China’s growth outlook largely immune from outside turmoil


China is headed for continued growth of about 8 percent a year on average over the next 10 to 20 years — backed by abundant domestic savings that support investments, and an almost unlimited supply of labor that will keep wage costs low, a Hong Kong-based scholar told a recent seminar in Tokyo.

Lawrence J. Lau, vice chancellor and professor of economics at the Chinese University of Hong Hong, said the country’s prospect will not be affected by external factors — except perhaps for possible disruptions in oil supply — because China’s reliance on exports will remain marginal.

“China’s economic growth so far has been investment-driven, as opposed to consumption- or export-driven, with the bulk of the investments domestically financed. . . . The Chinese economy is not too vulnerable to external disturbances,” the professor said.

Lau gave the lecture, “Prospects for Chinese economic growth: a view from Hong Hong,” at the Jan. 16 event organized by Keizai Koho Center at Keidanren Kaikan in Tokyo’s Chiyoda Ward.

Despite becoming the world’s fourth-largest economy in terms of gross domestic product in 2006, China is still a developing economy with a per capita gross domestic product of $1,980 — far below the $10,000 mark considered to be the threshold for a “developed” country, Lau said.

Also, its growth since economic reforms began in 1978 has been driven mainly by growth in tangible capital input — such as structures, equipment and physical infrastructure — and not by technological progress or productivity increases, the professor said. This, he noted, is typical of economies in their initial stages of economic growth — like the United States during the 19th century or Japan between the Meiji Restoration and World War II.

While China’s official GDP growth rate has risen from 10.1 percent in 2004, 10.2 percent in 2005 to 10.5 percent last year, Lau noted that other indicators suggest that the economy is in fact slowing down, including a decline in the rate of growth in industrial output, excess capacity in many sectors, slowdown in export and import growth, and falling real estate prices in major cities.

The consumer price index grew 1.3 percent in 2006, compared with 1.8 percent in 2005, as prices of goods, services and assets fell — another indicator of a gradual economic slowdown.

Lau noted that the problems confronting the Chinese economy today include potential macroeconomic instability, low level of household consumption, rising income inequality, environmental degradation and bureaucratic corruption.

In the coming years, the Chinese government will place greater emphasis on pursuit of social harmony, efficiency and long-term sustainability in its economic management, he said.

Still, prospects for continued rapid growth of the Chinese economy in the foreseeable future are “excellent” — because its economy will be largely immune to what happens outside the country, the professor stressed.

On the other side of the low household consumption is the high rate of domestic savings — which has approached 40-50 percent in recent years — that has traditionally financed the bulk of domestic investment in China.

Foreign direct investments (FDI) — accounting for roughly 10 percent of investments in China — are important because they bring technology, markets, new business models and knowhow to China, but FDIs and foreign loans alone cannot sustain China’s rapid growth, he said.

A country with a high savings rate does not need to rely on foreign capital — unlike Latin American nations that had to borrow abroad and bear the potential risk of a large foreign currency-denominated debt, he explained.

Lau also noted that there will be little upward pressure on wage levels of unskilled, entry-level labor in the coming decades.

Today, primary sectors like farming and mining account for 12.5 percent of China’s GDP, with industrial sectors accounting for 47.5 percent and service sectors 40 percent.

But roughly half of China’s labor force is still in the primary sectors — meaning that the fast-growing industrial and service sectors will be able to tap into the vast pool of surplus rural farm labor, he said.

Although China is often called the “world’s factory” because of its dominance in exports of light manufactured goods ranging from textiles to some electronic appliances, those exports’ contribution to its GDP remains low, Lau said.

China’s domestic value-added on these exports remains low because they are mostly “processing” exports based on imported intermediate inputs, raw materials and equipment.

Moreover, roughly 60 percent of Chinese exports are conducted by foreign-invested firms, meaning that a major portion of profits from the export trade accrues to foreign rather than Chinese firms, he said.

Exports account for about 35 percent of China’s GDP, according to the latest available figures. However, Lau said, the direct domestic value-added content of Chinese exports is low — at 20.4 percent — so the GDP originating from exports is only about 7 percent of the total.

“If the 7 percent does not grow, the economy will do fine if the remaining 93 percent continues to grow,” Lau noted. Even if the indirect value-added is taken into account, the economy, with its vast internal market, “is not too vulnerable to external disturbances,” he added.

China is often criticized by lawmakers in the United States for keeping the value of its yuan currency artificially low to keeping its exports competitive.

But Lau noted that given the low domestic value-added on exports — a mere 19.1 percent on those bound for the U.S. — a 10 percent appreciation of the yuan will result in less than 2 percent net increase in the direct costs of Chinese exports to the U.S.