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| 等 级：资深长老 |
| 经 验 值：18233 |
| 魅 力 值：696 |
| 龙 币：8592 |
| 积 分：10218.8 |
| 注册日期：2004-04-02 |
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就算是学习英语了,其实也是一个预告
Maijin 作为摩根斯丹利首席经济分析师的谢国忠，还是相当有水准的
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China: The Hard Road to Balanced Growth
Andy Xie (Hong Kong)
Summary and Investment Conclusion
China’s growth model has depended disproportionately on exports
and fixed investment. The gross value of the two could exceed 89% of
China’s GDP in 2005 up from 60% in 2001. Consumption’s share in GDP
has declined from 60% to 50% during the same period. China’s economy
is more than twice as dependent on trade and fixed investment as on
average in the world.
China’s growth model has succeeded due to the low base factor.
As China becomes the third-largest trading economy in the world and its
fixed investment reaches half of GDP, the current model increasingly
runs into diminishing returns and is unlikely to be able to sustain
high growth over the long term. China’s development needs to be
modified to emphasize consumption more.
However, the road to a more balanced growth model is difficult.
China’s current growth model is deeply rooted in its political
economy. The system relies on giving incentives to foreign capital for
trade development to create financial capital and state financial
system monopolizing the financial capital for fixed investment. This
model tends to concentrate income among those with political privileges
and is not good for mass consumption development.
China is taking tentative steps towards reforming its exchange
rate. Many observers applaud the direction and believe that a strong
Chinese currency would shift China’s growth model towards
consumption. This is quite wrong, I believe. Without reforming the
political economy to spread income and wealth, a strong currency would
only turn China into a poor version of Japan. This is why I believe
that China must be careful in reforming its currency regime.
The Boom
China’s economic cycle has peaked and is beginning to turn
down. The upturn between 2001 and 2005 has been massive: exports
increased by 182%, fixed investment by 130%, M2 by 86%, and retail
sales by 62%. This boom is similar in size to the last one between
1991-95. Adjusting for inflation, mostly caused by currency
depreciation between 1991-95, the growth rates are quite similar
between the two periods across different sectors.
Cheap money is the cause of both booms. The Fed decreased
drastically in 1991 to deal with the S&L crisis and even more
dramatically in 2001 in response to the tech bubble bursting and 9/11.
The ample liquidity affects China in two ways. First, China experiences
an export boom on the strong global demand inspired the low Fed funds
rate. Second, hot money flows into China.
The difference in inflation rates between the two booms is often
cited as a big difference. I do not think so. In the previous boom,
exports lagged investment substantially, which caused the currency
devaluation and inflation, because China did not have much capacity to
join the global economy and used inflation tax to fund initial capital
formation. China did not have capacity shortage at the beginning of
this boom and could fund the capital expansion with export revenues.
Not Just Another Cycle?
Trade and investment usually lead China’s boom. After each
boom, both become bigger relative to the economy. In the 1991-95 boom,
exports plus fixed investment rose to 58.4% of GDP in 1994 from 45.9%
in 1991. In the current boom, it rose to about 89% in 2005 from 59.7%
in 2001. Are there limits to this tendency of the Chinese economy to
lean towards exports and fixed investment?
Many have predicted the death of China’s investment and
export-led model before, mostly on the bad debts from overinvestment.
China has sailed through another cycle without changing its model but
this model eventually stops working. We just do not know how far the
ratios of investment and exports can go.
China has certainly entered uncharted territories in both. Fixed
investment accounted for about half of the economy in 2005,
unprecedented for a large economy. Exports could reach 40% of GDP in
2005, also unprecedented among large economies. In the previous boom,
the fixed investment to GDP ratio peaked at 38% in 1993 and the exports
to GDP at 22.3% in 1994. This boom has pushed the Chinese economy much
further down the road of exports and investment-led growth. Have both
ratios peaked for China in this boom? i.e., Will China be able to push
the two ratios to create another boom?
The answer to this question is critical to the medium-term
outlook of the Chinese economy. If the investment/export-led model has
reached its limits, China will experience several years of slow growth
and must go through painful structural reforms to revive high growth
again. If the model still has room to go forward, China’s economy
could slow down for two years to digest the excess investment from the
boom and experience another export/investment-led boom when global
monetary conditions loosen again.
I suspect that China will continue its current model if the
external environment allows. China’s investment is driven by
government policy rather than returns on capital. Hence, as long as
financial capital is available, investment can grow. Financial capital
becomes available when China’s exports rise with global demand. The
limits to China’s investment growth are not defined by market forces.
Free trade is the external factor vital for China’s development
model. As long as the global trading system is relatively open, China
can expand its market share in global trade due to its competitive
advantages from low labor costs and high savings rate.
The global trading system has become freer over the past two
decades, a favorable trend for China’s development model.
Protectionist sentiment is certainly on the rise. However, as the sunk
cost in the current system is very high for every major economy, it is
not easy to see how protectionism could prevail in the near future.
Why Is China Investment Prone?
China’s development model is based on (1) incentivizing foreign
capital to grow exports to create financial capital and (2) the
state-controlled financial system monopolizing financial capital for
investment planned by the central or local governments.
State-directed investment has multiple purposes.
First, it complements foreign capital in sustaining China’s
competitiveness. When the foreign-capital dominated export sector
grows, state-directed investment ensures that the supporting
infrastructure grows in tandem. This is the most constructive aspect of
China’s investment machine.
Second, state-directed investment is the primary policy
instrument for spreading economic development inland. The trade sector
is concentrated along the coast. The five coastal provinces (Guangdong,
Fujiang, Zhejiang, Shanghai, and Jiangsu) account for 75% of the
country’s exports but only 20% of the population. State-directed
investment channels financial capital that the coastal provinces create
through trade into inland provinces to increase their capital base and,
hence, labor productivity. Even with the massive state-directed
investment in the interior provinces, the income and wealth gap between
the coast and the inland is still widening.
Third, state-led investment has become the primary instrument for
the supervision of local government achievement by the central
government. China’s political incentives function on awards for
development success or punishment for development failure. A commonly
used metric is GDP at city or province level. The easiest way for a
city to create GDP is through fixed investment. Also, popular opinion
views physical transformation as the most important benchmark for the
success of a government. Hence, political incentives are heavily biased
towards fixed investment.
China’s power structure is a gigantic pyramid. It is quite
difficult for such a top-down linear power structure to run a vast
country with 1.3 billion people. Fixed investment is tangible and can
be a reasonable instrument for the top layer of political power to
supervise the lower levels.
When politicians are motivated to do something, they tend to
overdo it. Fixed investment in China is just one example. Hence, China
tends to experience excess capacity. When there is excess capacity, it
is inevitable that government will promote exports by keeping the
currency low or providing financial incentives. But, when export growth
absorbs the excess capacity, the same political incentive could lead to
another wave of excess capacity. This is why fixed investment and
exports become bigger over time relative to China’s economy.
China’s Development Is Biased Against Consumption
China’s development model is positively biased towards
investment and implicitly biased against consumption. As investment/GDP
ratio rises, the role of the government in the economy increases. That
tends to cause income concentration.
Those with access to power enjoy a disproportionate share in
national income growth. The rising income inequality is unfavorable for
consumption development. A small number of rich people who control most
bank deposits tend to consume expensive items that have a low
multiplier effect for the economy. They also have a tendency to use the
money for further investment or speculation, which may exacerbate the
overcapacity problem.
China still has a labor surplus. Without special skills or
privileges, market competition ensures that most receive low wages.
When government introduces a layer of cost either through a monopoly,
unfair land allocation, or awarding construction contracts, it spreads
among all the workers in the form of lower wages for all. This sort of
distortion is very negative for consumption development.
The trade sector has a better multiplier effect for consumption
but it is not large. Most factory workers receive low wages. If the
sector adds three million workers a year, the total income for these
factory workers is less than US$5 billion or 0.4% of GDP. Far more of
the trade income goes into debt service for the supporting
infrastructure and equipment.
Reforming the Currency Is Not a Solution
Many observers urge China to increase the value of its currency
to boost consumption. This is a dangerous suggestion, in my view.
Currency appreciation may boost consumption in a market economy but
only when the appreciation is not artificial. China is not yet a market
economy. Artificially boosting the currency value would not serve the
purpose at all.
A stronger currency is likely to boost the value of bank deposits
controlled by a small minority. Their increased purchasing power for
foreign goods might lead to more imports of luxury cars or more
shopping trips to Paris. It won’t boost mass consumption.
Instead, a strong currency would kill economic growth, I believe.
Monetary liquidity would decline for two reasons: (1) fewer exports due
to cost increases, and (2) lower value of exports translated into local
currency. China’s overinvestment has kept returns on capital low. The
funds for new investment depend on new money from export growth.
Without reforming the political economy first, a strong currency policy
would turn China into a poor version of Japan.
The Hard Road to Balanced Growth
China can move towards a balanced growth model and, in my view,
must do so at some point as the current model ceases to work. We do not
know when China’s development model will cease to work. But it is
important to ponder the reforms necessary for a balanced growth model.
I believe that China must undertake three fundamental reforms to
achieve balanced growth.
First, China must decrease the role of the government in the
economy, which is a necessary condition for better income distribution.
China must create a different mechanism for supervising local
governments. I would not be surprised if the dominant role of the
government in the Chinese economy shifts income equal to 10% of GDP
from the masses to those with privileges. It would be inconceivable for
mass consumption to become a growth driver for the Chinese economy
without removing this massive cost.
Second, China should give the assets under government control to
the people. The Chinese government owns land, natural resources, and
numerous state-owned enterprises. Chinese households, on the other
hand, are asset poor. I estimate that household wealth is less than
200% of GDP, far too low for consumption to drive the economy (see
‘China needs to spread its wealth’, Financial Times, April 15,
2004). The assets under government control could be worth 100% of GDP.
If the assets are returned to the people, it could propel a multi-year
consumption boom.
Many argue that this is a bad idea because the people do not know
the value of the assets and would sell them cheaply. First, I think
that it would still be better for the people. Assets under government
control are rarely well-employed and can encourage corruption.
Eventually, people may get nothing if these assets are under government
control for any length of time. Second, it is always possible to
introduce a lock-up for selling the assets in the mechanism for
returning the assets to the people.
Third, China must reform the healthcare and education sectors to
decrease peoples’ concerns about their costs. Healthcare and
education are, in theory, are still under government control; however,
these sectors usually raise funds from students and patients
arbitrarily. China enjoys neither the efficient benefits of private
ownership nor the low costs of public ownership.
When I travel around the country, I sense that most people in
China are deeply concerned with the potential costs of healthcare or
education. This concern is, in my view, a major deterrent against
consumption growth.
Fourth, China should boost its supply of affordable housing.
Skyrocketing property prices have been another deterrent against
consumption development. Property is the most important expenditure
item for a typical family. High property prices are a secular force
against consumption. A modest property can easily exceed 15 times the
household annual income in Chinese cities. Such high prices are not
conducive for consumption development.
Often analysts argue that rising property prices are good for
consumption. This is true in the short term only, and at the expense of
long-term consumption. When home ownership is widespread, rising
property prices pump up household paper wealth. As long as people
genuinely believe that they are richer, they will spend more money.
However, this works only when prices are rising fast, which is not
possible forever. After the initial price rise is over, the wealth
effect is gone. However, the people who need to form new families have
to pay more for their houses and, therefore, must save more. High
property prices are bad for consumption in the long term.
To address the above four issues is likely to take a decade for
China, in my view. Hence, it is unlikely that China could make the
switch from investment/export-led to consumption-led growth soon.
However, it is never too soon to start.
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2005-11-01 12:47:07
