China Transitioning to Consumption-Based Economy | American Funds

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September 2015

China Transitioning to Consumption-Based Economy

Economist Stephen Green examines China’s move to a new growth model along with the challenges of capturing an accurate GDP reading.



Stephen Green


Stephen Green: China is a kind of a supersized version of a classic East Asian economy, a Japan or South Korea. All these economies were export-led. They had high savings rates, good education and a lot of government intervention in the economy. And in that sort of startup phase for growth, it’s relatively simple for the government to direct resources. So government decides we need a steel industry. So it pushes savings towards steel. We need a shipbuilding industry. We need to build infrastructure. All that’s pretty easy. And so China really in many ways just followed the South Korean and Japanese sort of development route.

And they’ve achieved a lot, obviously. We’ve grown sort of around ten, 12 percent for 35 years. That, that story’s coming to an end, but it’s not completely over yet.

There’s still an awful lot more investment to come. It’s just that investment has to move away from building roads and airports into building better schools, better hospitals, sorting out the environment by throwing a lot of investment dollars at the environment, sorting out the water problems by better irrigation, other such things. So it’s slightly smarter investment is where we need to go now.

The other important thing I think is probably missed in a lot of the conversation about China, is that one of the, one of the problems with the statistics is it probably overstates the GDP growth rate. But another problem is that the statistics probably do a pretty good job of capturing investment but not a great job of capturing consumption. So the government does a good job of capturing the amount of cars produced, but a very bad job of tracking the amount of karaoke nights that people, or restaurants or travel or online behavior, and that’s really where the growth is.

The economy’s already a lot more balanced than the official data suggest it is. So that’s another reason I think you can be cautiously optimistic, that we can make this successful transition away from this old growth model into the new growth model.

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