Rebalancing China’s Economy
Richard Katz writes in the Wall Street Journal Asia, from Tokyo:
It is impossible to visit Chongqing, a 10-million-person city in western China, without being overwhelmed by the mile upon mile of new sky-high apartments and office buildings, bridges and roads rising in ever-widening circles. But the sight is less impressive when one learns that it is accompanied by rampant real estate speculation, years of double-digit price hikes in real estate all over China, and a countrywide syndrome of excess investment and a dearth of consumer spending. Instead, parts of the picture look alarmingly like Japan’s late-1980s bubble and subsequent “lost decade.”
The two countries have experienced similar cycles. A decade ago, a mainland investment boom led to a Chinese nonperforming loan crisis even bigger than Japan’s 1990s bust. A massive, painful restructuring of China’s debt-laden state-owned enterprises ensued. Now, China risks a repeat of that painful adjustment. The good news is that, in stark contrast to Tokyo’s decade of denial, Premier Wen Jiabao and other leaders have publicly recognized that today’s imbalances must be addressed.
As in Japan, consumer spending is too low to keep the economy motoring ahead. In China, consumption was only 50% of GDP in the 1980s and today an astonishingly low 37%. Typically, poor countries devote about 60% of GDP to personal consumption. The problem is not lack of desire to spend, but lack of money: Household disposable income has been shrinking as a share of GDP. The annual flow of 10 million workers from countryside to city has suppressed wage growth while regulated rates give consumers negligible returns on their savings deposits.