Research Center for International Finance
Policy discussion No. 2014.009, Jun.17 2014
The unpalatable choices that lie ahead for china’s economy
He Fan
china’s high-growth economic model seemed to weather the global crisis better than most. but fan he warns that 2008 can now be seen as a crucial turning point – downwards
The crisis year of 2008 was a turning point for the Chinese economy’s performance; until then, China had grown at an astonishing rate, with average quarterly GDP growth reaching 10.5%. But in the years following 2008, the engines of economic growth slowed down. Even the unprecedented €4bn (four trillion renminbi) stimulus package announced towards the end of that year to bolster economic growth, the Chinese economy was unable to avoid a soft landing, for by 2013 the annual growth rate had dropped to 7.5%.
At first glance, the changes in China’s GDP are even more alarming. The share of capital formation to GDP had been at a constantly high level before the worldwide crisis broke, and it even climbed from 41.6% in 2008 to 48.3% in 2012. The share of consumption to GDP, though, dropped from 56.9% in 2008 to 49.6% in 2012. By much the same token, net exports had been increasing quickly before the crisis, but plummeted by 2012.
The result has been that the contributions to China’s growth of investments, consumption and net exports changed substantially. The average contribution from consumption to annual growth rate saw a slight but nonetheless encouraging improvement between 2008 and 2012, while from investment it surged from 48.5% to 57.3%. But the contribution from next exports fell off the cliff, dropping from plus 11.8% to minus 6.2%. In other words, rather than shifting from investment-led to consumer-led growth, post-crisis China appears to be stuck on its investment-led growth track.
But consumption versus investment is only part of the rebalancing debate; the other part is promoting services over manufacturing industry. There’s greater cause for optimism here; back in the 1990s, the share of services output to total output was expanding greedily, from 31.6% in 1990 to 39.0% in 2000, and uninterrupted by the global financial crisis, increased steadily in 2013. The share of industrial sectors increased through the 1990s and peaked at 42.2% in 2006, and then declined to 37% by 2013. The share of construction, on the other hand, reached a record high in 2013. Agriculture and mining gradually dropped from 27.1% in 1990 to 10.7% in 2008, and then slid further to 10% in 2013. The accelerated growth of the services sector can be illustrated by the employment statistics, for in 2011 the services overtook the primary sector as China’s biggest source of jobs.
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