ChinaÆs inflection point
China is at the precipice of an important phase of its economic development, according to Qing Wang, managing director and chief economist for Greater China at Morgan Stanley Asia.
Wang, speaking at the TPM Asia conference in Shenzhen in mid-October, posited a theory that China is facing an inflection point that many past Asian economies have faced ' when its gross domestic product reaches $7,000 per capita.
In the last few decades, 40 countries have reached that level.
'Thirty of those 40 countries have seen their growth rates decelerate after reaching the $7,000-per-capita level,' he said. 'Japan's and Korea's experiences are most relevant. China today is like Japan in 1969 and Korea in 1988. After this inflection point, GDP growth tends to decelerate quickly and labor income as a percentage of GDP tends to increase. We shouldn't be surprised if China's growth is less in the next decade, and inflation higher, but with growing consumption.'
In recent months, American Shipper has tackled the issue of China's wage levels and its increasing consumer power ('Unrest causes unease' and 'Destination China,' www.AmericanShipper.com/links).
'The Japan-Korea experience would be the worst-case scenario for China,' Wang said.
He said Japan led the economic growth phase in the Asia-Pacific region, ultimately yielding to strong growth periods in Korea, Taiwan, Hong Kong and the ASEAN nations.
'Due to the sheer size of China, that same evolution will happen, but it will happen within China,' he said. 'If China grew 8 percent over the next decade, that would imply a 2.3 percent decrease in growth from 2000 to 2010. But despite the deceleration in growth, the projected GDP would quadruple in the next decade even if the (Chinese currency) appreciates 3 percent a year versus the U.S. dollar.'
It appears China can learn from the two divergent paths Japan and Korea took when they reached this key inflection point.
'After the inflection point, Japan operated with a trade surplus, while Korea developed a trade deficit,' Wang said. 'That means Korea relied on imports. Will China follow Korea or Japan's path? The biggest influences may come from currency and protectionism in other countries.
'Ten years after Japan and Korea crossed that inflection point, they were hit with crises,' he continued. 'For Japan, it was oil, and for Korea it was the Asian financial crisis. This highlights the risk China's economy is facing. If commodity prices surge, it could derail the sustainability of growth. And Korea showed that if you run a trade deficit, you're susceptible to the discipline of the global economy. And that's why China has been so intent on hedging foreign outflows.'
Wang also addressed the concern that China's economy could slow due to a declining population and earlier retirement for its citizens.
'Labor supply will not be a constraint on economic growth,' he said. 'Labor in the services and manufacturing sectors is four times more productive than in the agricultural sector. So even if the absolute number is going down, the ones who remain are more productive.'
Wang said China's economy is in a Goldilocks phase, not too hot and not too cold, not too much growth and not too much inflation
'The question is, what is the sustainability of the Goldilocks phase?' he said.
Much will depend on how much pressure there is for China to revalue its currency, and how gradually that revaluation would occur.
'Precisely because it's been undervalued for so long by China, to bring it to an equivalent level, you need to do it gradually,' Wang said. 'After the economic crisis, every country is trying to export their troubles. And the U.S. is doing that be devaluing the dollar. But in order to devalue the dollar, another currency has to appreciate. In a way, we're already in a currency conflict.'
Wang added the loser of the currency war will likely be China, simply because 'they will have the burden of adjustment that they didn't have before.'
Walter Kemmsies, chief economist for Moffatt & Nichol, discussed this topic in the November American Shipper ('China currency syndrome,' www.AmericanShipper.com/links).