China is going through a much talked about slowdown, with fears over an imminent bursting of the credit bubble, but even more important than these, admittedly serious, immediate problems are the long-term challenges that China is facing. These challenges are interlinked and in some cases even appear to be mutually exclusive.
1. Rebalancing the Economy
The government continues to struggle to rebalance the economy away from credit-fuelled investment towards consumption. One of the chief challenges is to reduce the savings ratio, which stood at 39.5% of disposable income in 2013 and increase private consumption. However, with a still-weak social safety net this is proving hard to achieve. Current estimates suggest that by 2030 private consumption will account for 41.6% of GDP, compared to 67.4% in the USA. Rather more surprising is that, despite US incomes being four times higher than those in China, per capita savings in 2030 are set to be just 20% higher in the USA than they will be in China.
Per Capita Savings in the USA and China: 1990-2030
Source: Euromonitor International from national statistics
Note: Data are in constant 2013 prices
China’s large population has long been a key strength, but the population is ageing. The population of working age is already in decline and fertility rates are low. The median age of the population is on a par with the Western European average – unusual for an emerging economy. An ageing and slow-growing population matters because it contributes to skills shortages, and skills shortages and increasing wages are a real challenge for the Chinese economy. In 2005, average wages in Mexico were twice as high as those in China, but by 2014 wages in China had overtaken those in Mexico.
The government recognises this challenge and has relaxed the one child policy; but the relaxation of the one child policy won’t turn the tide of ageing because the legacy of the policy means that the number of women of childbearing age has fallen. Therefore, even if fertility rates do rise, the actual number of births may not increase substantially.
March 2014’s National New-type Urbanisation Plan for 2014-2020 has shown the government’s commitment to urbanisation as a national priority. The target is to increase the proportion of the population living in urban areas from 53% in 2013 to 60% by 2020. The aim of the policy is to regularise rural migrants and to increase consumption – urban consumers both earn and spend more than their rural counterparts. The policy may also help with a related challenge – that of inequality. China’s 642 million rural inhabitants have thus far benefitted far less from China’s economic growth and this has widened the gap between the rich and poor. By enlarging the urban population and increasing the number of small and medium sized cities, inequality may lessen.
China’s demographic challenges and shrinking working-age population mean that the existing workforce has to work harder and smarter for growth to be sustained. It is imperative therefore that China move up the value chain away from basic manufacturing and focus on becoming an innovative economy. To do this it requires a creative and highly-skilled workforce. Education is crucial in this drive, as is increasing R&D and incentivising foreign direct investment. Labour productivity has almost doubled in US$ terms since 2008, but in 2013 at US$11,753 per person employed, was below that of other major emerging economies such as Brazil, Russia, Mexico and Turkey.
5. Environmental Degradation
China’s fifth – but by no means smallest – challenge is environmental in nature. In 2010, China overtook the USA to become the world’s largest energy consumer. Added to which, at 69.3%, coal accounts for the largest proportion of China’s primary energy consumption – in fact China consumes 4.6 times the amount of coal as its nearest “rival” the USA. China also has the dubious title of the world’s largest polluter, accounting for 28.3% of global CO2 emissions in 2013 – more than North America and Western Europe combined. As a result, air pollution has been a consistent challenge for the authorities.
Water scarcity - as a result of pollution, economic and demographic trends, but also as a result of a lack of water resources - is also a problem which is heading for crisis point. Particularly as increasing urbanisation places more stresses on supplies – because urban inhabitants use more water than their rural counterparts. The scale of the challenge is huge but the solutions do not have to be on a similar scale, relatively small changes aimed at improving efficiency and decreasing waste could have an important impact as well as large-scale government investments such as the South-North Water Transfer Project which works by moving water from the south to water-stressed locales in the north of the country.