China can maintain its economic growth
- By John Ross
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E-mail China.org.cn, August 13, 2014
China's advantage in meeting this challenge is that its investment level, 47% of GDP, is the highest of any major economy, providing a solid basis for long term growth. Maintaining such a high level of investment is the first essential for China's rapid growth, while reduction in investment would affect growth negatively.
The second key ratio determining economic growth is 'how much bang you get for a buck' from investment. Technically this is known as ICOR (incremental capital output ratio): what percentage of GDP has to be invested to generate 1% GDP growth.
So far China's situation is also satisfactory in this respect. Taking the average for the latest three years for which there is data in order to avoid distortions caused by short term fluctuations, China invested 5.1% of GDP for each 1% rise in economic growth, whereas the U.S. had to invest 7.9% – China's investment was therefore about 50% more efficient that the U.S's investment. But China's investment efficiency has fallen – the gap used to be bigger.
A key reason is the slowdown in China's industrial growth. Productivity increases in services are much slower than in industry in all countries. But in the last three years China's industrial growth has significantly decelerated to around 9% a year, as shown in the following chart.
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It is too early in China's development for it to shift from a manufacturing to a service-based economy. By comparison, South Korea is still an economy dominated by manufacturing, but China's per capita GDP is only one quarter to one third of South Korea's, depending on the measure used. A premature shift from industry to services would therefore lead to a significant decline in China's economic efficiency.
So far the problem is not serious – 9% industrial growth is sufficient to achieve China's 7.5% GDP growth target. But any further industrial deceleration would be damaging, as productivity growth in services cannot substitute for productivity growth in the manufacturing industry.
Maintaining the competitiveness of China's industry will therefore be the key to maintaining China's overall economic efficiency and growth in the coming years.
The author is a columnist with China.org.cn. For more information please visit: http://www.shenbo75.com/opinion/johnross.htm
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