Matt Miller: How is China progressing in your view — let me start with you, Andrew — on its long-term shift from an investment-based economy to a consumption-based economy? That’s something observers have been talking about as being necessary. Where are we in that trajectory?
Andrew Dougherty: The first thing I’d say is that not only observers are talking about it, but the Chinese government itself has been talking about it for at least the last decade, recognizing that this is an important transition for them to make.
Matt Miller: Why is that? Why is it important that they do this thing everyone’s talking about?
Andrew Dougherty: The Chinese economy has been the beneficiary of several trends, one of which is a very high savings rate in China. That’s fueled this investment boom, and that’s been a supporter of growth for China both in terms of satisfying demand in the domestic economy, but also driving its export trade and increasing GDP through net exports. So it’s been an important part of the growth story and a positive part, for the most part, to date.
Typically, as economies mature, you start to see the investment complex decrease as a percentage of GDP, and you start to see consumption increase. So if you look at the developed countries like the United States and Europe, anywhere between 70% and 85% of GDP is consumption.
Matt Miller: Right.
Andrew Dougherty:And investment [is] somewhere between 10% and 15%, maybe 20%. Even India, which is a developing country, has consumption at 65%, roughly, of GDP. In China, if you include government consumption, you’re really only at about, roughly speaking, 50%, maybe a bit more. Between 40% and 45% of GDP is still coming from investment.
And part of the problem is that the Chinese growth model is linked to politics and social issues in China. So as you see the economy start to slow — and in those periods, actually, consumption rises as a function of the overall output — unfortunately, then, the government tends to get concerned about social stability, and so they increase GDP.
Matt Miller: Because there may be more unemployment?
Andrew Dougherty: Because of unemployment issues, exactly. And so then they increase GDP, typically through investment spending, infrastructure [and] property-cycle stimulus. So that’s what we’ve seen in the last 18 months or so in China, which is why growth has recovered. But again, that slows this progression toward a more consumption-oriented economy.
Matt Miller: Let me bring you in, Stephen. Do the authorities there think about this as a 10-, 15-, 20-year transition where, as China becomes wealthier, it’s meant to make this transition?
Stephen Green: I think the philosophy is, “Build it and incomes will grow,” right? So invest in infrastructure and people will be able to get to work and go on holiday. Build a decent sewer system and people will have nicer lives. Build an airport and people will be able to travel. . So their philosophy is very much a “build it and they will come” kind of thing.
And if you look around the rest of the emerging world, whether it’s Brazil or India — Indonesia as well — infrastructure and building stuff and investing for the future is something that is sorely lacking, right? So this is something that China does well, maybe a little bit too well. But it’s something that, I think, sets the foundations for a 5-, 10-, 20-year story of growth.
Matt Miller: The growth rate has been decelerating in recent years. How do you think about where that’s headed going forward? Let me start with you this time, Stephen.
Stephen Green: So we’re in kind of year 32, 33 of China’s fast-growth phase, right? You go back to 1977, 1978: that’s when the reforms took place. And we’ve been growing [on] average about 10% a year.
Matt Miller: Which is extraordinary, right?
Stephen Green: Which is extraordinary and almost unprecedented. When you look at, though, the experience of other countries, you find that at around this stage, growth begins to slow. And the question that, as economists, we’ll debate all the time is, “How fast will it slow?” Right? We did 30 years at 10%. Are the next 10 years going to be at 6% or 7%, or is it going to be 2%, 3%? And we have a big discussion about the various factors which will determine whether China grows at 3% or 5%.
Personally, I’m more in the 5%, 6% camp. I think there’s a lot more easy growth to come. Clearly, the days where we could grow at 9%, 10% or even sort of low teens sustainably are well over.
Matt Miller: Andrew, are you a 5% or 6% camper, or are you a 2% to 3% camper? How do you think about–?
Andrew Dougherty: Sometimes in the investment world, we use the phrase “a stock is ‘priced to perfection,’” meaning everything has to go right for the existing price to sort of make sense. And I feel like a price of 5% to 6% growth on China’s 10-year outlook expects things to really go right — including the reform program which Stephen alluded to. I think they’ve outlined and are well aware of the economic reforms that will allow them to continue the productivity growth that’s required to keep economic growth going at that rate.
My concern is, as pragmatic as the Chinese leadership have historically been, a lot of those reforms are inherently politically related or motivated or driven. And without political liberalization of some sort — and I’m not suggesting what that should be — but I do think that political reform is inherently tied up with some of these economic reforms, or that the political system as it currently operates makes it difficult for some of those economic reforms to be successfully implemented. That’s where I think the slower overall average growth path on a 10-year view maybe looks more like 3% or 4%.