China is at a crossroads; if it fumbles next steps a middle-income-trap awaits.
The paper highlighted this week is another in the ‘Working Paper’ series from the IMF. This one, by Longmei Zhang from their Asia and Pacific Department, was released last September and highlights some of the pressing problems China now faces and, more usefully, solutions required.
A couple of problems are worth specific highlight. Credit intensity i.e. the number of dollars in for a given return out, has doubled since the GFC. That has to stop. China’s Gini-coefficient has risen from 0.3% in the ’80’s to 0.53 in 2013, the fastest growth of any major economy. That has to be reversed.
So, how do you go about effecting a re-balance?
The paper outlines five fixes:
- Float the exchange rate and let the market work out what the ‘right’ level is
- Boost health care spending if you want people to lower their savings rates
- Deregulate the service sector. You want people to open and go more to nail-bars? Cut the red-tape
- Harden budget constraints. Don’t kill the SOEs; but make them work smarter
- Raise education and social protection spending. You’ll help address that Gini problem in the process
The sixty four thousand dollar question; can China do it? The answer is an article of faith China fans and cynics will never find common ground on.
The paper swerves a direct answer but concludes constructively, ‘With decisive implementation of these policies, China can sustainably maintain strong economic growth and achieve its economic transition, and become a greener, more inclusive, and more consumption and service driven economy.’, and who doesn’t want that?
You can access the paper for a full read via the following link Rebalancing in China—Progress and Prospects.
Happy Sunday.
[Look again at the chart at the top of this note if you have a moment. There’s an important observation for long-term investors. From the point Taiwan and Korea were when at the same per capita GDP China is now it took them nearly 25-years to peak out. China therefore still has many, many years of growth ahead. 中国加油! Go China!]