China’s Growth: Why Less is More

IMF Blog, October 29, 2013

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Borrow and invest supports growth in the short run, but eventually debt rises, investment becomes less productive, and risks increase.
China’s economy still has considerable buffers; risks to the outlook in the near-term are described as extremely low.
Emerging vulnerabilities:
- Surging credit: a broad measure of credit (total social financing) had held steady at about 130 percent of GDP for much of the 2000s; since 2008, it has shot up to around 200 percent of GDP; an increase of 70 percent of GDP in 4½ years.
- Strains on local government finances.
- Weakening balance sheets in parts of the corporate sector.
Investment dynamics:
- Investment accounts for nearly half of the economy’s output, which is among the highest in the world and high relative to the historical experience of other fast growing economies.
- As more output goes into investment, less goes into consumption; in the past decade consumption’s share of output has declined significantly.
Policy implication: reversing the decline in consumption’s share requires rebalancing growth away from investment and towards consumption.

Core reforms emphasized:
- Further strengthening of the financial sector.
- Opening the service sector to more competition.
Expected effects of reforms:
- A more market-based financial system will better channel household savings to productive uses, providing more credit to dynamic start-ups in the service sector.
- Greater competition in services (healthcare, education, financial services, logistics, utilities, telecom) would allow start-ups to emerge and create jobs.
- The service sector is more labor intensive than industry; more labor intensive growth means higher household income and more consumption.
- Financial sector reform would boost household income from investments directly; currently bank deposits often offer zero or negative returns when adjusted for inflation, whereas a more market-based system would improve returns for households.
Analogy: Done together, these reforms could provide a one-two punch analogous to state enterprise reform in the late 1990s and joining the World Trade Organization, which propelled growth in the 2000s.

Tradeoffs and transition costs:
- Taming rising risks—by reigning in credit growth and rationalizing investment—will likely slow the economy in the coming years.
- Less stimulus means less growth; reform itself could entail adjustment costs with some short run impact on growth.
Growth projections and scenarios:
- With reforms, China’s growth could average around 6 percent a year from now to 2030.
- By contrast, a status-quo scenario could result in China getting stuck in the middle-income trap, with income per person peaking at around 25 percent of that in the United States in 2030.
- With successful reforms, income per person in China could reach 40 percent of the U.S. level by 2030.
- Note on perspective: by most measures—except China’s 10 percent average annual growth over the past 30 years—averaging around 6 percent a year would be a fantastic outcome.

Near-term slower growth is framed as a tradeoff worth making for higher future income.
By 2030, China—especially with successful reforms—will almost certainly be the world’s largest economy.
China’s success will substantially increase income in China and mean much higher global demand, which will be hugely important for a robust and healthy global economy.
Concluding message: Less growth in China today in exchange for more, much more, income in the future—so, less is indeed more.

Credit: Steven Barnett, October 29, 2013

iMFdirect博客: 中国的经济增长：为什么慢一些反而可能好? 2013年10月29日
- iMFdirect博客: 中国的经济增长：为什么慢一些反而可能好? 2013年10月29日 (Markdown version)
- iMFdirect博客: 中国的经济增长：为什么慢一些反而可能好? 2013年10月29日 (PDF)