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Making sense of China growth numbers

An international comparative perspective is useful in assessing China’s growth
performance. So far the record holders of high growth are Taiwan and Korea,
which have experienced high economic growth lasting for about 40 years. Japan’s
high growth period lasted for 18 years. By comparison, China’s high growth
period has so far lasted 27 years. This puts her ahead of Japan, but still short of
Taiwan and Korea.

China’s high growth has been achieved through high rates of fixed capital
investment and of export growth caused in turn by a large amount of foreign dir-
ect investment. In addition to the equipment and machinery investment, the fast
pace of infrastructure build-up and investment in real estate and urban housing
construction (induced by rapid urbanization) have contributed to China’s high
investment ratio. The trinity consisting of local governments, developers, and
four state-own banks, has been one of the main propelling forces behind this
investment spree.

China’s high economic growth and rapid urbanization have however given rise
to some new contradictions that cannot be ignored. Among these are: (a) decline
of the rural economy (especially in inland and mountainous areas, which are trad-
itionally not rich), manifested in large-scale depopulation (b) emergence of a class
of landless peasants, and (c) emergence of urban poor, including peasant migrants.
These contradictions have already graduated from being economic problems into
becoming social problems. Unless the government deals with these problems,
these may turn into political problems. In fact, the number of various distur-
bances has been increasing over the past years. More than half are related
to land expropriation by governments and developers. It will be difficult for China
to sustain high growth without resolving those newly emerging contradictions.

Changing population dynamics will also affect China’s economic growth pros-
pects in the near future. There are three anticipated changes. First, new supply
of young labor will decrease sharply in the near future owing to the continued
enforcement of the “one child policy” and the rapid spread of education at senior
high school level and above. The growing tightness of the labor market finds
manifestation in the fact that wages have been rising since 2002. This is bound to
affect China’s exports. Second, the Chinese society is aging at the fastest rate in
human history. Taking care of the aged, who will now comprise a higher propor-
tion of the population, will entail a greater financial burden on the government
and the society. Third, the total population of China will reach a stationary state
around 2020, much earlier that previously projected.

In view of the emerging contradictions and the population dynamics, it is
necessary for the Chinese government to bring about changes in its policies. In
particular, it has to change the financial redistribution system, which has so far
favored the trinity comprised of local governments, developers, and state-owned
banks, and make it work more in favor of the poor and the needy. At the same
time, China needs to change her industrial policy to make it more congruent
with the goal of sustainable development.