Q: What is your take on China’s declining GDP figure?
In my view, the Chinese economy is moving rapidly – far more rapidly – than people
realize, but I think there are two complications. The first is that GDP numbers are a
better reflection of the old economy. That means the data quantifies activity like how
many tonnes of steel a factory produces, or how many tonnes of coal you generate,
and that activity is much easier to measure. So there is no doubt that the old
economy – which suffers from excess capacity, has energy inefficiencies, has
pollution problems – is slowing down, and that is what is being reflected in the GDP
numbers.
But I question whether the data captures activities such as those linked to e-
commerce, and whether the data reflects a major change in the structure of the
economy, when consumption patterns reflect a move activities onto the internet. A lot
of service areas are beginning to do well, there are a lot of start-ups. This growth is
driven by other measures, such as higher real wages, shift in domestic consumption
and services and cut in red tape for start-ups.
This goes back to a serious problem, which we see in advanced economies, with
measuring the true GDP input of the New Economy where technology and services
play a large part. Some of ths input comes through in consumption, some of it comes
through in production, but they have difficulty measuring the total factor productivity
(TFP) of the New Economy. Even today, statisticians are struggling to measure
productivity gains from computerization, robotization, and new discoveries. We have
many new discoveries in biotechnology, medicine, healthcare and education, but
these don’t seem to be reflected in growth in GDP numbers.
I think China is now in this particular conundrum, where people have difficulty
measuring what is new growth, vs growth measured against dying, obsolete
industries that are fading out. I think this shares the same conundrum that faced
Japan, Europe and the United States. It is true that when economies reach a large
scale, growth naturally slows, because the base is bigger, but we also have the
problem of measuring more complex growth.
It is so much easier for us to measure how much steel is being consumed, how much
coal is being produced. You put in these numbers, you crunch up and you get a new
number. But in the new economy where you don’t use that much steel or electricity,
revenue growth and value added is clearly happening. But is it captured in statistics?
That’s a fundamental issue that is now facing China.
Q: Still, markets and investors are getting spooked by this data. What would
you say to them?
That this slowdown is a good thing. It’s a good thing because its means that the old
polluting industries are dying, otherwise the new economy can’t grow. One should not
treat this (slowdown) as though it is the end of the world. We see growth in areas in
China which people haven’t looked at. If you look very carefully at the numbers,
growth in the service sector is still double digit. Consumption is between 10-11 per
cent, which is the number I saw recently. The number of new companies which have
been registered since the liberalization of the rules and regulations over start ups
have been very healthy. Are these being translated into GDP numbers, I don’t know.
It’s a statistical exercise. My view is that we should be more concerned about the
quality of growth, rather than the quantity of growth.
Q: But the slowdown in the old economy is also triggering associated
problems such as job losses. What is your view on this?
Everyone seems to have it in mind that you can have growth without pain. How did
China gets its fantastic period of over 10 per cent growth? This growth happened
because in 1997/98, under premier Zhu Rongji, the decision was made to literally link
the RMB to the USD. There was no official link, but de facto, the RMB followed the
US dollar. Having that nominal anchor forced the Chinese government to adjust the
real economy around that exchange rate.
This forced China to undergo a very painful period, in which 20 million people who
were working in the old State Owned Enterprises (SOEs) and in the heavy industries
such as coal and steel, lost their jobs. At the same time, China’s manufacturers
started shifting to light industries, such as those that manufactured washing
machines, cars, and other consumer durable goods. Most of these plants had to do
with assembly and had started growing after 1997/98. These same companies are
the ones that benefitted from China’s joining the WTO, and they enjoyed double digit
growth. These light manufacturing companies also succeeded in opening China up to
new markets. So by the time the boom in Europe and the US ended in 2007, China
had already moved on and had started selling to new markets in Africa, Latin America
and other emerging markets.
Now that the new markets are becoming saturated, I believe there was an
understanding during the Third Plenum that the Chinese growth model needed to
change – from one dependent on exports and heavy industries to one that supports
the new economy, so we see the birth of a service-, innovation-, domestic-driven,
consumption-driven economy. And this is beginning to happen.
In the last 4-5 years, particularly since 2012/2013, China has been working on
reducing excess capacity, so you can see that some of the coal-fired power stations
have shut down, and effectively dealing with their pollution and carbon emissions.
It could be argued that the cutdown in excess capacity and shift to green economy
may not be happening fast enough, but the hope is that the Chinese economy is
becoming leaner, hopefully cleaner, and greener. But in the meantime, don’t expect
that obsolete industries won’t go through the process of shedding jobs. The
challenge lies in new job creation through the service sector.
This interview first appeared in AGI, the University of Hong Kong, 16 October 2015
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