. A factory worker might only take home 40 per cent of it, but they would still be earning more than the farmer.

So household income relative to GDP may have declined, but household income - and therefore consumption - has risen in absolute terms.

"As more and more people move over, the share of household income declines. That's a good thing, but all the analysts see it as a bad thing," he said. "It's the secret to China's growth rate, because it's more profits and [it means] the more rapidly the country grows. The literature has turned a good thing into a bad thing."

Another factor behind low consumption rates in China is the high savings rate of migrant workers, and this stems from the lack of social welfare services for these people.

In China, only those with a local residence permit are typically able to access services such as health care and education in the cities.

That means migrant workers, of which China has more than 200 million, save a large proportion of their wages to ensure they can look after themselves and their families.

It is usual for them to put aside between 40 and 45 per cent of their income, double the figure of established residents in the big cities who have a local residence permit.

"This explains 70 per cent of the growth imbalances in China," said Mr Huang.

"China's trade surplus in the last seven or eight years is explained by the savings rates increasing much faster than investment."

Scrapping the residence rules would, he said, go a long way to increasing domestic consumption and eliminating China's trade surplus. "People are talking about structural reform and other things. But there's one simple thing you could do."

He also believes if the government put more revenues from state-owned enterprises into social welfare programmes, it would increase consumption ratios, something he thinks in any case is likely to happen over time.

So, given his assessment of the current situation and his predictions for the years to come, it seems not everyone is waiting for the wheels to come off China's formidable economic juggernaut.

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