Don’t Expect China’s Growth to Continue

August 10th, 2011

Michael Pettis argues China’s miracle growth won’t last much longer:

Can China rebalance away from investment and toward domestic consumption as the main engine of growth? Yes, but with great difficulty. Chinese households consume only about 35% of gross domestic product (GDP), far less than any other country. Such a large domestic imbalance has no historical precedent.

Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries.

But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%.

Basically, China’s growth over the last two decades has been due overwhelmingly to state-directed investment in infrastructure development, and they’re reaching the end of the road for economic growth from investment. China needs to readjust their economy to be a more consumer-based economy to succeed in the coming decades.

The PRC is trying, of course. But as Pettis points out, households only hold 35 percent of GDP. Getting that percentage up to a safer level will require significant adjustment and slower overall economic growth.

China’s path to world economic domination is not an easy one.