Jul 23, 2013

    China household-income growth is key


    AS THE debate in Beijing intensifies over the quality and sustainability of China's economic growth, a shift in thinking is taking place. China's most thoughtful economists are increasingly sceptical about the need for high gross domestic product (GDP) growth rates.

    The country's leadership has always put great stock in its GDP numbers. This year's growth target is 7.5 per cent; when Finance Minister Lou Jiwei said in Washington earlier this month that "the 7 per cent goal should not be considered as the bottom line", China's state-run media first reported and then, hastily, whitewashed his statement.

    According to Xinhua News Agency, Mr Lou had actually used the 7.5 per cent figure - coincidentally, the number reported last Monday for the second quarter.

    Such shenanigans are pointless. GDP growth rates over the next few years of 7.5 per cent, or even 7 per cent, will be impossible to achieve. Until now, such gaudy statistics have been produced by ballooning investment.

    With so much of that investment now creating less economic value than debt, China has experienced an unsustainable expansion in credit. The country is perilously vulnerable to a chaotic adjustment.

    This cannot continue. Growth will drop to well below 7 per cent one way or another, because credit growth must slow sharply.

    Ultimately, though, GDP growth rates are the wrong target. For China to successfully rebalance its economy towards a healthier and more sustainable model, the measure that matters is how fast median household income is growing.

    Why? It is now widely understood that the reason for China's very low household-consumption share is the very low household-income share of GDP, which - at around 50 per cent - is among the lowest recorded.

    To raise that figure while maintaining GDP growth of 7.5 per cent, or even 6 per cent, would require a ferocious surge in Chinese household income, even as China and the world slow down. This will be impossible to achieve without a continued, and very dangerous, surge in debt.

    As a number of prominent Chinese economists have noted, it is not the GDP growth rate that matters for ordinary Chinese people. Ordinary Chinese, like people everywhere, do not care about their per-capita share of GDP. They care about their real disposable income.

    In recent decades, real disposable income has grown at well above 7 per cent a year, which, although much lower than China's GDP growth rate, is nonetheless a tremendous feat. This is the growth rate that must be maintained. Beijing's policies should aim for average annual growth in household income of 6 or 7 per cent.

    This would ensure social stability and continue to drive China's economy forward.