Five myths about
the
Chinese economy
Predictions of deepening economic woes are plentiful. Here are
five arguments against the pessimism.
A widely held Western view of
China is that its stunning
economic success contains the seeds of imminent collapse. This is a kind of
anchoring bias, which
colors academic and think-tank views of the country, as well as stories in the
media. In this analysis, China appears to have an economy unlike others—the
normal rules of development haven’t been followed, and behavior is irrational
at best, criminal at worst.
There’s no question, of course,
that China’s slowdown is both real and important for the global economy. But
news events like this year’s stock-market plunge and the yuan’s devaluation
versus the dollar reinforce the refrain, among a chorus of China watchers, that
the country’s long flirtation with disaster has finally ended, as predicted, in
tears. Meanwhile, Chinese officials, worried about political blowback, are said
to ignore advice from outside experts on heading off further turmoil and to be
paranoid about criticism.
My experience working and living
in China for the past three decades suggests that this one-dimensional view is
far from reality. Doubts about China’s future regularly ebb and flow. In what
follows, I challenge five common assumptions.
1.
China has been faking it
A key tenet of the China-meltdown
thesis is that the country has simply not established the basis for a
sustainable economy. It is said to lack a competitive, dynamic
private-enterprise structure and to have captured most of the value possible
from cheap labor and heavy foreign investment already.
Clearly, China lacks some
elements of a modern market economy—for example, the legal system falls short
of the support for property rights in advanced countries. Nonetheless, as China-economy scholar Nicholas
Lardy recently pointed out, the private sector is vibrant and tracing an upward
trend line. The share of state-owned enterprises in industrial output continues
to drop steadily, from 78 percent in 1978 to 26 percent in 2011. Private industry far outstrips the value added
in the state sector, and lending to private players is growing rapidly.
In fact, much of China’s
development model mirrors that of other industrializing and urbanizing
economies in Asia and elsewhere. The high savings rate, initial investments in
heavy industries and manufacturing, and efforts to guide and stabilize a
rapidly industrializing and urbanizing economy, for example, resemble the
policies that Japan, South Korea, and Taiwan followed at a similar stage of
their development. This investment-led model can lead to its own problems, as
Japan’s experience over the past 20 years indicates. Still, a willingness to
intervene pragmatically in the market doesn’t imply backwardness or economic
management that’s heedless of its impact on neighboring economies and global
partners.
Furthermore, China’s reform
initiatives since 2013 are direct responses to the
structural changes in the economy. The new policies aim to spur higher-value
exports, to target vibrant emerging markets, to open many sectors for private
investors, and to promote consumption-led growth rooted in rising middle-class
incomes. Today, consumption continues to go up faster than GDP, and investors
have recently piled into sectors from water treatment to e-commerce. These
reforms are continuing at the same time China is stepping up its anticorruption
drive, and the government hasn’t resorted to massive investment spending (as it
did in 2008). That shows just how important the reforms are.
2.
China’s economy lacks the capacity to innovate
Think tanks, academics, and
journalists alike maintain that China has, at best, a weak capacity to
innovate—the lifeblood of a modern economy. They usually argue as well that the
educational system stomps out creativity.
My work with multinationals keen
on partnering with innovative Chinese companies suggests that there’s no
shortage of local players with a strong creative streak. A recent McKinsey
Global Institute (MGI) study describes areas where innovation is flourishing
here. Process innovations are propelling competitive
advantage and growth for many manufacturers. Innovation is at the heart of the
success of companies in sectors adapting to fast-changing consumer needs, so
digital leaders like Alibaba (e-commerce) and Xiaomi (smartphones) are emerging
as top global contenders. Heavy investment in R&D—China ranks number two
globally in overall spending—and over a million science and engineering graduates
a year are helping to establish important beachheads in science- and
engineering-based innovation.
3.
China’s environmental degradation is at the point of no return
To believe this, you need to
think that the Chinese are content with a dirty environment and lack the
financial muscle to clean things up. OK, they got things wrong in the first
place, but so did most countries moving from an agrarian to an industrial
economy.
In fact, a lot that’s good is
happening. Start with social activism. A documentary on China’s serious
air-pollution problems (Under the Dome), by Chai Jing—a former
journalist at China Central Television (CCTV), the most important state-owned
broadcaster—was viewed over 150 million times in the three days after it was
posted online, in March 2015. True, the 140-minute video, which sharply
criticizes regulators, state-owned energy companies, and steel and coal
producers, was ultimately removed. But the People’s Daily interviewed
Chai Jing, and she was praised by a top environmental minister.
China is spending heavily on
abatement efforts, as well. The nation’s Airborne Pollution Prevention and
Control Action Plan, mandating reductions in coal use and emissions, has
earmarked an estimated $277 billion to target regions with the heaviest
pollution.That’s just one of several policy efforts to limit
coal’s dominance in the economy and to encourage cleaner energy supplies. My
interactions with leaders of Chinese cities have shown me that many of them
incorporate strict environmental targets into their economic master plans.
4.
Unproductive investment and rising debt fuels China’s rapid growth
To believe this, you would have
to think, as many skeptics do, that the Chinese economy is fundamentally driven
by overbuilding—too many roads, bridges, and buildings. In fact, as one economist has noted, this is a
misperception created by the fact that the country is just very big. An
eye-popping statistic is illustrative: in 2013, China consumed 25 times more
cement than the US economy did, on average, from 1985 to 2010. But adjusted for
per-capita consumption and global construction patterns, China’s use is pretty
much in line with that of South Korea and Taiwan during their economic booms.
China’s rising debt, of course,
continues to raise alarms. In fact, rather than deleveraging since the onset of
the financial crisis, China has seen its total debt quadruple, to $28.2
trillion last year, a recent MGI study found. Nearly half of the debt is directly or
indirectly related to real estate (prices have risen by 60 percent since 2008).
Local governments too have borrowed heavily in their rush to finance major
infrastructure projects.
While the borrowing does border
on recklessness, China’s government has plenty of financial capacity to weather
a crisis. According to MGI research, state debt hovers at only 55 percent of
GDP, substantially lower than it is in much of the West. A recent analysis of
China’s financial sector shows that even in the worst case—if credit write-offs
reached unprecedented levels—only a fairly narrow segment of Chinese financial
institutions would endure severe damage. And while growth would surely slow, in
all likelihood the overall economy wouldn’t seize up.
Finally, the stock-market slide
is less significant than the recent global hysteria suggests. The government
holds 60 percent of the market cap of Chinese companies. Moreover, the stock
market represents only a small portion of their capital funding. And remember,
it went up by 150 percent before coming down by 40.
Rumors drive the volatility on
China’s stock exchange, often in anticipation of trading by state entities. The
upshot is that the direct impact on the real economy will most likely be some
reduction in consumer demand from people who have lost money trading in shares.
5.
Social inequities and disenfranchised people threaten stability
On this one, I agree with the bears,
but it’s not just China that must worry about this problem. While economic
growth has benefited the vast majority of the population, the gap between the
countryside and the cities is increasing as urban wealth accelerates. There’s
also a widening breach within urban areas—the rich are growing richer.11
Urban inequality and a lack of
access to education and healthcare are not problems unique to China. People
here and in the West may find fruitful opportunities to exchange ideas because
the pattern across Western economies is similar. Leaders of the central
government have suggested policies to improve income distribution and to create
a fair and sustainable social-security system, though implementation remains a
matter for localities and varies greatly among them.
In short, China’s growth is
slower, but weighing the evidence I have seen, the sky isn’t falling.
Adjustment and reform are the hallmarks of a stable and responsive
economy—particularly in volatile times.
Jonathan Woetzel is a director in
McKinsey’s Shanghai office, as well as a director of the McKinsey Global
Institute. A version of this article was previously published on Forbes.com, on
October 5, 2015.
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