Michael Pettis is Professor of Finance, Guanghua School of Management, Peking University, author of The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy, Avoiding the Fall: China’s Economic Restructuring and The Volatility Machine: Emerging Economics and the Threat of Financial Collapse. Pettis is out with his latest missive on China. Below is a brief excerpt on Chinese GDP growth.
From Michael Pettis
I was told by some of my students who attended the INET conference in Hong Kong last year that one of China’s most prominent economists spent his entire speech explaining why my prediction that China will grow by an average of 3-4% over the 2012-22 period (actually I have always said that this is the upper limit of growth) was impossible, and why growth would average well above 7% during this period.
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I spoke at a panel presentation with this same economist last week and when he was asked for his long-term growth prediction, he said something that greatly surprised me. Instead of continuing to insist
that growth could not possibly drop below 7%, he said that he predicted growth would be come in somewhere between 4% and 6% during the 2012-22 period.
I still think this is too high, but remember that I have been arguing for three years that I expected the consensus to drop every year by 100-200 basis points. This seems to be happening. By 2015-16 I suspect 3-4% will be the “new normal”, with everyone eager to explain that what really matters is unemployment and household income growth. Of course they will be correct. As long as unemployment is low and household income growing at 5% or thereabouts, actual GDP growth doesn’t matter – to ordinary Chinese, that is.
How can GDP grow at 3% while household income grows at 5%? It seems difficult but in fact is not at all impossible. Remember that during Japan’s rebalancing period, from 1990 to 2010, GDP grew by ½% but household income grew by nearly 2%. For this to happen all we are saying is that the household share of GDP, after contracting for thirty years, must now rise while the state share contracts.
Or, to put it another way, instead of boosting investment growth by transferring wealth from the household sector to the state sector, we must now boost consumption by transferring wealth from the state sector to the household sector. This is all the Third Plenum reforms do, but it is why the adjustment will be so politically difficult and why there will be so much opposition from the vested interests.
But it is happening. I have already explained why interest rate liberalization is simply one way of reversing the original hidden transfers, and here is another:
After more than a decade of mostly empty talk, China has finally announced a bold move to grant urban hukou status to 100 million people by 2020. The target is a major component of China’s new urbanisation plan, which represents a significant commitment towards achieving genuine urbanisation.
In the past two to three years, urbanisation has been refashioned to drive growth and remake the Chinese economy in the coming decades. To accomplish that, it is essential to allow migrants living in cities to have a full urban hukou, and thus be able to access basic urban services.
For the past three decades, “urbanisation in China has often meant allowing millions to move into cities without giving them an urban hukou, thereby excluding them from using social services. In recent years, it has also meant local governments borrowing huge amounts of money against land (much of it expropriated from rural people) to build infrastructure, some necessary, some not. Impressive GDP growth is generated, some of it suspicious.
But the story doesn’t end here, and what comes next is the most important part of what investors and analysts should understand about the reforms. Unfortunately I think there continues to be a lot of confusion about just this point.
Migrant workers will be wealthier thanks to hukou reform, but we cannot say that there has been a transfer of wealth from the state to the household sector until we specify how the cities will pay for that transfer: