Misreading Chinese rebalancing, of course

Used Car Lot – Shenyang

The punditocracy has once again succumbed to the “China Crash” syndrome – a malady that seems to afflict economic and political commentators every few years. Never mind the recurring false alarms over the past couple of decades. This time is different, argues the chorus of China skeptics.

Yes, China’s economy has slowed. While the crisis-battered West could only dream of matching the 7.5% annual GDP growth rate that China’s National Bureau of Statistics reported for the second quarter of 2013, it certainly does represent an appreciable slowdown from the 10% growth trend recorded from 1980 to 2010.

But it is not just the slowdown that has the skeptics worked up. There are also concerns over excessive debt and related fears of a fragile banking system; worries about the ever-present property bubble collapsing; and, most important, the presumed lack of meaningful progress on economic rebalancing – the long-awaited shift from a lopsided export-and-investment-led growth model to one driven by internal private consumption…

For an unbalanced economy that has under-consumed and over-invested for the better part of three decades, this is unnerving. After all, China’s leadership has been talking about rebalancing for years – especially since the enactment of the pro-consumption 12th Five-Year Plan in March 2011. It was one thing when rebalancing failed to occur as the economy was growing rapidly; for the skeptics, it is another matter altogether when rebalancing is stymied in a “slow-growth” climate.

This is superficial thinking, at best. The rebalancing of any economy – a major structural transformation in the sources of output growth – can hardly be expected to occur overnight. It takes strategy, time, and determination to pull it off. China has an ample supply of all three…

Why are services so important for China’s rebalancing? For starters, services are far more labor-intensive than the country’s traditional growth sectors. In 2011, Chinese services generated 30% more jobs per unit of output than did manufacturing and construction. This means that the Chinese economy can achieve its all-important labor-absorption objectives – employment, urbanization, and poverty reduction – with much slower GDP growth than in the past. In other words, a 7-8% growth trajectory in an increasingly services-led economy can hit the same labor-absorption targets that required 10% growth under China’s previous model.

That is good news for three reasons. First, services growth is beginning to tap a new source of labor-income generation, the mainstay of consumer demand. Second, greater reliance on services allows China to settle into a lower and more sustainable growth trajectory, tempering the excessive resource- and pollution-intensive activities driven by the hyper-growth of manufacturing and construction. And, third, growth in the embryonic services sector, which currently accounts for just 43% of the country’s GDP, broadens China’s economic base, creating a significant opportunity to reduce income inequality…

Slowly but surely, the next China is coming into focus. China doubters in the West have misread the Chinese economy’s vital signs once again.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. His most recent book is The Next Asia.

You may or may not live your intellectual life the way my wife and I do. We are truly fortunate that communication between us, discussion, dialogue, investigation of everything from feelings to philosophy has few barriers – other than that we’re a couple of hermits who sometimes forget about human speech. 🙂

A favorite recreation is catching a discussion between Tom Keene and someone like Stephen Roach on Bloomberg Surveillance. The wonders of timeshifting with a DVR means we needn’t count on paying attention at 4AM Mountain Time.

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