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Monday, December 15, 2003

Another Great Leap

Martin Wolf has an excellent article in Financial Times. He comes out strongly for the China growth camp. The catch-up potential is simply enormous he argues, and there could be another 2 ½ decades of fast growth. As he puts it, “Will the journey ahead be an easy one? No. Is sustained rapid growth a certainty? No. But it is going to be substantially easier than most doomsayers suppose.”

I can’t agree more, especially with the last bit. Coming from Singapore and growing up in the 70s and 80s, that was how it was. Exceptional growth was the norm, and it didn't seem that difficult to achieve. Now the torch has passed on. China is much bigger of course, and if we are to be surprised, it might well be that growth in this catch-up process comes faster than even Martin assumes.

While there are those who remain skeptical about actual growth rates achieved in China, they are burying their heads in the sand. There is more than enough anecdotal evidence. I came across another bit over the weekend. Shanghai will ban bicycles from all the important streets next year. Bicycles have been king of the road for decades. Now, local police say bikes are 'getting in the way' and will jack up fines tenfold for traffic offenders. 'Progress' has always meant saying goodbye to a previous way of life.

All this growth means China's savings is also rising. While that’s partly a function of the rapid growth rate, there are other reasons.

Yuan Gangming, director of the Institute of Economics at the Chinese Academy of Social Science (CASS) explained to my colleague that in the past when the State took care of everything, nobody saved. Earnings were mostly spent. So a lack of investment meant inflation occurred easily. Now that the state no longer provides free benefits, the Chinese are starting to save – whether it’s for the down payment on mortgages, hospital bills or for retirement.

I wonder. It’s a massive increase in savings (savings rate is over 40% of GDP), reminiscent of that renown Asian propensity to save. And that leads me to think that if there is to be a question mark over China’s long-term future, you could wonder, after the catch-up potential is realized, whether its economy can successfully transform into a truely mass-consumer society (ala the US). It’s a stage of growth where the other Asian economies have largely faltered. But that's another story.

Now here's an excerpt from Martin ..

China can make another great leap forward
Today China's GDP per head, at purchasing power parity (PPP), is only about a sixth of that of the United States. But evidence from South Korea and Taiwan indicates it is easy for a catch-up country to sustain very rapid growth until its GDP per head is more than half the US level. Japan did even better than that. If the US economy continued to perform as it has done over the past half century, with a growth of GDP per head at just over 2 per cent a year, while China also managed to continue to grow at just over 6 per cent a year per head, the Asian giant would not achieve the magic halfway point until shortly before 2040. On this basis, therefore, another 2 1/2 decades of growth as fast as the last 25 years' is perfectly feasible.

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