In this interview of the McKinsey Global Institute we hear the opinion of Chinese economies on how China is acting through the crisis. People interviewed are members of the McKinsey Council on China Business Economists. The forecasts of GDP growth are similar to the ones predicted in this blog Agri Food Think Tank by October of last year despite Global Crisis.
Janamitra Devan: What is your view about China’s GDP in 2009?
David Li: My view is very, very simple. That for 2009, the Chinese GDP most likely will grow between 8 and 9 percent. And most likely it will move toward 9 percent rather than 8 percent. The reason’s very simple. Two things are going up to compensate for the diminishing export. One thing is consumption: the retail [sector] has been growing very, very fast in China. The other thing is investment. Lots of investment projects are being started right now as we speak. So, these two things are growing very fast, compensating for lost exports.
Tang Min: I’m less optimistic than David. My projections are 7 to 8 [percent].
Chi Wei: Well, I’m optimistic about the Chinese economy. But I’ll say 7 to 8 percent is about the range. But in the long term, China is going to grow at a considerable rate.
Xiao Geng: I think 7 percent would be great. Eight percent would be quite difficult. I’m a little concerned about the export sector and also how fast those investment projects can create value-added employment, wages, and profit.
Janamitra Devan: Is China in a recession? And if so, how do you define “recession” for a country like China?
David Li: I wouldn’t say “recession.” I would characterize it as an expanded time-out [of the growth of the economy]. The Chinese urbanization rate has been slower than the industrialization rate. And right now, China is making up for its slow pace of urbanization. And urbanization is the major engine for the economy of the world. As we speak, in Beijing, there are three or four subway lines being built underground. We don’t see them; they are very busy working on this. And Beijing is not exceptional. There are many, many other cities in which these [types of] things are happening.
Also, China is in a stage where households are massively, aggressively upgrading their consumption. We are not talking about their first watches. We’re not talking about their first microwaves. We’re talking about their first automobiles—the first automobiles in their lifetime. And the first commercially developed apartments.
In this kind of environment, it’s very difficult to expect the Chinese economy to grow very slowly. Anything below 8 percent would be, by Chinese standard, considered a recession.
Tang Min: By international standards, 7, 8 percent, that’s excellent—the best—performance for many, many countries. But standards in China for the past 30 years have averaged 9.7, 9.8 percent. So a 7 to 8 percent [growth in GDP], from a Chinese point of view, is a little bit disappointing.
Janamitra Devan: What is wrong or right about China’s growth? Or rather, what is wrong or right about China’s composition of GDP?
David Li: What is appropriate and what is not appropriate depends on the time horizon. In the long run, the current structure of GDP definitely is crazy, right? It’s inappropriate, because we are having only about 50 percent—actually, 49.5 percent—of GDP each year absorbed by consumption. That’s too low a ratio of consumption. That’s the long-term point of view.
However, facing the impact of the financial crisis, there’s no other choice but to increase the proportion of investment. If consumption cannot be boosted in the short run, the only answer is investment. Investment typically, in the past few years, accounted for 45 percent of GDP. This year, I would predict that investment would even go up as high as 60 percent of GDP.
So, that’s the only thing to do, right? Because otherwise, there’s no way to provide enough jobs. If you cannot provide enough jobs for the young kids and the college graduates, they are going to complain. The social pressure will be so high. So, to me 8 percent is the minimum [needed] to provide enough jobs.
Tang Min: I think China needs a major structural change. And that structural change, mainly, is domestic demand and more job creation and less dependence on the global market. And this pattern can only be achieved if the government invests more in the service sector, if the policy is more favorable to the service sector—to small and medium-size enterprises, to private-sector development.
David Li: In the short run, there are very few options but to keep a reasonably fast pace of GDP growth through heavy investments. In the long run, after the financial crisis, sure, we definitely will work hard, improving the structure of the economy.
Chi Wei: I’m concerned about this huge investment infrastructure in such a short period of time. Is there any way you can guarantee that this investment will be effective? Once you put the railway there or highway there, if it’s not going to be productive, it’s redundant. It’s a waste of resources at the expense of the high growth.
Xiao Geng: I think infrastructure investment actually is very useful and important. But the government also needs reform to help increase productivity in the service sector. And I don’t think the government has done enough.They already have a plan to build the subway, build the highway and railway. So, you just speed up those processes. But we have to think about who’s going to use them and how to encourage the service sector’s development, tax reform—those kind of second-wave reforms—to encourage a more productive market.
Janamitra Devan: What is your view about China’s GDP in 2009?
David Li: My view is very, very simple. That for 2009, the Chinese GDP most likely will grow between 8 and 9 percent. And most likely it will move toward 9 percent rather than 8 percent. The reason’s very simple. Two things are going up to compensate for the diminishing export. One thing is consumption: the retail [sector] has been growing very, very fast in China. The other thing is investment. Lots of investment projects are being started right now as we speak. So, these two things are growing very fast, compensating for lost exports.
Tang Min: I’m less optimistic than David. My projections are 7 to 8 [percent].
Chi Wei: Well, I’m optimistic about the Chinese economy. But I’ll say 7 to 8 percent is about the range. But in the long term, China is going to grow at a considerable rate.
Xiao Geng: I think 7 percent would be great. Eight percent would be quite difficult. I’m a little concerned about the export sector and also how fast those investment projects can create value-added employment, wages, and profit.
Janamitra Devan: Is China in a recession? And if so, how do you define “recession” for a country like China?
David Li: I wouldn’t say “recession.” I would characterize it as an expanded time-out [of the growth of the economy]. The Chinese urbanization rate has been slower than the industrialization rate. And right now, China is making up for its slow pace of urbanization. And urbanization is the major engine for the economy of the world. As we speak, in Beijing, there are three or four subway lines being built underground. We don’t see them; they are very busy working on this. And Beijing is not exceptional. There are many, many other cities in which these [types of] things are happening.
Also, China is in a stage where households are massively, aggressively upgrading their consumption. We are not talking about their first watches. We’re not talking about their first microwaves. We’re talking about their first automobiles—the first automobiles in their lifetime. And the first commercially developed apartments.
In this kind of environment, it’s very difficult to expect the Chinese economy to grow very slowly. Anything below 8 percent would be, by Chinese standard, considered a recession.
Tang Min: By international standards, 7, 8 percent, that’s excellent—the best—performance for many, many countries. But standards in China for the past 30 years have averaged 9.7, 9.8 percent. So a 7 to 8 percent [growth in GDP], from a Chinese point of view, is a little bit disappointing.
Janamitra Devan: What is wrong or right about China’s growth? Or rather, what is wrong or right about China’s composition of GDP?
David Li: What is appropriate and what is not appropriate depends on the time horizon. In the long run, the current structure of GDP definitely is crazy, right? It’s inappropriate, because we are having only about 50 percent—actually, 49.5 percent—of GDP each year absorbed by consumption. That’s too low a ratio of consumption. That’s the long-term point of view.
However, facing the impact of the financial crisis, there’s no other choice but to increase the proportion of investment. If consumption cannot be boosted in the short run, the only answer is investment. Investment typically, in the past few years, accounted for 45 percent of GDP. This year, I would predict that investment would even go up as high as 60 percent of GDP.
So, that’s the only thing to do, right? Because otherwise, there’s no way to provide enough jobs. If you cannot provide enough jobs for the young kids and the college graduates, they are going to complain. The social pressure will be so high. So, to me 8 percent is the minimum [needed] to provide enough jobs.
Tang Min: I think China needs a major structural change. And that structural change, mainly, is domestic demand and more job creation and less dependence on the global market. And this pattern can only be achieved if the government invests more in the service sector, if the policy is more favorable to the service sector—to small and medium-size enterprises, to private-sector development.
David Li: In the short run, there are very few options but to keep a reasonably fast pace of GDP growth through heavy investments. In the long run, after the financial crisis, sure, we definitely will work hard, improving the structure of the economy.
Chi Wei: I’m concerned about this huge investment infrastructure in such a short period of time. Is there any way you can guarantee that this investment will be effective? Once you put the railway there or highway there, if it’s not going to be productive, it’s redundant. It’s a waste of resources at the expense of the high growth.
Xiao Geng: I think infrastructure investment actually is very useful and important. But the government also needs reform to help increase productivity in the service sector. And I don’t think the government has done enough.They already have a plan to build the subway, build the highway and railway. So, you just speed up those processes. But we have to think about who’s going to use them and how to encourage the service sector’s development, tax reform—those kind of second-wave reforms—to encourage a more productive market.
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