The China files, Part 1: How fast can China grow?

May 9, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Hugo Dixon

How fast can China grow over the next decade? Nowhere near the breakneck speed it has enjoyed over the past three decades. Multiple economic, environmental and political challenges will slow it down.

The capitalist revolution launched by Deng Xiaoping after Mao Zedong’s death still has a long way to go. But it is now in its early middle ages rather than its infancy. The government recognizes that the old model driven by exports and investment is running out of steam; indeed, its recently unveiled 12th five-year plan tries to grapple with that challenge.

But it won’t be easy for the next generation of leaders, who are due to take over next year, to devise a new model that can move nearly as fast as the old one. Growth since 1980 has averaged 10 percent a year, according to official statistics. Such rapid growth over such a long period is virtually unique.

In the early stages of economic development, a country can grow very fast with the right policies. It is in catch-up mode. The quality and quantity of labor expand rapidly as the benefits of education kick in and the labor force grows. The quality and quantity of capital also take off if cutting edge technologies from abroad are adopted and money is poured into equipment, factories and infrastructure. And efficiency improves, especially if markets are freed up to competition.

This is basically what has happened in China since Deng launched his revolution. The country has witnessed a rapid urbanization which flooded factories with cheap labor: the urban share of the total population has grown from 20 percent to 50 percent between 1980 and 2010. People have worked incredibly hard to escape the poverty of their forebears.

Investment has been especially high: reaching a mind-boggling 48 percent of GDP in 2009. And exports have been driven ever upwards by an artificially low exchange rate, combined with closer integration in the world economy since China joined the World Trade Organization in 2001.

These trends can’t continue at the same pace. The country’s exports are now so big that it can’t keep expanding its share of world trade so fast. What’s more, its indebted customers in the West have a limited ability to keep buying.

The West is also turning up the pressure on Beijing to allow the yuan to appreciate, as politicians worry that an undervalued exchange rate is putting their own workers out of jobs. The topic will be on the agenda again when senior Chinese and American officials meet for the latest in their series of strategic and economic dialogues in Washington on May 9-10.

Exports peaked at 35 percent of GDP in 2007, just before the global financial crisis. After that, China’s rapid growth was fueled instead by a stimulus program of heavy infrastructure spending and massive expansion of credit. But, as more and more roads, high-speed railways, factories, office blocks and homes are built, the returns on investment are falling. The net return on total assets in the entire economy is estimated at only 1.2 percent in 2009, according to Lombard Street Research.

The financial consequences of this investment splurge haven’t become fully apparent. The over-investment in property has been disguised by the credit expansion, which fueled what looks like a speculative bubble. Meanwhile, the low returns in infrastructure are often hidden in the off-balance sheet vehicles of China’s local governments.

A burst property and infrastructure bubble would rock the economy, not least because construction has been such an important engine for growth. True, it’s unlikely to lead to a financial crisis because bad debts can be dealt with by the central government bailing out either the local governments or the banks. But Beijing won’t be able to keep repeating the same trick; otherwise its own currently strong fiscal position will be under threat.

If China only had to contend with slowing export and investment growth, it might be able to engineer a gradual slowdown in its economy — averaging perhaps 7 percent over the next decade. That’s actually the government’s new target, although it consistently sets hurdles it expects to be able to jump easily. But demographic and environmental challenges mean that even hitting 7 percent could be tough.

A rapidly aging population is one — the result of rising life expectancy and the country’s one-child policy, launched to prevent overpopulation in 1978. The proportion of people aged 14 or younger was 16.6 percent in 2010, down 6.3 percentage points since 2000, according to the latest census. The number aged 60 or older, meanwhile, rose 2.9 points to 13.3 percent. As a result, the labor force has basically stopped growing. That will slow down growth not just because human capital isn’t expanding but because upward pressure on wages is eating away at competitiveness.

Another constraint is the environment. China is so big that its economic success is applying a brake to further progress. Not only has this helped push up the price of commodities, which are hugely important for China’s manufacturing-orientated economic model; the country will have to reduce the carbon-intensity of its GDP to help stop the planet overheating. As Chinese consumers become more concerned about being healthy as well as wealthy, action will also have to be taken to tackle water shortages, air pollution, traffic congestion and other effects of uncontrolled industrialization and urbanization.

All this is bound to slow China down. And that’s even before taking into account two big challenges China can no longer ignore: the need to switch gears to a new, consumption-led economic model, and the quest for social stability in a country with high inequality and few political rights.

This is part one of a multi-part series. Part two looks at China’s brave new economic model. Part three looks at China’s crony capitalism.


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Th best part of China they can catch up every sector through their products. Let’s see how do they grow and how much it take to accomplish smoothly?

Posted by edwardsteve | Report as abusive

The question should be .When will China fall.

Posted by deerecub1977 | Report as abusive

Either Dixon hasn’t read the latest 5-year-plan or articles by China’s leading economists – or he’s playing to the Bears and baloney artists of Wall Street and the Beltway. Because the folks I referenced have been proposing a slower rate of growth for a while now – for sound economic and social reasons.

So, why be the Howard Cosell of business journalism? Why restate the obvious as if it is a discovery? Forgive my cynicism; but, first usual first conclusion is that someone writing crap like this has an ideological commitment to redirecting understanding between nations involved in commerce – suit political goals.

I’m not especially familiar with Dixon – but, where he has worked and works, what political analyses and strategies characterize those “points of light” are pretty consistent. He hasn’t changed what he works for – or who.

Posted by Eideard | Report as abusive

Remembering the exact number is tough, but I estimate that over the past 25 years, I’ve read about 25 private and public reports every year arguing that China’s high rate of growth can’t possible continue, about one report every two weeks. That’s a rough total of 625 reports, all saying the same thing, using the same tired old arguments, still beating that dead horse for 25 long years. What all of them really say is, ‘I’m afraid, and I hate the people who make me afraid.’ Frankly, I really don’t give a damn.

Posted by FirstAdvisor | Report as abusive

[…] This is the second part of a three-part series. Part one on the pace of China’s growth is here. […]

Posted by The China files, Part 2: Brave new economic model | Reuters Breakingviews | Report as abusive

China has essentially been parasiting off of Democratic countries, by using a low minimum wage coupled with free trade negotiations. This allows it to utilize a zero minimum wage that will attract foreign investment interested in cheap labor. As such, it has become the world’s manufacturing hub, churning out tons of “Made in China” products as fast as its slave-wage impoverished lower caste can produce it.

As other countries and interest groups come to recognize this however, there will be an outcry against the trade barriers and eventually, perhaps also China’s low minimum wage. Similarly, the low minimum wage may be protested by China’s own workers, the way those in other countries are revolting against the fascist regimes controlling all of their wealth. However, China strictly controls its media and ruthlessly stamps out opposition, so it is questionable whether such movements can be successful within the country.

China also uses its computer hackers, as well as the more traditional spies, to conduct technological espionage, stealing trade secrets from the U.S. It has developed technology far faster than it would have otherwise due to these tactics, which have been recently in the news. So far, it has yet to get really called out on this.

I would say China’s growth will continue only so long as countries like the U.S do not call it out on them, or stop dealings with China.

Posted by Jzyehoshua | Report as abusive

There are many schools of thoughts in the West predicting the failure of the “China model”.

But what good would it be to the world if China fails. There is a cartoon in the MAD magazine in the late 50s depicting two well-fed Americans talking, expressing their fear of the starving Chinese coming over to grab their foods. China is now a galaxy away from such poverty, yet many people in the West wants her to fail. Many people in the West are just being paranoid and have misunderstood China completely. Their views shows an undertone of racism beneath pure jealousy.

Posted by NukeAware | Report as abusive

China has high growth in last 3 decades.At the same time,800 millions people have lifted out of poverty.
Now,china is still a developing country.500 millions people will migrate to city in next 20 years,that is,labors is not a problem.

We don’t care whether you like us.We all believe that China will keep growth in a long time.

Well,One day in the future,Chine will fall.Like every other countries.So what?

Posted by miumiuoo | Report as abusive

The emphasis on the domestic consumption sector in promoting economic growth, via local government spending, infrastructure support , including transport,tourism,and health and old age pension spending,tackling people’s livelihood issues will be another big engine of growth reinforcing the export dependent strategy. I am not surprised when the former Vice-President of the World Bank, returning to Peking University to teach, is reported to have said that China can grow at 8% pa for the next 20 years.

Posted by neuiaw | Report as abusive