Hamish McRae: China will keep growing for years - but will it get rich before it gets old?
It would be nice to hope we’re thinking in a joined-up way about our relations with China, but I’m not sure we are
Published: 15 December 2005
It is official. The Chinese economy has passed the British one in size, to become the world’s fourth largest. This leap was achieved by the sudden discovery of the Chinese authorities that is had been under-recording the size of the private sector - but even if they hadn’t the chances are that the Chinese would have overtaken the British either this year or next.
You can get some feeling about this headlong growth from one statistic. In November the output of cars was 21.6 per cent up on the previous year. The rest of the world is shutting down its car plants, though in the case of General Motors it maybe not fast enough, while in China output is soaring. It tells you something about the way power is shifting in the world, something that is still not fully recognised in Europe.
The rise of China as an economic power (and also, albeit slightly more slowly, India) raises so many questions that it is hard to get a grip on the scale of the change. But the overtaking of the UK does give a moment for reflection on the great question: how long can China’s headlong race for growth continue?
The best background for answering such a question is the Brics study by Goldman Sachs. This study, done two years ago, constructed a model for growth for the existing developed world and for four giant emerging economies, Brazil, Russia, India and China. Inputs include population and workforce growth, transfer of technology, exchange rate realignment and so on. Readers of this column will be familiar with its findings: by 2009 China becomes the world’s third largest economy, passing Germany, and by 2050 China is the largest, ahead of the US, while India has passed Japan into third place.
Recently the Goldman team has extended its work to look at the somewhat smaller (but still large) emerging economies such as Indonesia. It has also checked that has been happening to the Brics two years on. The answer is that the performance of China in particular has actually been faster than it had calculated. Indeed China seems to be growing even faster than other springboard economies, such as Japan, Singapore, South Korea and Taiwan. The progress of each country since it took the economic reforms that projected it on to a growth path is shown in the top graph. Those of us who thought that China’s size would make it impossible for it to achieve a steep a growth trajectory as the Asian “tigers” have been proved wrong, at least up to now.
So what might change this? In the short-term it is hard to see anything stopping China but on a three to five-year outlook there are some serious causes for concern. One is energy supplies. Growth in demand from China is one of the main reasons why the International Energy Agency in Paris forecast this week an increase in demand for oil of 7.8 per cent next year. But an energy squeeze would affect the entire world, so in relative terms China, which has abundant coal supplies, is not going to be much worse affected than anywhere else. It also has considerable scope for improving energy efficiency.
Another threat is that its main export market, the US, might either go into recession or seek to reduce its trade dependence on Chinese imports. Last summer pressure from the US forced the Chinese authorities into a modest revaluation of the yuan. You can see what has been happening to Chinese trade patterns from the next graph. Its surplus on trade with the US has soared, with the EU rising solidly too; but it is in deficit with the rest of Asia and Japan.
While it is hard to see the US shutting out China, do remember how the US treated its much closer ally, Japan, during the 1980s, when it felt threatened by Japanese imports. The US forced a huge revaluation of the yen, which led to Japan having to hollow out its exporting industries, pushing production offshore and contributing to the long period of stagnation that started around 1990 and which seems to be ending only now.
In any case, provided it can earn enough foreign exchange to keep its imports covered, China can carry on growing swiftly on the back of domestic demand. You can see one measure of that in the graph on motor production, which seems to whizz endlessly upwards. Another would be the rise in retail sales. Figures released yesterday show these up 12.4 per cent year on year, another astounding figure. Commenting in this, Capital Economics reckons that while growth in China will slow somewhat next year there is nothing in the statistics to suggest there will be the “hard landing” that some people expect.
Growth, and in particular the uneven way the fruits of growth have been shared, has led to tensions. Until recently the urban populations were drawing ever further ahead of the rural people in terms of living standards. It is hard to know quite what is happening in such a vast country and all statistics need to be treated with caution. Nevertheless there does seem to be evidence that wealth is now reaching the countryside as well as the cities, as you can see from the growth in rural incomes, which is plotted on the last graph. Such tensions will continue of course, and the base for rural incomes is very low. Nevertheless any evidence that wealth is trickling down must be welcome to the Chinese authorities, and of course to the population at large.
I suppose the short answer to the question posed at the beginning - how long the growth could continue? - is “quite a while yet”. But it will tail off. China is at a demographic “sweet spot” at the moment, with the size of its workforce still rising. The fall in birthrates as a result of the country’s one-child policy has yet to have its impact on this. But it will start to shrink within about 10 years, leading to the question: “will China get rich before it gets old?”
The short answer to that one is that it will certainly get much richer but that it will not achieve a developed-country lifestyle for the majority of its people, at least for the foreseeable future. And in another generation the combination of a shrinking workforce and eventually a falling population will check the rise of China’s economic power. But that is a long way off.
Meanwhile the sheer economic success of the country should encourage us to rethink our own economic relations. There are a lot of awkward questions. For example, to what extent is the UK using the fact that it educates thousands of Chinese students to our own economic advantage? To what extent can the historical link through Hong Kong be used as a lever to improve our relative trading position? How do we help China make progress in areas where the UK has a competitive advantage, such as financial services? It would be nice to hope that we are thinking in a joined-up way about our relations with the next global superpower, but I am not at all sure we are.
At some stage the Chinese economy will indeed go ex-growth but the only safe assumption is that despite whatever bumps there will be on the way, that will not be for a long while yet.
It is official. The Chinese economy has passed the British one in size, to become the world’s fourth largest. This leap was achieved by the sudden discovery of the Chinese authorities that is had been under-recording the size of the private sector - but even if they hadn’t the chances are that the Chinese would have overtaken the British either this year or next.
You can get some feeling about this headlong growth from one statistic. In November the output of cars was 21.6 per cent up on the previous year. The rest of the world is shutting down its car plants, though in the case of General Motors it maybe not fast enough, while in China output is soaring. It tells you something about the way power is shifting in the world, something that is still not fully recognised in Europe.
The rise of China as an economic power (and also, albeit slightly more slowly, India) raises so many questions that it is hard to get a grip on the scale of the change. But the overtaking of the UK does give a moment for reflection on the great question: how long can China’s headlong race for growth continue?
The best background for answering such a question is the Brics study by Goldman Sachs. This study, done two years ago, constructed a model for growth for the existing developed world and for four giant emerging economies, Brazil, Russia, India and China. Inputs include population and workforce growth, transfer of technology, exchange rate realignment and so on. Readers of this column will be familiar with its findings: by 2009 China becomes the world’s third largest economy, passing Germany, and by 2050 China is the largest, ahead of the US, while India has passed Japan into third place.
Recently the Goldman team has extended its work to look at the somewhat smaller (but still large) emerging economies such as Indonesia. It has also checked that has been happening to the Brics two years on. The answer is that the performance of China in particular has actually been faster than it had calculated. Indeed China seems to be growing even faster than other springboard economies, such as Japan, Singapore, South Korea and Taiwan. The progress of each country since it took the economic reforms that projected it on to a growth path is shown in the top graph. Those of us who thought that China’s size would make it impossible for it to achieve a steep a growth trajectory as the Asian “tigers” have been proved wrong, at least up to now.
So what might change this? In the short-term it is hard to see anything stopping China but on a three to five-year outlook there are some serious causes for concern. One is energy supplies. Growth in demand from China is one of the main reasons why the International Energy Agency in Paris forecast this week an increase in demand for oil of 7.8 per cent next year. But an energy squeeze would affect the entire world, so in relative terms China, which has abundant coal supplies, is not going to be much worse affected than anywhere else. It also has considerable scope for improving energy efficiency.
Another threat is that its main export market, the US, might either go into recession or seek to reduce its trade dependence on Chinese imports. Last summer pressure from the US forced the Chinese authorities into a modest revaluation of the yuan. You can see what has been happening to Chinese trade patterns from the next graph. Its surplus on trade with the US has soared, with the EU rising solidly too; but it is in deficit with the rest of Asia and Japan.
While it is hard to see the US shutting out China, do remember how the US treated its much closer ally, Japan, during the 1980s, when it felt threatened by Japanese imports. The US forced a huge revaluation of the yen, which led to Japan having to hollow out its exporting industries, pushing production offshore and contributing to the long period of stagnation that started around 1990 and which seems to be ending only now.
In any case, provided it can earn enough foreign exchange to keep its imports covered, China can carry on growing swiftly on the back of domestic demand. You can see one measure of that in the graph on motor production, which seems to whizz endlessly upwards. Another would be the rise in retail sales. Figures released yesterday show these up 12.4 per cent year on year, another astounding figure. Commenting in this, Capital Economics reckons that while growth in China will slow somewhat next year there is nothing in the statistics to suggest there will be the “hard landing” that some people expect.
Growth, and in particular the uneven way the fruits of growth have been shared, has led to tensions. Until recently the urban populations were drawing ever further ahead of the rural people in terms of living standards. It is hard to know quite what is happening in such a vast country and all statistics need to be treated with caution. Nevertheless there does seem to be evidence that wealth is now reaching the countryside as well as the cities, as you can see from the growth in rural incomes, which is plotted on the last graph. Such tensions will continue of course, and the base for rural incomes is very low. Nevertheless any evidence that wealth is trickling down must be welcome to the Chinese authorities, and of course to the population at large.
I suppose the short answer to the question posed at the beginning - how long the growth could continue? - is “quite a while yet”. But it will tail off. China is at a demographic “sweet spot” at the moment, with the size of its workforce still rising. The fall in birthrates as a result of the country’s one-child policy has yet to have its impact on this. But it will start to shrink within about 10 years, leading to the question: “will China get rich before it gets old?”
The short answer to that one is that it will certainly get much richer but that it will not achieve a developed-country lifestyle for the majority of its people, at least for the foreseeable future. And in another generation the combination of a shrinking workforce and eventually a falling population will check the rise of China’s economic power. But that is a long way off.
Meanwhile the sheer economic success of the country should encourage us to rethink our own economic relations. There are a lot of awkward questions. For example, to what extent is the UK using the fact that it educates thousands of Chinese students to our own economic advantage? To what extent can the historical link through Hong Kong be used as a lever to improve our relative trading position? How do we help China make progress in areas where the UK has a competitive advantage, such as financial services? It would be nice to hope that we are thinking in a joined-up way about our relations with the next global superpower, but I am not at all sure we are.
At some stage the Chinese economy will indeed go ex-growth but the only safe assumption is that despite whatever bumps there will be on the way, that will not be for a long while yet.