Chinese surprise: new full crisis will come from China...
Material posted: Publication date: 08-06-2013

China is entangled in problems of its unbalanced economy. Help will come from where you least expect it – from the village...

By the end of 2010 China has all chances to become the world's second economy, though growing. But the idyllic picture collapses, we need only to look at the sources of growth. But they are all the same: exports, public investments in infrastructure, investments in capital-intensive industry. China caught up with the developed West in terms of GDP, but the race for standard of living and private consumption is only just beginning. And other way to grow long and steadily not. According to expert estimates, such a goal the country will decide no earlier than 2025, and for this the authorities have to literally climb out of my skin. However, there is one but: our ideas about the state's economy is not quite true. It is therefore possible that a consumer Paradise and the long-term stability will be there much earlier...


Monsters, Inc

The Chinese economy is skewed towards export sectors and domestic demand is weak: the population saves too much and spends little. This is a textbook point of view on China, which for many years shared by the world Bank, the IMF and most economists. At first glance, the way it is. The share of consumption in GDP decreases from 50% of GDP in 1990 to 35% in 2009. by Itself, this decrease is not alarming. "This case is falling in relation to GDP of consumption is not unique, says the report by McKinsey Global Institute (MGI) "Got spend: stimulating Chinese consumer". On the contrary, it is quite typical for a fast process of industrial modernization that China is experiencing for the last 20 years." The study provides the example of the United States: in the early twentieth century there consumption reached 95% of GDP. However, when in the struggle with the great depression the government undertook the development of infrastructure projects, the share of consumption in GDP began to fall, reaching during the Second world war the minimum value over the past century – 50% of GDP. Since then, as post-industrial economic development, the consumption gradually increased and now account for over 70% of GDP.

A similar process can be observed in other countries experiencing rapid growth. In South Korea, the share of consumption in GDP declined from 62% in 1980 to 48% in 2009 and on Taiwan during the same period, from 69 to 54%. In Japan, whose "economic miracle" ended in the 1980s, the figure of the last 30 years remains unchanged at 55% of GDP. However, no country has experienced such a sharp decrease in the consumption to GDP as China, to 35%. The problem lies in the structure of the Chinese economy, which is dominated by industrial giants, preferring to reinvest or accumulate income instead of distributing them in the economy in the form of salaries and dividends, according to the researchers at MGI. In addition, the investment giants need a lot more than people. This industrial model is different from the post-industrial, dominated the small company and the services sector, which is important primarily human capital. Therefore, the growth of welfare (and with it consumption) in the country's chronically lagging behind GDP growth. According to MGI estimates, employment growth in China in recent years has averaged approximately 1% per year, and this despite double-digit GDP growth rates. As a result, for the past 20 years, the share of corporations in national income has reached, according to MGI, 22% vs. the previous 14%, while the share of households fell to 56% with the former 72%.


Running in place

Another inhibiting factor is traditionally considered to be the mentality of the Chinese consumer. According to the stereotypical view that Chinese prefer to live with a tightly tightened belt and save for old age. This is evidenced, for example, the high share of savings in GDP: more than 45%. But behind this staggering number are all the same industrial giants and only to a lesser extent, ordinary citizens. "If we look at the explosive growth of savings to GDP that occurred in China over the past five years, it appears that virtually all of the increase came in the corporate and public sector, – explains the chief economist for the Asian markets the Swiss investment Bank UBS Jonathan Anderson. – Households do not actually have changed the level of their savings: it was about 20% of GDP in the 1990s, and remains". Of course, 20% – many: the same in South Korea and Taiwan, the figure is 14% and 15% respectively. And in Japan accumulation of households today – about 9% of GDP, but even in the 1970s, a period of rapid economic growth, household savings was at the level of 25%. In another aspect of the problem draws the attention of the chief economist of the Beijing office of the world Bank Luis Guys. "Chinese statistics worth watching with the utmost care, the expert says. For example, the official data on household saving rate we try to double-check, conducting their own surveys. They show that the level of savings below the official statistics of 1.5–2% of GDP".

However, there are very different statistics. Many Chinese consumer markets are experiencing a boom. For example, car sales exceeded U.S. performance. According to the observations of the Russian orientalist, Professor of Kookmin University in Seoul Andrei Lankov, a boom is not confined to the city: simply put, if there more and more people buy cars, in rural areas mopeds. "In many ways, the behavior of consumers in the neighboring fully economically developed South Korea shows China future," said Mr. Lankov. According to the National Bureau of statistics of China, real estate sales for 2009 jumped fantastic and 75.5%, reaching a volume of 4.4 trillion yuan ($664 billion). A similar pattern is observed in the sector of consumer goods – TVs, computers, refrigerators, air conditioners, mobile phones, etc. the growth Rate of retail sales over the past few years are at the level of two-digit quantities.

In short, consumption in China is increasing, and more rapidly – by about 8-9% per year. In absolute terms, this indicator increased from 1.9 trillion yuan (250 billion dollars) in 1990 to 8 trillion yuan (1.2 trillion dollars) in 2008 and a conservative scenario MGI will exceed 30 trillion yuan (4.5 trillion U.S. dollars) in 2025. And the dynamics of industrial production and exports is even higher. GDP growth production is increased, and the share of consumption falls in it. "The Chinese consumer is not much different from its European or American counterpart and spends as soon as he has money," sums up Jonathan Anderson.


Man in the street with a double bottom

It turns out that the population of China is quite willing to spend money. So the problem is not how to change the mentality of one and a half billion people, and that they had more money. Experts in eager rivalry suggest to the Chinese authorities their recipes. "State enterprise until recently did not pay dividends, and they account for only 5-10% of net profit depending on the sector, says an expert on the Chinese economy, analyst at the OECD Richard Hurd. – Payment of higher standards in developed countries as dividend to minority shareholders as well as directly to the Ministry of Finance could contribute to the redistribution of company profits and ultimately transfer the money to the population. But now this is not happening". With his opinion agreed Louis Guys. "If the Corporation will pay dividends at the level of 30% of the profits, that is approximately the same as in the West, it will be able to raise the level of consumption to GDP at 4-5 PPT, and quite quickly," he says.

Another tip is almost as old as Chinese export-oriented economic model. "A more expensive yuan would reduce corporate profits, this, in turn, will reduce the level of accumulation and re-investment in the creation of excess capacity, which will help to deflate the bubble in the economy and balance its development in favor of domestic consumption," says Jonathan Anderson. Similar recipes healthy offers and Professor of Economics at Peking University, former CEO of Bear Stearns Michael Pettis. "The Central Bank of China may raise Deposit rates, wages can rise faster than productivity, state-owned companies can be privatized through the distribution of shares among the population, – the expert lists. – All these measures give similar effect."

The whole "gentleman's set" proposed by the experts at MGI. In addition to basic steps like changing the structure of the economy and development of the social protection system it contained and quite down-to-earth ideas. Their leitmotif is the development of infrastructure, but not transport or industrial, and retail sales. Today in rural China (where more than half of its population) through the channels of organized retail is restricted to 18% of consumer demand – against 50% in urban areas. You need to improve the accessibility not only of goods but also the credit resources. The Chinese are only beginning to taste life in the credit: the debt of households increased from 4% of GDP in 2000 to 12% of GDP in 2009. On the assessment of the MGI, with the current trend, the volume of outstanding consumer loans will increase from 3.7 trillion yuan in 2009 to 8 trillion yuan (1.2 trillion dollars) in 2014. However, if the development of retail lending in China will reach the same scale of that in Taiwan (where their volume is 29% of GDP), the consumer market will benefit of 10 trillion yuan in the next five years. A package of such measures, according to MGI, is able to increase the share of consumption in GDP by 2.8 to 4.7% by 2025. And taking into account all possible moves by 2025 it could rise to 45.2, 50.5 per cent of GDP – thus, by this measure China will be compared with the developed countries of the West.


Village secrets

And what about the authorities? Their response to the crisis was a stimulus package of 600 billion dollars. But the question is: what stimulates it? Experts MGI estimate that 89% of the allocated funds accounts for investments in infrastructure and only 8 per cent to support consumption. Does this mean that achieving the dream of a balanced economy is postponed indefinitely? Possible. However, China, as usual, has a secret. In this case, it is the heterogeneity of the regions of the country. Not only and not so much on the level of welfare or development, how the economic model. This feature back in 2008 noticed Professor Sloan school of management Massachusetts Institute of technology Yashen Huang, in his article "Private ownership: the real source of the Chinese economic miracle." According to his observations, the average dominance of the industrial behemoths and the state capital hides a very diverse picture. As an example, he cites the city of Wenzhou, located several hundred miles South of Shanghai.

Unlike Shanghai, where reigns the state, and Shenzhen, where the priority was given to foreign investment, Wenzhou developed according to the laws of the free market almost since the beginning of the 1980s. In terms of GDP per capita of Shanghai is twice as fast as the Zhejiang province, where Wenzhou is located. However, the amount of the income of households in these two regions are equal. And in Shanghai the figure was much higher – thanks to subsidies and benefits, but not salary. In contrast, in 2006, residents of Shanghai earn an average of 44% fewer residents of Zhejiang on business and 34% less on the income from ownership of property. "The moral is: capitalism can create cityscapes and statistics GDP, but not actual living standards," says Yashen Huang. In his opinion, the example of Zhejiang is no exception: in many rural provinces economy is based on small private enterprise, and growing faster than the national average. In other words, in some areas of China needs an economic model is already applied in practice. This might suggest that its spread all over the country – only a matter of time.

Alexander Zotin


Tags: economy , crisis , China , finances