China’s investment story4 min read . Updated: 17 Nov 2009, 09:19 PM IST
China’s investment story
China’s investment story
I write this from a freezing Beijing where I am ensconced in a well-heated deluxe room of the Lakeview Hotel at Peking University. The campus, which I had first visited in 1996, has been transformed since: It has reportedly received generous capital infusions of at least $100 million on several occasions during the last 15 years. I met a number of senior foreign academics who are attached to Peking and Tsinghua universities, whose infrastructure and quality of faculty are improving continuously. As an academic, I admit to feeling most envious of my Chinese counterparts.
But the real bonus of being here has been to find an answer to the question, how is China able to flood global markets with cheap exports without any evident infringement of WTO norms? The related issue is China’s ability to push up investment levels to historically unprecedented levels. These investment levels have been used to expand the manufacturing base, and China has emerged as the second largest exporter after Germany. It is building up huge modern infrastructure capacities, which some would argue may be relatively overdeveloped, given China’s current income levels. The simple answer, provided by Professor Michael Pettis, who is attached to Peking and Columbia universities, is that the Chinese have achieved this by effecting a massive and sustained cross-subsidization of the productive/corporate sector by Chinese households. Chinese household savings have been transferred to the corporate sector through taxation, pricing and exchange rate mechanisms. These are reflected in consistently high corporate savings that are used for expanding capacities and for churning out low-cost tradable products. Real wages have been kept low and productivity growth has been kept at high levels, aided by a near-complete lack of industrial strife. The dismantling of “iron bowl" practices in private and even state enterprises further encouraged high rates of household savings. Consequently, the share of wages in GDP has not risen. Savings were also encouraged by keeping the exchange rate undervalued, which effectively made non-tradable goods and services, which generally constitute a larger share of personal consumption in emerging economies, more expensive relative to tradable products. This promoted exports while restraining domestic consumption.
The flood of household savings, with recourse only to deposits in public sector banks, has been used to keep lending rates extremely low, thereby reducing the costs of capital for Chinese producers and exporters. For example, nominal interest costs have been kept at 6-7%, when as a rule of thumb, Pettis argues, they should have been closer to the nominal rate of growth of GDP, which has been around 14-15%. Thus, Chinese exporters not only enjoyed an endless supply of cheap and highly productive labour, whose skills are being constantly upgraded, but they also enjoyed relatively low capital costs. Add to this the subsidy inherent in the availability of government-acquired land, abundant energy supplies, negligible environment and transactions costs, and we have a clearer picture of China’s export competitiveness. This also implies, however, that Chinese producers perhaps have a negative value-added on the basis of domestic resource cost calculations. Has this been the story in other East Asian economies during their own periods of high growth and export orientation? Perhaps, but not for long, as both Japan and Korea were restrained after a point by strong external pressures. But China took the extra step of accumulating US treasury bills at levels never seen before and bought itself an insurance policy against US intervention. Can this continue? Not indefinitely, for sure. Ignoring external pressures, which will inevitably emerge domestically as well, China cannot sustain this for too long. As another panellist Professor Xu Xinzhong argued, the low level of consumption may not be due to the share of wages in GDP remaining low, but it may be due to the growing income and regional inequalities that exclude an increasing number of people from the benefits of rapid growth. This is already generating unsustainable social stress and pressures to put in place a social security system and to protect the environment from deteriorating further. Farmers are also beginning to protest against the government’s acquisition of land which, so far, has been routinely handed over to industrial enterprises. Further, the renminbi had been allowed to appreciate for two years prior to the onset of the current global crisis, reducing to some extent the price distortion between the non-tradable and tradable sectors. However, the renminbi has again been pegged to the dollar since July, when the latter started depreciating against major currencies. A large part of the Chinese fiscal stimulus has also been directed at creating infrastructure capacities instead of pushing up household consumption. Thus China, along with the US, may successfully shift the cost of adjusting the global macroeconomic imbalances to the rest of the world. The US could well go along as it helps its own recovery if China continues to finance its deficits. The US stance will become clear during US President Barack Obama’s visit this week. The next column will take up the implications of this Sino-US policy tango for India.
Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations. These are his personal views. Comment at email@example.com