Analysis tends to oscillate between two extremes. The first is that the China experience is unique and that a developed China will change the world unrecognisably; the second is that the China growth experience is a myth, based on a fraud of artificially cheap capital, and the economy will eventually collapse in a heap.
Predictably, the truth turns out to be rather less exciting. Economic growth can only be achieved in three ways: by adding capital, by adding labour or by increasing productivity.
When economists study China closely they find that the increases in its productivity – as well as those of Japan and the Asian tigers in earlier decades – are not that startling. The reality is that Asian and Chinese growth comes on the back of a huge savings rate that (in the absence of total blockages) then translates into higher investment and growth. Much of the capital may be badly used and rates of return may be poor because supply of capital outstrips demand. But in circumstances where one third of gross domestic product is being saved, some wastage is unimportant and, in any case, growth just powers ahead.
Jonathan Anderson, chief Asia economist at UBS, has recently written on this issue in the Far Eastern Economic Review, and says: “Despite China’s seemingly world-beating rise and the hype surrounding China’s ‘special circumstance’, from a macroeconomic perspective the mainland looks almost exactly like its Asian predecessors.” That is, in historical terms, China’s rate of growth, increase in trade and rate of industrialisation is no more spectacular than in previous emerging market growth situations.
From the high savings perspective it is also easier to explain high current account and balance of payments surpluses – Asian countries export rather than import capital – and low exchange rates that are the cause of so much political posturing on the world stage.
The real issue for those advocating a stronger yuan is to look instead at their own economies and ask why the savings rates are so low and how this affects growth. The bad news for them is that Indian savings rates have shot up, confirming the view that India will be the next country on the high growth trajectory.
