Oct 19, 2015 - continued massive urbanisation process is enormous. The per capita capital stock of China today roughly e
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China’s economy: the four engines of growth | beyondbrics
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beyondbrics China’s economy: the four engines of growth Kevin Lu, Partners Group Author alerts
Oct 19 2015 12:08 1 comment
China’s economic growth surprised on the upside in the third quarter. Yet markets will probably remain fixated on the economy’s slowdown and on the devaluation of the renminbi in August. We are in a world where volatilities rule, economic opinions differ and geopolitical conspiracy theories abound. The mainstream view on the Chinese economy is that it will slow considerably, and only return to healthy growth if it can be “rebalanced” away from investment and exports to a household consumptiondriven model. This view is incomplete at least, and misguided in some aspects. The Chinese economy, over the next two decades before China becomes a highincome country, will be driven by four engines. First, infrastructure and related investment will continue to drive the economy forward, as they have for the past four decades. China’s per capita GDP ranks 90th in the world. Beijing’s most recent urbanisation plan calls for 100m more people to be moved from farming regions to cities by 2020, and 250m by 2026. The need for infrastructure and other investments driven by this continued massive urbanisation process is enormous. The per capita capital stock of China today roughly equates to the level in the US in the 1930s. The potential marginal return of capitalintensive investment, while lower than before, is likely to continue to be higher than what we typically see in a high middle income country. In addition, as Carnegie Endowment’s Yukon Huang pointed in an article in Caixin last month, compared with South Korea and Japan, Chinese’s economy is replete with distortions that the others did not have at a comparable stage in their development. The Chinese government’s current attempts to address such distortions, such as through the continued SOE and hybrid economy reforms, are likely to lead to significant improvements in productivity. The “reform http://blogs.ft.com/beyondbrics/2015/10/19/chinaseconomythefourenginesofgrowth/#
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China’s economy: the four engines of growth | beyondbrics
dividend” will continue to pay off. In short, the investmentdriven “old economy” is likely to continue to thrive if the right policies are in place. The second engine is China’s “new economy”, which is centred in the services sector and grounded on rising levels of household consumptions, especially in urban areas. Since 2007, the services sector has consistently outgrown the primary and secondary sectors. Over the past five years, the contribution to GDP growth from the services sector has grown from 39 per cent to 57 per cent, reflecting greater demand for health care, education, tourism, entertainment, telecommunications, etc. As the provision of services is dominated by the private sector, the share of government and SOE employment in China’s urban areas has declined from 59 per cent in 1995 to 20 per cent in 2015. The third engine, reflecting the unique stateprivate sector dynamics in China, is the ability for the government to marshal state resources to make investments that both generate a longterm economic return and improve the quality of life for Chinese people. As I argued back in 2012 in a Foreign Policy article on Bo Xilai’s “Chongqing model”, the Chinese government, at both central and provincial levels, has been consistently willing and able to invest in such “quality of life investment” projects. An example is the affordable housing projects called “social housing”. The government’s target is to build enough social housing to accommodate 23 per cent of the urban populace by 2020, up from an estimated 14 per cent in 2011. This translates into an additional 30m units over seven years, according to UBS economist Tao Wang. While such social housing projects will take the form of real estate investments, they will improve people’s quality of life in the short term and stimulate additional demand and consumption. The fourth and final engine for China’s continued growth is to export infrastructure and over capacity to other countries, through increased connectivity under the new Silk Road and “one belt, on road” strategy. The newly established Silk Road Fund and the Asia Infrastructure Investment Bank (AIIB) would cornerstone such efforts. The recent industrial parks set up in Ethiopia, Zambia, Nigeria and other Africa countries, long advocated by my former World Bank colleague Justin Lin, are another way to move beyond exports of goods and services to exports of capacity, and of development experience more broadly. While the west ponders why Beijing uses this awkwardsounding label “one belt, one road”, Beijing is in fact astute with its reference to the Silk Road: if efforts for better connectivity could be done 400 years ago by our ancestors, there is no reason we cannot do it again today. It will certainly take longer for this engine to deliver growth to China than the other three domestic engines described above, but the BeltRoad strategy would have the most significant longterm impact for the world, as it potentially unlocks the “connectivity value” of the global economy beyond the level of connectivity today. The globalised world is interconnected through flows of goods, capital, technology, people, information, security and even mindsets. http://blogs.ft.com/beyondbrics/2015/10/19/chinaseconomythefourenginesofgrowth/#
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China’s economy: the four engines of growth | beyondbrics
Beijing’s experiment with its BeltRoad strategy could significantly redefine and broaden such connectivity, in addition to bringing economic growth to China and the other countries involved. The paradigm shift on August 11 to a more direct, marketbased mechanism to set exchange rates for the renminbi would also in the medium term further strengthen the connectivity between China and the rest of the world, in particular the Eastern Asian countries whose trade links with China are the strongest. In spite of heightened volatility in the short term, especially vis a vis the US dollar compared with the more tightlycontrolled and US dollarbenchmarked regime of the past, this will become increasingly apparent as the PBOC reduces the level of its interventions. It is clear that in August the Chinese government mishandled its desire to manage the domestic equity market. Fortunately, China’s equity market is a fraction of the size of its US equivalent and matters very little to most Chinese investors, the Chinese real economy or the global economy. The fundamentals of the Chinese economy matter far more, and they continue to be strong and the economy will continue to grow robustly, driven by these four engines. Dr Kevin Lu is a Managing Director at Partners Group, a global private equity firm. Back to beyondbrics Tags: China economy Posted in Asia, China | Permalink
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