We will know of China’s climb to the top of the world pollution ladder; what is less known is that it’s phenomenal growth did not create the jobs one would expect from such expansion rates. So, where did all the money go: into expanding industries through reinvestment, creating infrastructure, paying officials well and filling state coffers. The following Sydney Morning Herald article provides the details.
Most policymakers, investors and environmentalists are by now aware that the future of the Australian economy and indeed the planet depends in no small part on China. But by focusing on China’s headline economic growth rate they are in danger of missing the story.
China’s gross domestic product growth is invariably impressive but its significance is swamped by changes in the composition of that growth. And if there is a single internal meta-trend to watch, it is the changing division of economic returns between capital and labour.
In 2002 Chinese corporate profits accounted for 20 per cent of GDP. Within five years that figure had risen above 30 per cent.
Rising corporate profits – largely captured by state-owned companies – is partly explained by urbanisation. Apartment blocks and freeways are capital intensive. They consume steel, cement, aluminium, chemicals and electricity.
The economic returns from China’s recent growth model have been naturally captured by heavy industry. Some of those profits have come from export earnings and been recycled into foreign exchange reserves. But mostly they have been ploughed back into investments in more steel, aluminium and cement factories in a self-reinforcing cycle.
In China the high profits, savings and investment of heavy industry have been amplified by government policy. UBS China economist Wang Tao lists the important ones:
- Artificially lowering the prices of land, resources and energy;
- Allowing state-owned firms to keep and reinvest profits;
- Stalling on liberalising services and the financial sector in particular, which limits investment choices;
- Favouring large, state-owned companies over other enterprises; and
- Rewarding officials on raw GDP and production numbers.
It is no coincidence that the turbo-charging of Chinese profits, particularly in heavy industry, has exactly coincided with the biggest and longest global resources boom in at least 100 years. It also explains how China has vaulted prematurely into top spot on the world’s carbon emissions charts.
Exponential growth in heavy industry production explains how Chinese electricity consumption flipped from trailing GDP growth in the 1980s and ’90s to exceeding it.
Electricity consumption growth has averaged 13.5 per cent this decade, outstripping GDP growth of 10.4 per cent, while heavy industry has risen to consume 55 per cent of China’s (coal-dependent) electricity production.
The good news for the long-term health of the planet – if not for investors in BHP Billiton and Rio Tinto – is that China’s pattern of growth in heavy industry is “not remotely sustainable”, to quote Jonathan Anderson at UBS.
In fact it seems to be already reversing. (Mining investors should not yet fret – another seismic shift in the structure of the Chinese economy is that the slump in Chinese resources consumption has been overtaken by a larger slump in high-cost domestic production, opening the door for an unprecedented surge in Australian exports).
The surge in Chinese corporate profits this decade has not only manifested in soaring resources prices and the accelerated suffocation of the planet. Another way to look at rising profits is that a declining share of national income is flowing to workers.
The share of employee compensation fell from 53 per cent of China’s GDP in 1997 to 45 per cent in 2002 and a miserly 40 per cent in 2007.
That’s one of the sharpest shifts in any major economy anywhere in the world.
Economist Wang Tao again shows what’s been going on. She says the emasculation of employee income was not due to wage restraint. Rather, it was due to China’s lousy record of jobs creation. Growth in the number of non-farm jobs averaged just 3.4 per cent between 2000 and 2007, less than half of the 6.9 per cent rate recorded in the 1980s.
Not surprisingly, the relative decline in employee compensation has led to a commensurate relative decline in household consumption (from 45 per cent of GDP at the start of this decade to 35 per cent in 2007, compared to 70 per cent in the United States).
China’s disposable household income data shows a similar pattern, although the series appears to have been ruptured by a large GDP revision in 2005.
The relatively low growth in employee compensation explains how the Chinese Communist Party has managed to create the most un-egalitarian nation in Asia, equalled only by Nepal, according to the Asian Development Bank. Perhaps it also explains a large portion of the 100,000 “mass incidents” that the Chinese Government reportedly counted across the country last year.
These days China’s domestic problems and imbalances do not confine themselves within China’s borders. China’s falling consumption rate can explain its relatively low imports and its world record trade surpluses. These, in turn, have fed the world’s economic imbalances and created the preconditions for the global financial crisis.
These are all reasons why keeping pace with China’s impact on the world requires you to track the structural changes – and therefore the policy debates and political struggles going on within China.