No hard landing for China's economy
- By John Ross
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E-mail China.org.cn, September 19, 2012
While some deceleration in China's economy was inevitable due to the international situation, the slowdown was magnified in early 2012 by several policy errors – these are now being corrected.
The first error flowed from confusion on how to stimulate domestic consumption – i.e. raising local living standards. The goal should be to maximize the sustainable rate of consumption increase. But unfortunately, this became confused with a different idea of sharply increasing the percentage of consumption in China's GDP. These two goals are actually contradictory, since GDP growth, largely fueled by investment, underpins sustainable consumption. A sharp increase in consumption cuts into investment levels, inadvertently leading to lower GDP and consumption growth.
The practical consequences of this confusion were clear in 2012. To attempt to raise the share of consumption in China's GDP, wage increases far above the economy's growth rate were pushed through. In the most striking examples, Sichuan raised the 2012 minimum wage by 23 percent, and Shenzhen announced a 16 percent increase on the 2012 minimum wage following a 20 percent increase in 2011.
This increased inflationary pressures and squeezed private and state company profits – creating in the first half of 2012 a trend accurately termed "profitless growth”. Falling profits led to investment reductions, with fixed asset growth falling from 25.0 percent in August 2011 to 20.2 percent in August 2012. This also cut tax income's growth, pressuring the state budget.
This process shows why the phrase "consumer-led growth"sometimes used in China is hopelessly confused. In a market economy production does not take place because there is a demand for consumption. It only occurs if production is profitable. As profits declined in 2012 investment fell, the economy slowed, and consumption's growth rate therefore declined. The growth rate of retail sales, before adjusting for inflation, fell by 4.9 percent between December 2011 and August 2012 while the CPI fell by 2.2 percent. Real retail sales growth, the main factor in consumption, therefore fell. Predictably, attempting to increase consumption's percentage in GDP led to consumption rising more slowly!
But if China’s government could not control world economic trends, the government did not use available policy tools to halt fixed investment's decline due to the influence of the World Bank's Report on China. As I previously warned in advance, this report was highly dangerous for China: "This type of economic program is… not simply a ‘theoretical' model. It has been thoroughly and demonstrably discredited… Russia [in the 1990s] was ill-advised enough to adopt this type of economic program. It is to be hoped… China does not follow the same course.”
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