This is the con argument in the second of two mini-debates The Globe is hosting in advance of Friday’s Munk Debates on China’s role in the 21st century. The topic: Will the Chinese economy drive the global economic recovery? Click here for the pro argument.
For the past 30 years, China – like many Asian countries before it – has pursued an export-led growth strategy. By hitching its wagon to consumer demand from abroad, and suppressing such demand at home, it has been able to achieve turbo-charged development. The rest of the world’s prosperity drove China’s, not the other way around.
The imbalances implicit in this model posed little problem when China was a newly emerging market; but now that it has become the world’s second-largest economy, they can no longer be sustained. The global financial crisis, which hit Chinese exports hard, drove that point home loud and clear. These days nearly everyone recognizes, in principle, that China needs to shift to a new growth model driven not by exports, but by domestic consumer demand. If it’s successful, many say, the Chinese consumer could emerge as the main growth engine, not just for China, but for the world.
Making this adjustment happen, however, is much easier said than done. In reality, it involves a lot more change and turmoil than Chinese authorities have been willing to stomach. Instead, they’ve sustained high rates of GDP growth by engineering a massive investment boom, fuelled by cheap money and easy credit. In turn, this strategy has fuelled asset bubbles and inflation – economic minefields that can just as easily drag down the global recovery as build it up.
Chinese consumption has been growing, but not nearly enough to tilt the balance. In fact, according to the IMF, consumption as a percentage of China’s GDP has steadily declined, from 42.2 per cent in 2003 to 35.5 per cent in 2009. In the meantime, the investment-led “boom” produced by printing money has all but eliminated the motivation for the Chinese to tackle the kind of challenging reforms – to its banking system, its currency, its social safety net – needed to develop a strong consumer-based economy.
There is no question that China has the potential to be a driver of global economic growth. It will never be able to realize this potential, however, without profound changes to the way China runs its economy.
Patrick Chovanec is an associate professor at Tsinghua University’s School of Economics and Management in Beijing.
Editor's Note: The Munk Debates are semi-annual events that feature prominent figures in their fields. The next debate, to be held June 17, asks whether the 21st century will belong to China. It features former U.S. Secretary of State Henry Kissinger alongside economist David Daokui Li, CNN host Fareed Zakaria and historian Niall Ferguson.
For more news, videos, interviews and biographies, follow The Globe and Mail 's coverage of the upcoming debate here.