I, obviously, liked this week’s Economist article on China quite a bit.
So I really shouldn't still be writing about last week’s article on Chinese consumption growth. That article argued that consumption, not exports is driving Chinese growth -- and that China therefore might be able to weather a US slump. But I cannot resist.
The data in Goldman’s latest China Economic Quarterly helps explain why I wasn't persuaded by the Economist's argument.
There also is no doubt that Chinese consumption is growing faster than US consumption. Pretty much everything in China is growing faster than in the US. Moreover, consumption was about the only thing in the US that didn't slow in q3, so we don't yet have a test of the Economist's thesis. China hasn't (yet) needed to decouple.
But Goldman's data -- specifically the data in the summary indicators on p. 45 -- shows pretty clearly that the recent acceleration in Chinese growth hasn't come from an acceleration in consumption growth.
I used the data in that table to compare the average (real) growth in investment, and private consumption from 1998 through 2004 with the expected growth rates for investment and private consumption during the 2005-2007 period, and I did the same same thing with contribution to growth from net exports.
- Private consumption is expected to grow at an average rate of 7.3% from 2005 through 2007 – more or less precisely its average growth rate from 1998 through 2004 (7.2%). And since private consumption is less than 50% of GDP, that implies growth of 3.5% or so even if investment and exports don't help out. That's good, but still well below the kind of growth China expects.
- Fixed investment is expected to grow at an average rate of 12.7% from 2005 through 2007, a bit higher rate than its 12.1% average from 1998 through 2004. Investment growth peaked at 16.5% in 2003 – subsequent efforts to reign in investment growth by keeping bank lending below the growth in bank deposits have paid off. (If you have access to the Goldman report, see the first chart on p. 44 showing lending growth v. m2 growth). Domestic bank loans now finance only 20% of Chinese fixed asset investment (see p.41), effectively freeing up Chinese households savings to be lent first to the central bank and then to the savings short US …
- Net exports contributed, on average, 0.2% to China’s GDP growth from 1998 to 2004. They are expected to contribute average of 2.2% to Chinese GDP growth between 2005 and 2007. The 2.6% contribution to growth in 2005 was far higher than in any other previous year – the previous peak was 1.2% in 2000 (tech boom days). And at an estimated 2.2%, 2006 isn’t far behind.
Two caveats: One, the data in the summary indicators seems to be consistent with the data table in the October 23 article "A brighter outlook for 2007" (which notes that the data comes from the 2006 China statistical handbook) but not with the data presented in some of the other articles. Don't ask me for an explanation -- presumably new data come along. Two, Goldman puts a somewhat different spin on Chinese consumption growth than I do here, with a reprinted September 22 article emphasing growing strength in consumption.
I know that highlighting the contribution that net exports make to China’s growth makes many uncomfortable. For one thing, the contribution of net exports rose right after China’s leaders started to emphasize the need to rebalance China’s growth. And I think many are uncomfortable highlighting the possibility that China spurred its growth by pushing its exchange rate down. But there is little real doubt that net exports have made a substantial contribution to China's recent growth.
To be clear, I don't think China ever really had had a policy of pushing the RMB's trade weighted value down to spur its exports. China pegged to the dollar when it was rising, and it stayed pegged to the dollar when the dollar started to fall in 2002. But since China didn't change its policy as the world changed,China's RER fell significantly from 2002 through 2004. It is still 10% below its 2001 level today on Goldman's index-- even though Chinese productivity is a lot higher than its was in 2001.
RMB depreciation didn't immediately lead China's current account surplus to soar -- though it did lead to a surge in China's exports. China's current account surplus only started to soar after China reigned in domestic lending growth - slowing domestic demand growth and import growth -- in early 2004. Look at exhibit 2 of the Goldman quarterly, which shows a sharp fall off in the contribution of domestic demand to Chinese nominal GDP growth from mid 2004 on.
Personally, I think that the result would have been different if China had opted to let a rise in the RMB help cool the Chinese economy, rather than just using administrative controls to reign in investment. That is why the Economist’s story last week seemed off. It focused on the part of China’s economy that hasn’t accelerated, not the part that has.
No more from me. I want to conclude with links to four items on China that have caught my eye recently.
- Hong Liang’s argument that Chinese data overstates Chinese investment – and that the oft expressed view that China is currently over-investing is wrong.
- The latest from Hofman and Kuijs of the World Bank on the role of business savings in propelling the surge in overall Chinese savings
- Nick Lardy’s analysis of China, which emphasizes the role net exports have played in China’s recent growth. Lardy’s charts are also excellent – note the rise in corporate profits as a share of GDP, the rise in net exports and the expected 9% of GDP current account surplus in 2006.
- The discussion on China in Martin Wolf’s Economist Forum – particularly the debate between Dr. Buiter and Dr. Wolf on the desirability of large, sustained Chinese current account surpluses.