Recently China’s president Xi Jinping was quoted in saying that China’s GDP growth will be subdued in the foreseeable future, relative to the rapid growth in the past decade. China’s official newspaper Xinhua has put the internal target at 7.5% p.a. for 2013 from a 7.8% p.a. actual figure achieved in 2012, and many are undoubtedly aware that this is a 13-year record low. Exactly how much has the world’s second largest economy grown by and how has China done it?
The gross domestic product (GDP) is a number commonly used to represent the combined size of a nation’s economy, usually over the course of a year. We are talking about large numbers, intended to represent and record every economically significant action taken within a country’s borders. The percentage growth in GDP is also a figure that’s closely watched by economists, businessmen and governments worldwide as an economic indicator of how a country’s economy is performing. There have even been papers written about how presidencies in democracies are made or lost based on the size of this number.
To put into perspective China’s growth over the past decade and a half, China’s GDP has grown 6-fold, from approximately $1.2 trillion to $8.3 US trillion in nominal terms since 2000 (Fig 1.). This is in the order of 16%-17% per year for the past decade. In real terms it’s a bit more modest at 11% a year, still no small feat when compared against Australia’s 2.5-3% p.a. average over the same timeframe. This is the difference between a 35% growth vs. a 350% growth in the real economy over the same period. To achieve the same growth as China with Australia’s economy at our current rate would take half a century.
Fig 1. Source: World bank
Of course a straight comparison between GDP is hugely unfair – China is a developing nation with a huge population and arguable low capital per person. Most studies agree that this has allowed China to take advantage of the export market when it opened itself up to the world for trade in the early 1990’s. By transitioning from an agricultural economy into an urbanised industrial manufacturing lead model and using the biggest labour force in the world, China was able to grow through manufacturing exports – producing everything from t-shirts to washing machines, and everything in between. Other factors which allowed the rapid growth included advances in information technology which made it easier to take advantage of the latest technological developments around the world. Countries like Australia which are situated on, or close to the economic development frontier cannot leverage these same avenues of growth.
Despite coming out of the recent global economic crises unscathed (compared to Europe amongst others), not everything is rosy. As the president has noted, based on current trends the era of rapid growth may be coming to a close. Having seen the rapid rise and collapse of the US property bubble which culminated in the Global Financial Crisis, China’s leaders are careful to rein in inflation and what some might perceive as an overheated economy – fuelled by too much state-lead investment in its own domestic property markets.
China is now also no longer the sole supplier of cheap labour and production facilities as other countries in the region and around the world begin to industrialise, which feeds into the other issue of a lack of domestic consumption driven growth. Chinese people are the world’s most savings-happy people, with over a savings rate of over 50%. As exports begin to slow the government will have to find some way to convince its people to spend if it wants to stimulate economic activity.
One other issue is to do with in measuring the exact value of the GDP itself, no small task considering the size of the Chinese economy. Many suspect that China fudges some of its numbers (it only takes two weeks to produce this figure in China compared to eight weeks in the US) in order to maintain a façade. Combined with reports of ghost cities (see Henry’s article for a quick background) being built, some raise the question of whether or not these figures are deliberately inflated. The current premier Li Keqiang was quoted on WikiLeaks as far back as 2007 promoting the idea that China’s GDP was ‘man-made’ because it was unreliable, and other indicators such as electricity consumption might be a better proxy for economic activity. However other studies done on the topic using data outside of Communist party influence appear to corroborate the official version of the story.
Will China’s rapid growth continue? Looking back historically, things aren’t very promising. In Japan – another country which previously experienced rapid growth, we can see that GDP simply stagnated and has done so for the past two decades. However one particular study recently found that China’s productivity factor is presently only about 13% of that in the US, meaning that there are still a few decades’ worth of catch-up growth through economic reform and raising human capital in China. Perhaps China’s golden age is not quite over yet.
The diplomat: The curious case of China’s GDP
Xinhua: China keeps 2013 GDP growth target unchanged
Policymic: Xi Jinping the New Leader of China:
Guardian: China GDP how it has changed since 1980
World Bank: GDP figures