China has defied the naysayers and stayed the course
By Stephen S. Roach (China Daily) 2011-06-03
There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem. But they stem largely from misplaced generalizations.|
Here are 10 reasons why it doesn't pay to diagnose the Chinese economy by drawing inferences from the experiences of others:
Strategy: Since 1953, China has framed its macro objectives in the context of five-year plans, with clearly defined targets and policy initiatives designed to hit those targets. The recently enacted 12th Five-Year Plan (2011-2-15) could well be a strategic turning point - ushering in a shift from the highly successful producer model of the past 30 years to a flourishing consumer society.
Commitment: Seared by memories of turmoil, reinforced by the "cultural revolution" (1966-76), China's leadership places the highest priority on stability. Such a commitment served China extremely well in avoiding collateral damage from the crisis of 2008-2009. It stands to play an equally important role in driving the fight against inflation, asset bubbles and deteriorating loan quality.
The "China model" is very different - especially its emphasis on strategy, commitment to stability, and its wherewithal to deliver.
Wherewithal to deliver: China's commitment to stability has teeth. More than 30 years of reform have unlocked its economic dynamism. Enterprise and financial-market reforms have been key, and many more reforms are coming. Moreover, China has shown itself to be a good learner from past crises, and shifts course when necessary.
Savings: A domestic savings rate in excess of 50 percent has served China well. It funded the investment imperatives of economic development and boosted the cushion of foreign-exchange reserves that has shielded China from external shocks. China now stands ready to absorb some of that surplus savings to promote a shift toward internal demand.
Rural-urban migration: Over the past 30 years, the urban share of the Chinese population has risen from 20 percent to 46 percent. According to the estimates of the Organization of Economic Cooperation and Development, another 316 million people should move from the countryside to China's cities over the next 20 years.
Such an unprecedented wave of urbanization provides solid support for infrastructure investment and commercial and residential construction activity. Fears of excess investment and "ghost cities" fixate on the supply side, without giving due weight to burgeoning demand.
Low-hanging fruit - Consumption: Private consumption accounts for only about 37 percent of China's GDP - the smallest share of any major economy. By focusing on job creation, wage increases and the social safety net, the 12th Five-Year Plan could spark a major increase in discretionary consumer purchasing power. That could lead to as much as a 5-percentage-point increase in China's consumption share by 2015.
Low-hanging fruit - Services: Services account for just 43 percent of Chinese GDP - well below global norms. Services are an important piece of China's pro-consumption strategy - especially large-scale transactions-based industries such as distribution (wholesale and retail), domestic transportation, supply-chain logistics, and hospitality and leisure.
Over the next five years, the services share of Chinese GDP could rise above the currently targeted 4-percentage-point increase. This is a labor-intensive, resource-efficient, environmentally friendly growth recipe - precisely what China needs in the next phase of its development.
Foreign direct investment: Modern China has long been a magnet for global multinational corporations seeking both efficiency and a toehold in the world's most populous market. Such investments provide China with access to modern technologies and management systems - a catalyst to economic development.
China's upcoming pro-consumption rebalancing implies a potential shift in foreign direct investment - away from manufacturing toward services - that could propel growth further.
Education: China has taken enormous strides in building human capital. The adult literacy rate is now almost 95 percent, and secondary school enrollment rates are up to 80 percent. Shanghai's 15-year-old students were recently ranked first globally in math and reading as per the standardized PISA metric. Chinese universities now graduate more than 1.5 million engineers and scientists annually. The country is well on its way to a knowledge-based economy.
Innovation: In 2009, about 280,000 domestic patent applications were filed in China, placing it third globally, behind Japan and the United States. China is fourth and rising in terms of international patent applications. At the same time, China is targeting a research-and-development share of GDP of 2.2 percent by 2015 - double the ratio in 2002.
This fits with the 12th Five-Year Plan's new focus on innovations-based "strategic emerging industries" - energy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials and autos running on alternative fuels. Currently, these seven industries account for 3 percent of Chinese GDP; the government is targeting a 15 percent share by 2020, a significant move up the value chain.
Yale historian Jonathan Spence has long cautioned that the West tends to view China through the same lens as it sees itself. Today's cottage industry of China doubters is a case in point. Yes, by our standards, China's imbalances are unstable and unsustainable. Premier Wen Jiabao has, in fact, gone public with a similar critique.
But that's why China is so different. It actually takes these concerns seriously. Unlike the West, where the very concept of strategy has become an oxymoron, China has embraced a transitional framework aimed at resolving its sustainability constraints. Moreover, unlike the West, which is trapped in a dysfunctional political quagmire, China has both the commitment and the wherewithal to deliver on that strategy. This is not a time to bet against China.
The author is a member of the faculty at Yale University, non-executive chairman of Morgan Stanley Asia and has the book, The Next Asia, to his credit.