China’s economy is probably growing at 15-16% annually as opposed to the rate of 10-11% claimed by the government, says Jahangir Aziz, head of the Asia and Pacific division of the International Monetary Fund (IMF).
Even though China has been growing at more than 10% for the past five years, compared with India’s 8.5%, with a non-food non-energy inflation of 1%, compared with India’s 6%, its growth is more heavily dependent on exports and investment than domestic consumption and, therefore, less sustainable, says Aziz.
Aziz, who has been studying China since 1999, says these are his personal views.
“China’s growth is underestimated because while China’s industrial statistics are very good, being a centrally planned economy, it underestimates the huge services sector,” maintains Aziz.
Also, real consumption, the data for which is updated only once a year, has expanded with a 2% difference from output growth, or 8% since the 1990s, he says.
Nor has growth been very employment-friendly. “It has taken 10% of growth to generate only 1% more jobs every year,” Aziz maintains.
While the Indian rupee has appreciated 15% against the dollar since July 2005 and interest rates have become 200 basis points higher, China has raised interest rates by only 100 points and allowed an appreciation of the renminbi, its currency, by less than 7%.
Economist Surjit Bhalla, head of Oxus Research, says that the cost to the Indian economy is much higher if the Reserve Bank of India allows the rupee to appreciate as exports will suffer. “China has managed to keep its exchange rate undervalued, with low inflation and high GDP (gross domestic product) growth,” he points out.
Aziz says the Chinese government should let the renminbi appreciate as a part of a strategy to rebalance the economy and moderate high growth.
China’s low domestic consumption, some 44% of GDP, large savings and cheap input costs, have led to investments at 55% of GDP and a huge trade surplus with Asia and the US.
But the huge overcapacity will need China to find newer export markets and keep prices competitive, a task that becomes difficult as the world economy slows, he says.
China, thus, needs to increase domestic consumption by raising the floor on lending rates, the ceiling on deposit rates and let the currency appreciate faster.
On the other hand, it also needs to liberalize the prices of inputs and cut tax incentives for industry, Aziz says.
The IMF expert adds the major difference between the Indian and Chinese economies is that the former is constrained by the supply of goods not being able to keep pace with demand expansion, while China’s low domestic consumption has not helped capacity absorption.
Many Indian economists and analysts, such as those with the research institution National Council of Applied Economic Research, say that supply constraints in the economy, rather than excess demand, have fuelled relatively high inflation.
“India, as a developing economy, needed to step up its domestic consumption to at least 50% of the GDP,” chief statistician of the government, Pronab Sen, said recently.