A panel of leading Chinese economists explains how the world’sfastest-growing economy keeps expanding despite the global downturn. MAY 2009
Source: McKinsey Global Institute
China’s economy has demonstrated remarkableresilience in the midst of a worldwide slump. How has the country copedwith the financial crisis? Is China finally emerging as an engine ofglobal demand? Can its economy generate enough new jobs to maintainsocial stability? What will drive future growth? How should foreignfirms in China adapt? In this interview, conducted by McKinsey’sJanamitra Devan in March 2009 in Beijing, four distinguished members ofthe McKinsey Council on China Business Economists explore thesequestions. read the transcript below.
Janamitra Devan: What is your view about China’s GDP in 2009?
David Li: My view is very, very simple. Thatfor 2009, the Chinese GDP most likely will grow between 8 and 9percent. And most likely it will move toward 9 percent rather than 8percent. The reason’s very simple. Two things are going up tocompensate for the diminishing export. One thing is consumption: theretail [sector] has been growing very, very fast in China. The otherthing is investment. Lots of investment projects are being startedright 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 theChinese economy. But I’ll say 7 to 8 percent is about the range. But inthe 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 aboutthe export sector and also how fast those investment projects cancreate 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.” Iwould characterize it as an expanded time-out [of the growth of theeconomy]. The Chinese urbanization rate has been slower than theindustrialization rate. And right now, China is making up for its slowpace of urbanization. And urbanization is the major engine for theeconomy of the world. As we speak, in Beijing, there are three or foursubway lines being built underground. We don’t see them; they are verybusy 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, aggressivelyupgrading their consumption. We are not talking about their firstwatches. We’re not talking about their first microwaves. We’re talkingabout 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 Chineseeconomy to grow very slowly. Anything below 8 percent would be, byChinese standard, considered a recession.
Tang Min: By international standards, 7, 8percent, that’s excellent—the best—performance for many, manycountries. But standards in China for the past 30 years have averaged9.7, 9.8 percent. So a 7 to 8 percent [growth in GDP], from a Chinesepoint 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 isnot appropriate depends on the time horizon. In the long run, thecurrent structure of GDP definitely is crazy, right? It’sinappropriate, because we are having only about 50 percent—actually,49.5 percent—of GDP each year absorbed by consumption. That’s too low aratio of consumption. That’s the long-term point of view.
However, facing the impact of the financial crisis, there’s no otherchoice but to increase the proportion of investment. If consumptioncannot be boosted in the short run, the only answer is investment.Investment typically, in the past few years, accounted for 45 percentof GDP. This year, I would predict that investment would even go up ashigh as 60 percent of GDP.
So, that’s the only thing to do, right? Because otherwise, there’s noway to provide enough jobs. If you cannot provide enough jobs for theyoung kids and the college graduates, they are going to complain. Thesocial 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 majorstructural change. And that structural change, mainly, is domesticdemand and more job creation and less dependence on the global market.And this pattern can only be achieved if the government invests more inthe service sector, if the policy is more favorable to the servicesector—to small and medium-size enterprises, to private-sectordevelopment.
David Li: In the short run, there are veryfew options but to keep a reasonably fast pace of GDP growth throughheavy 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 hugeinvestment infrastructure in such a short period of time. Is there anyway you can guarantee that this investment will be effective? Once youput the railway there or highway there, if it’s not going to beproductive, it’s redundant. It’s a waste of resources at the expense ofthe high growth.
Xiao Geng: I think infrastructure investmentactually is very useful and important. But the government also needsreform to help increase productivity in the service sector. And I don’tthink the government has done enough.
They already have a plan to build the subway, build the highway andrailway. So, you just speed up those processes. But we have to thinkabout who’s going to use them and how to encourage the service sector’sdevelopment, tax reform—those kind of second-wave reforms—to encouragea more productive market.
Janamitra Devan: Chi Wei, a question to you as a labor economist. What is your view on job losses so far?
Chi Wei: Well, in terms of total numbers,it’s striking. And in terms of structure, most of the losses have beenin the manufacturing and exporting industries. And the group of peoplewho have been hit most by the financial crisis and the downturn ismigrant workers. They don’t really show up in official statistics,because they go back home. They’re not counted as a base of the totallabor force. But their welfare has to be considered. And there shouldbe more policy to help them.
Janamitra Devan: Is that a major concern of the Chinese government right now?
Xiao Geng: We probably have 200 millionmigrant workers. And then also, you know, these migrant workers, theyare supposed to have a piece of land in their village so they have akind of safety net that they can go back to. And also the food price inChina is quite low, you know. So it’s not like in the US, where if youlose your job, you’re in trouble, you have to pay mortgage, everything,you have to pay. So, this is a group of people who don’t have anymortgage, you know. As long as they can have enough to eat, basically,they are largely fine. I think it’s manageable.
Tang Min: This misunderstands the currentnew migrants. In fact, we did some surveys in the rural areas. Themajority of those who go back—the migrants who lose their jobs—areyoung people. Do they have a piece of land? Well, many of them actuallydo not own a piece of land. And many of them are renting out. Also,when they graduate from high school, right away they move to the city.They have never done farm work. So for them, it’s very difficult to goback and stay in the farm area. And the income in farm areas is maybeonly one-tenth of what they are getting in the cities. Also, oncepeople lose their job it means the whole family loses out, becausethere are many families in the rural areas that are very low income anddepend on the money that’s sent back. Now, when people lose money, thewhole family is forced back into poverty. So, it is actually quiteserious.
David Li: I think the migrant workers losingjobs, relatively speaking, is less of a social problem [than] collegegraduates who are looking for jobs but cannot get jobs. After all,these migrant workers are scattered in the countryside. They are not sowell organized. In contrast, we have college graduates. They areconcentrated in large cities. And if a significant proportion of thesepeople cannot get jobs—say, ten percent—these students, they aretogether, they are in cities, they are communicating with each other.So it is not unimaginable for these kids to organize something,organize some kind of protests in urban areas. So, in my mind, thecollege graduates’ employment is a much, much bigger problem than themigrant workers losing jobs.
Janamitra Devan: What does all this mean if you’re a foreign business looking into China right now?
David Li: Well, I think there are two kindsof business opportunities in China for foreign business. One is that weare actually doing a lot of infrastructure projects. And the governmentis really enhancing environmental standards. So, in this regard, a lotof advanced technologies, advanced equipment, will be imported fromoverseas.
So, for those large corporations, I think they will see a greatbusinesses opportunity. And second, the Chinese government is now eagerto promote GDP growth for all the various reasons we have discussed.So, therefore, the government is much more open-minded in talking aboutvarious reforms. Arguably for the past few years, the GDP growth rate,the economy, was doing too well to do reform. The government was busycontrolling the overheating of the macroeconomy. Now, the opposite istrue. So there are a lot of discussions of reform. And in thesediscussions, foreign corporations are not only observers. Actually inmany cases, they are participants.
Why not form some kind of collaboration with local partners andparticipate in the reform process and tell the government what kind ofthings, what kind of regulations, can be relaxed? Therefore, moreinvestment can come in, more businesses opportunities can be there.
Janamitra Devan: Can China really be the new growth engine for the world? Is that realistic?
Tang Min: I do not overestimate China’scapacity. China is a developing country. Per capita GDP is only$3,000—less than one-tenth of United States, Japan, or Germany.
The engine for growth is maybe overestimated. Maybe the Chinese sharewill be higher. But in the next one or two years, I don’t think we cancount on China to play such an important role. Yes, if you take a lookat China, GDP grows a bit—at 7, 8 percent, it’s the highest in theworld. But if you take a look at the past few months, imports actuallydropped even faster than exports.
So for an engine to grow, you have to have a lot of imports, and thenpeople can sell and then stimulate the economy. But in fact, at thismoment China cannot play such a role. So I will say to the world: donot put too much of your hope on China.
Chi Wei: China’s population accounts for,like, one-fourth of the total population in the world, right? If youcan keep this one-fourth of people growing and happy and gettingwealthier, that’s a big contribution already.
David Li: China perhaps is a co-engine ofgrowth, a co-engine of international collaboration in many, manyregards. And in this regard, the world needs to learn how to betteraccommodate China. And China has to learn how to acquire various kindsof skills to better play this role.
Xiao Geng: I think that China actually is aleading engine right now—probably the first one to come out of therecession, or however you want to name it. And that’s because Chinaactually is probably the only economy that is functioning normally now,without much debt problems to the credit system, like overspending.
And so, it is really important as a case to show confidence to theglobal economy. You know, we can show how [a country] can return tonormal [levels of growth]. If you look at the US, Europe, Japan—theyare still in panic and they don’t know how to get to normal situations.China, I think, has already started getting to a normal situation.
Janamitra Devan: When do you expect recovery? Second quarter, third quarter, fourth quarter, or early 2010 for China?
David Li: Second quarter.
Tang Min: Third, fourth quarter.
Janamitra Devan: Third, fourth.
Chi Wei: Yeah, third, fourth quarter.
Xiao Geng: Yeah, I would probably say third quarter.
Chi Wei: I expect a good change in the sensethat, you know, the government is putting more attention on socialwelfare. But the concern I have is that most of the 4 trillion yuaninvestment [stimulus], most of the investment will be on the statesector, you know, the big share, will go to state corporations andgovernment spending deficits.
Xiao Geng: I think China actually is at acrossroads right now. And which direction it will go depends really onwhat China will do in the next few months and few years. If Chinareally starts to reform, it can take this opportunity to really becomea modernized market economy.
If China does not reform enough, then there’s a danger that China willactually expand the role of the government in regulation, in socialservice. And I’m not sure China has found a good model of socialservice, social security.
Janamitra Devan: How would you advise local players, local businesses and so on, in terms of responding to the crisis?
David Li: Very simple: stay in the game.Keep being alert. And try to be very, very active in this game, in thistime. This is a time not only of tremendous opportunities, but, also,the rules of the game are changing. And they are changing in a rapidway, in a dramatic way. So this is actually a time of goldenopportunity. |
