China by numbers: Where is the nation's economy heading?
When Canadian economist Mark Kruger gave a short talk on the Chinese economy this month at the Shanghai Book Fair, he spoke in fluent Chinese.
It was the first time I heard a Westerner giving a highly technical talk in Chinese, maintaining his linguistic ability even during a Q&A session that followed.
His book, titled "My View from Shanghai: A Canadian Economist Examines China's Economy," is a collection of essays written for the English-language news service Yicai Global in 2020-21.
The intent was to explain developments in the Chinese economy to a foreign audience at a time when many foreign media outlets were failing to provide sufficient context for Chinese mainland economic data.
I met Kruger for a private interview, where he explained that he first learned Mandarin during 1985-87 when he was a foreign student at Nankai University in Tianjin.
The nation has come a long way since his early days in China, Kruger told me.
"When I was a student, China was still plagued by pervasive shortages," he said during his book fair talk. "As a result, we needed ration tickets to buy household necessities, like food coupons (liangpiao) and cloth coupons (bupiao)."
There were no privately owned cars back then, and people got around on bicycles and incredibly crowded buses.
Kruger also recalled there were very few private restaurants, and the state-owned ones suffered from poor service and soiled tablecloths.
"Shopping was a hit or miss experience," he said. "We were often told the goods we wanted were 'not in stock,' or they were 'sold out' and we should come back tomorrow."
At that time, China used two currencies. The renminbi was used for most domestic transactions, and foreign-exchange certificates were needed for imported goods and export-quality Chinese goods, he recalled.
In my interview with Kruger, he shared some more contemporary thoughts about the Chinese economy.
Q: What are some of the changes you find most striking in China?
A: When I look back almost 40 years, I find that the country has completely changed. Instead of scarcity, it is now a country of plenty. China's economic development is real, not just numbers. The average person has become much wealthier, and the quality of life has improved significantly.
In say the last 10 years, great strides have been made in pollution reduction. I lived in Beijing between 2006 and 2013, and the pollution was terrible. But now the air quality is much better. I also think China has done a great job on poverty alleviation.
Another overriding change is that Chinese manufacturing firms have moved up the value chain. Early on, Chinese manufacturing was simply the assembling of imported, high valued-added components from other countries. But now more of those components are produced in China. That has been a huge development, and it is still ongoing.
Q: How do you explain China's phenomenal growth in recent decades?
A: I think it is basically because China's investment rate has been much higher than in other countries. And China is lucky that its people are savers, so funds for investment are available domestically. In many emerging market countries, the savings rate is very low, and firms have to borrow abroad.
In addition, China's investments have been pretty efficient. A lot of people think China has over-invested or has invested in a lot of wasteful projects, but that view does not stand up to scrutiny. Comparing China's experience with other G20 countries, you can see the high rate of investment and the return on that investment are still pretty good.
Over the five years from 2017 to 2022, China stood out among the G20 countries by having both the highest GDP growth rate and the highest investment rate. Economists have a way of assessing the efficiency of capital allocation at the macroeconomic level. It is called the "incremental capital output ratio," and it can be calculated by dividing the investment rate by GDP growth. A lower number is better because less investment is needed per unit increase in GDP.
China's low ratio implies relatively little investment is needed to generate relatively high rates of growth. It suggests that, at the macro level, China's capital is fairly well allocated.
Q: What are some of the risks that should be addressed to ensure China's sustained development?
A: I think the number one risk is probably the very rapid growth in indebtedness since the 2009 financial crisis. As a percent of GDP, China's indebtedness is not "off the charts" when compared with the other G20 countries, but its growth has been very fast and that is cause for concern.
The government fully understands that, which is why it has set a goal of 5 percent growth this year. At the beginning of the year, many observers thought it would be easy to hit 5 percent. What the government was telling people was that it was not going to support a high GDP growth rate through additional government spending or spending by government entities, which would only further raise the debt.
I think the high leverage of property developers is of particular concern. In 2020, the government implemented the "three red lines policy," which was intended to keep the growth of debt of property developers in line with the strength of their balance sheets. I think it was very smart policy. Unfortunately, since the pandemic, property sales have fallen dramatically and the financial difficulties of developers have become more acute.
Q: What do you think of the "decoupling rhetoric" used by some US politicians?
A: I think the deterioration in China-US relations is truly unfortunate. I think what we have been witnessing is the US using China as a scapegoat for its own domestic problems.
There has been an increase in income disparity in the US, which has hit those at the bottom of the distribution hardest. Between 1980 and 2022, the real wages of those with a high school education have fallen by 10 percent. Among the OECD countries, the US stands out with a relatively high rate of poverty. This is because the US aversion to taxation keeps government revenue low and prevents significant income re-distribution and the provision of basic social services.
When Donald Trump announced his candidacy for president in 2015, he famously put it this way: "Sadly, the American dream is dead." Trump was able to galvanize disillusioned segments of American society by telling them that "… there are no jobs because China has our jobs."
It has been very unfortunate that the US has chosen this confrontational path because decoupling, or reducing trade and investment with China, has been very expensive for the average American. Even though there have been some job losses, trade with China has been hugely beneficial for the US.
A study by Jaravel and Sager shows that more intensive trade with China between 2000 and 2007 increased each US household's annual purchasing power by US$1,500. Across the whole economy, the purchasing power of US consumers rose by US$411,464 for each displaced job, the annual salary of which averaged US$40,000. The authors' findings imply that the overall gains to US consumers through lower prices were more than enough to compensate all US workers who lost their jobs due to increased competition from China.
I hope we can find ways to bring China and the US closer again. I think one very encouraging possibility is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. China has already applied to join. Becoming part of the bloc would give China a great opportunity to demonstrate that a socialist market economy can be consistent with fair trade.
Q: What can the government do to create more jobs for new graduates?
A: I think it is very difficult to get into the labor market for your first job. One possibility is for the government to provide internships so that young people can gain experience. Getting on-the-job experience is very valuable.
I also think that many educated, recent college graduates are somewhat immobile. For example, they come to first-tier cities and attend good schools. Upon graduation, it may be difficult to find work in those cities, but maybe there are jobs elsewhere in the country. The recent graduates may be reluctant to leave first-tier cities. So, I think there should be ways to encourage them to go where they are needed, gain experience first, then come back if they want.
Kruger is the author of "My View from Shanghai: A Canadian Economist Examines China's Economy," newly released at the Shanghai Book Fair, which ends on August 22.
Now based in Shanghai, he is the opinion editor at Yicai Global, the English-language news service of Yicai Media Group, the financial news arm of Shanghai Media Group. He also holds senior fellow appointments at the Yicai Research Institute, the Centre for International Governance Innovation and University of Alberta's China Institute.
Previously, Kruger was a senior policy director in the Bank of Canada's International Department, a senior advisor to the Canadian executive director at the IMF and the head of the Economic and Financial Section at the Canadian Embassy in Beijing. You can find more on Kruger at https://www.yicaiglobal.com/opinion/mark.kruger