Tuesday 23 June 2009

"The model is cracking because it must "

[A country road on Jiangxin Island, Nanjing]

"China cannot build its economy for ever on a savings rate of 40 per cent of GDP, or exports growing at such a rate that by 2020 they will constitute half of the world's merchandise exports. The model is cracking because it must."

- Will Hutton

My question here is "why?". Not, of course, why Will Hutton believes these trends cannot continue forever - because they cannot (although they might go on for quite a long time), but why does he think that the slowing of growth in exports and the loosening of savings necessarily spells the end of Chinese growth? Exports make up a third of the Chinese economy, but domestic consumption is not growing so much more slowly than the rest. Savings act as a safety-net in absence of a proper welfare state, so until a welfare state is properly constituted they will remain high, and once this happens taxation is likely to step in to absorb the money which would otherwise be saved. All of this seems good reason to believe that Chinese GDP growth will slow from its 10% yearly average, not that the west will draw ahead of "a China facing political turmoil and increasing economic difficulties".


Anonymous said...

Exports make up a third of the Chinese economy

Again, this is not a very good metric. It's best to keep value-added in mind.

Gilman Grundy said...

Not sure I get you on this. I guess you're saying that export products are high value-added, and require only a small investment to turn a high profit which then gets re-invested etc. and that export lead growth as a result. It also affects the balance of payments, whilst domestic consumption would still require imports.

However, all of this seems a reason to believe that Chinese growth will slow, not that Chinese growth will fall behind that of the west. The domestic economy will continue to grow without the stimulus of growth in the export sector, perhaps not as quickly, but the industrial revolution is still under way in China. Not only that, but there would be an up-side in that it would encourage a more balanced infrastucture (not simply transport links designed to expedite exports), and more balanced growth (not merely growth centred around ports).

Bob fr shenzhen said...

China now imports a lot of stuff as well.
Also the saving is kinda of tradition in China but now is changing.