China affairs specialist Andrew Dougherty shares his growth outlook for China as it makes the transition from an investment-based economy to a service-based economy.
Matt Miller: Let’s talk about the question of economic growth — the role of state-owned enterprises, the concerns that the authorities have about maintaining high employment or high levels of purchasing power, at least — during the transition from what you and others have talked about: this transition from an investment-led to a more consumption- or services-based economy. Where are we in that transition?
Andrew Dougherty: The short answer would be we’re still in the early stages of this. China’s service sector has surpassed the manufacturing and agricultural sectors as the leading sector in the economy and now represents more than half of China’s GDP. So that’s a good indicator that they’re moving in the right direction.
On the other hand, investment is still a relatively high percentage of GDP growth. So we’re still in the 40%-plus range for investment as a percentage of GDP. Keep in mind, for Japan and some of the other East Asian countries that grew quickly in the ’80s and ’90s, the peak for them was in the high 30s, so you’re still above peak levels for those economies. It’s still excessively high levels of investment as a percentage of economic growth in China, and that will continue to come down in the next four or five years.
I think sometimes people think, “Oh, you know, just switch to consumption, and that will make up for the loss of investment.” That’s never the way it works. When an investment-led economy starts slowing its investment complex, that inevitably has negative knock-on implications, as you suggest, for employment and wages, and we’re starting to see some of that come through. It’s a painful transition and that’s one of the reasons why GDP growth is slowing so much.
Matt Miller: If you were giving advisors who were trying to think about the big picture in China — and what that means for investments and what we do in helping clients — what’s your, kind of, headline in terms of how you’d encourage folks to think?
Andrew Dougherty: I think we should expect slower growth for some years now, right? Three to five years, a growth environment of 2%-4% is not impossible. That could go to zero in some years, and it could surge back following a low year if you see some of these structural reforms come through, and productivity enhancements come through as a result of that.
The big question mark right now is how serious they are about these reforms. How aggressively will they push them? And then how concerned will they get about unemployment in the meantime and then, again, come back to stimulating growth?
This is really the first year where they seem pretty serious about slowing growth through some of these supply-side reforms. And they’re still doing stimulative policies on the demand side to try and offset that, but not as aggressively as they have in the past. So the big question mark is, can they sustain that? Are they comfortable with that politically and socially? But I think, regardless, we’re looking at very low levels of growth compared to what we’ve seen in the past and much lower than what the official GDP numbers will be saying.
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