1. The sources of Chinese growth: go west policy, urbanization and productivity
The minimum target for GDP progress in 2012, set by Beijing at 7,5%, represents the lowest annual increase since 1990 and lower than the average 10,2% achieved since 2000 (Graph A). But even so reduced, China's dynamics will still contribute to one third of global growth this year estimated by the Monetary Fund at 3,5%, thanks to the increase in the weight of the Chinese economy on world GDP (14,3% in 2011; it was 7,1% in 2000).
Growth in the coming years will increasingly come from the central and western regions, which will continue the process of convergence towards the per capita GDP levels already achieved by the coastal areas, the more developed ones, as strongly desired by the Government through the go west policy. Their development derives from the shift of production towards more competitive areas in terms of labor costs (Chart B), according to a well-known mechanism observed in the past. Since the mid-2000s, the internal areas of the country have been growing faster than those along the coast and their economic weight is increasing: at the end of 2011 it had reached 44% of nominal GDP, up from 40% in 2005 (latest data from the Institute of Statistics Chinese).
The national average rate of GDP growth will be slower but the variance between provinces will remain high, as many of them will continue to advance at double-digit rates in the coming years, offering new opportunities to Italian companies, in terms of production location and expansion of the outlet markets. Another fundamental and solid source of development in the coming years, this time extended to the whole country, is the unstoppable process of urbanization: over ten million Chinese move from the countryside to the cities every year, activating new spending on infrastructure and demand of housing and contributing to the increase in wages and the development of the middle class. It is estimated that by 2020 there will be at least 100 million new residents in urban centres, for a total of 750 million and this will bring the population to exceed one million inhabitants in nearly 200 cities.
A third important source of growth will continue to be constituted by the increase in productivity: in the last forty years labor productivity, calculated as the ratio between GDP at constant prices and employed persons, has grown by 1.500% and from 2005 to 2011 by 84 %, at an average annual rate of 10,7% (Graph C). This has been instrumental in generating the resources for the sharp increases in wages and the process shows no signs of stopping thanks to the continuous shift of the workforce from agriculture to industry and the service sector and the repositioning of manufacturing towards sectors with higher added value. The increase in wages feeds the purchasing power of households and consumption.
2. The unresolved problems: rebalancing of the components of demand and reform of the banking sector
Nonetheless, the Chinese growth model has become inadequate in relation to the stage of development reached by the economy. The country has to face a series of structural issues which in the medium term could undermine social stability, a necessary condition for the legitimization of political power. After all, all countries navigating towards economic maturity are subject to important phases of transition and discontinuity in which the stakes are high and adjustments not painless. It already happened in the XNUMXs in Japan and in the XNUMXs in South Korea, Taiwan and Hong Kong. A first issue to be resolved is the rebalancing of domestic demand between consumption and investment (Graph D).
The latter have been the real driving force behind the Chinese economy in recent years: expenditure on plant, machinery, buildings and infrastructure represented 46% of nominal GDP in 2011, while exports, which in 2006 had reached a peak of 39% , now they affect much less (29% in 2011). Household consumption, which in theory should be the ultimate goal of productive activity, accounts for only one third of GDP. This does not mean that China does not need to make more investments, but that economic policies should push the increase in consumption more than that of investments, as already clearly indicated in the directives of the twelfth five-year plan. Investment spending is not unbalanced with respect to the amount of savings, which is very high: 54% of GDP in 2011.
Furthermore, the endowment of capital goods per capita is still very low: equal to a quarter of that of the United States, when calculated at PPP. For example, although the real estate market is shaky, because prices have risen a lot and there are so many unsold homes, there is a high unmet need for homes: in 2010 there were around 150 million homes in urban centres, 85 million less than number of resident urban households (latest data available). On the other hand, the weight of consumption on GDP has been declining for ten years, despite the fact that they have increased more in China than in all the other major world countries.
However, it must be considered that consumption adjusts to changes in income with a certain time lag; this is because spending intentions are formed on the basis of habits that have taken root in the past, shaped by a thrifty peasant culture, with few needs to satisfy and slow to change, and are dictated by ex-ante expectations on the future level of income, expectations that in phases of strong development are systematically exceeded by the effective growth of income itself and thus produce an involuntarily much higher rate of savings than planned. A phenomenon that has already been observed, for example, in Italy during the years of the economic boom.
Therefore, just as consumption growth rose more slowly than income growth in the past, generating a high propensity to save in retrospect, the opposite will happen in the years to come. As a result of the lower GDP growth, income growth will slow down, but consumption growth will slow down much less, or at all, and thus their weight on GDP will increase. However, this form of adjustment alone is not sufficient to rebalance the components of domestic demand. To encourage a substantial and stable increase in consumption, it is necessary to continue to strengthen the social safety net (health and pensions), the deficiencies of which accentuate the social security and precautionary reasons for saving.
According to the World Bank, China spends 5,7% of GDP on social safety nets, compared to the average 12,3% of emerging countries in the same per capita income bracket. Many studies show that greater social spending would favor consumption, decreasing precisely the high precautionary savings: it is estimated that a one percentage point increase in the share of social spending in GDP, equally divided between health, education and pensions, would lead to an increase of the incidence of household consumption on GDP by 1,25 percentage points.
Furthermore, according to other calculations, in urban areas, each additional yuan spent by the government on public health would free up two yuan of consumer spending. A second problem to solve concerns the banking system. The economic stimulus measures to deal with the crisis triggered a credit boom: from 2008 to 2009 private sector debt leapt from 103,7% of GDP to 127,2%, an increase of 23,5 points in one year, reaching 127,4% of GDP in 2011 (source: IMF; for China, this figure includes loans to state-owned enterprises).
Such a pronounced and concentrated jump over time is not repeatable and can cause financial imbalances. However, there are two major peculiarities, compared to other countries, which make the Chinese banking system more resilient, paradoxically for the same reasons why it is inefficient: first, China can count on a very high number of savers who cannot direct their capital, in terms of both intermediaries and countries in which to invest (in this it is very reminiscent of Italy's financial autarky in the 70s and 80s); second, no problem credit becomes a loss if repayment is not requested, therefore it is unlikely that the State, which owns both the creditor banks and the debtor public enterprises, will trigger this mechanism.
This does not mean that the system needs to be profoundly reformed, as the current political leader, Wen Jabao has repeatedly reiterated. The government is taking some first steps, for example by introducing a gradual liberalization of the interest rate on bank deposits, currently tied to a certain ceiling. If this ceiling were raised, small banks would have more room to offer savers better conditions, partially crowding out the big ones. In China, the search for higher returns has prompted the wealthiest savers to invest in so-called "wealth management products", particular short-term savings instruments that offer a better return on capital; at the end of the first quarter of 2010 (latest data available), these products amounted to 10,4 trillion yuan, accounting for 12% of deposits.
Their recent proliferation (with the approval of the Central Bank) is in fact anticipating the liberalization of interest rates. Reforms, and economic policies in general, have slowed down in this phase because the ten-year change of leadership is underway. To have an acceleration it will be necessary to wait for the new top management to take office and take full control.
That said, China remains a vital source of global growth and its international prominence is set to increase. In addition to being the world's leading exporter (10,4% of global exports in 2011) and leading industrial power (21,7% of world production), it is also a very important investor. The dragon is climbing the ranking of the countries that generate the largest outflows of FDI, climbing to fourth place in 2010 (5,1% of world foreign direct investment). FDI made by Chinese companies is constantly growing, from 10,2 billion dollars in 2005 to 72,7 in 2011, and are mostly directed to sectors of enormous strategic importance for the supply of energy and raw materials.
