Another excellent analysis by Jim O’Neill carried in People’s Daily

China’s economy has surpassed our expectations and still has large development space

less optimistic view of China’s economy is not convincing

Jim O’Neill:

In late 2001, I first used the phrase BRIC to discuss the quick development of Brazil, Russia, India and China. In 2003, along with some GS colleagues, we first projected what the world might look like by 2050 if the BRIC and other large emerging economies reached their potential, a world that would be dramatically different than the one prevailing at the time. Then what is the present situation?

China’s economy has surpassed our expectations.

These two papers led to the beginning of the focus on the phrase BRIC. What is especially noteworthy over the subsequent 13 and ½ years is just how dominant China has become within the BRIC group in terms of economic size, as well of course, it’s increasing importance to the world economy. At the end of 2014, China’s economy surpassed $ 10 trillion in current US$. At $ 10 trillion, China is around 1 and ½ times the size of the other three BRIC countries put together. It is also bigger than the combined size of France, Germany and Italy. It is about twice the size of Japan.

In terms of size and growth, perhaps it is especially important to point out that not only did China grow at lot more than expected in the last decade, which was also true for the other three BRIC countries, but so far, in this decade, it is the only one that has –so far- surpassed my expectations. Due to China’s dominance, the BRIC countries collectively could become as large as the G7 countries collectively.

It is of course, to compare with the nominal GDP growth, China’s inhabitants’ individual wealth is the key factor that matters to their life. Given that China’s population is widely regarded to be reasonably stable, or if anything, declining modestly the country’s average GDP per capita- the simplest measure of wealth- should probably still broadly follow the path of its nominal GDP. Importantly again, GDP per capita has jumped sharply also to more than $7 thousand per head. While some measures has risen that hundreds of millions of Chinese have been taken out of poverty in the last 13 and ½ years, a key contributor to the UN achieving its millennium goal of halving poverty by 2015. In fact, this goal occurred by 2010, five years earlier, and has led to UN and World Bank researchers suggesting that the acceptable level to escape poverty might need to be raised. China has been easily the most important country contributing to these remarkable developments.

China’s prospects are still bright.

So what are China’s prospects now? In recent years, I have participated in many debates with other well-known commentators who are much more sceptical about China’s future, and while of course, I may be blind to the validity of their concerns, I find many of the arguments unpersuasive. Much of this is due to one simple fact, and that is the urbanisation of China’s citizens.

According to official data, just over 50pct of China’s people today live in cities, a vast rise compared to 20 years ago, but still significantly below the 70pct that is typically found in more advanced and wealthy economies. As I shall explain, if China were already 70pct urbanised today, then I would share, at least some of, the concerns of others. There is however a significant amount of evidence going through history going as far back as the industrial revolution in the UK, that urbanisation is a huge force that propels economic growth as urban dwellers drive all sorts of positive economic forces, both as consumers and producers. The OECD has recently published a very interesting study, consistent with this, that suggests the largest urban areas are typically associated with the strongest improvements in productivity. Therefore, in according with the factor of citizen rate, China’s economy still has large development space.

The problems that China needs to pay priority attention to.

Now, what does it need to focus on as policy priorities? The most important policy that I believe China needs to pursue is to go ahead with stated plans to give so called migrant workers full citizen rights as those that originate from urban areas. While I can see the challenges that may be raised by a sudden mass conversion in all cities, if true urban dwellers who have moved from the country can’t get the full rights, it follows that the conceptual benefits of urbanisation – starting with the very basic desire to own a property, and then to furniture it with consumer durables- cannot occur. It also follows that these migrant workers will be likely to maintain high levels of personal savings that they may need to help them to achieve some of the available resources that modern policies are making more available to recognised urban dwellers such as healthcare and insurance. China is trying in this field, for example, to rise to solve “Three 100 millions people” problem, which will not only improve the life of migrant workers but also strengthen the motive power of economy.

I have met some China sceptics that argue due to the success of the one child policy, there are not enough male urban migrants to participate in the presumed further urbanisation process assumed above, which if true, would be an issue. In this regard, I also view the decision to formally dismantle the one child policy as very sensible. Economic growth is driven by two factors over the long term, the number of people that work, and their productivity and if China had not relented, then it was highly likely that China would face a serious demographic challenge in the future. There is quite a bit of evidence that as people get wealthier (and more informed), they typically choose to have less children anyhow, so any fears that some policymakers may have of a renewed population explosion are probably not valid. So as I say, dismantling the one child policy in a non-disruptive manner is highly welcome.

Against the background of these two critical steps, I admire the government’s desire to grow the share of consumption in overall economic affairs. Indeed if the above two key steps are adopted with confidence, awareness and sincerity, they might be the biggest steps necessary to achieve what many often think is an elusive goal for China. From what I can tell, based on the official data, it is probably the case that the share of consumption in overall GDP has risen modestly in recent years, to 51.2pct of GDP in the year 2014. It needs to be much higher, not to the unsustainable level of 70pct that the US reached –and probably contributed greatly to the global credit crisis- but something in the 55pct vicinity at least. Indeed, something around 60pct would be quite normal and sustainable. In addition to pursuit of full urban rights for migrant workers, steps to ensure a credible social security and healthcare system and the development of a pension scheme of some sort are other necessary ingredients for helping the rise of the consumer, as this would allow for a decline in China’s too high personal savings rate.

I am a big fan of the focus on the “quality” of growth, the desire for a more knowledge based economy and society, and these are mutually consistent as is the necessary desire for a shift to less polluting and more efficient energies so that the quality of the urban and rural environment can be maintained in China.

(The author is Professor at the University of Manchester, Fansha translated)

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