There was a somewhat depressing message on offer in London yesterday from David Dollar, the director in charge of the World Bank's China Mission. Depressing because he refused to agree with the premise of a Standard Chartered-Oxford University conference that China can become an engine for world economic growth. Or not in the short term at least, or without fundamental reform which will be difficult to enact and take time to deliver.
Mr Dollar's underlying message was that the once-prosperous West shouldn't look to China, one of the few major economies in the world still to be growing relatively strongly, to help us out of our economic malaise. Since quite a lot of hope is indeed vested in this idea, that China can pull us all along in the wake of its continued growth story, in much the same way as America has historically, it is worth repeating some of his arguments.
As Mr Dollar points out, much of China's growth over the past decade has relied on US consumption. That's now come to an end. To keep progressing, China needs a new growth model. If a magic wand could be waved and the teaming masses of China could be persuaded to start consuming a bit more than they have, then things wouldn't look so bad.
Unfortunately, even combining Chinese consumption with that of the other two big surplus nations – Germany and Japan – still doesn't come anywhere close to matching that of the US. China responded quickly to the collapse in exports that occurred in October last year by enacting a substantial fiscal stimulus, but this has done very little to boost consumer demand in China. With manifest overcapacity in most areas of manufacturing, private investment has also remained subdued.
The bottom line is that though there are potentially an awful lot of them, Chinese consumers are not about to substitute for American ones. If an economy is producing primarily for export, it tends to pay its workers as little as possible.
To generate the holy grail of sustained domestic demand, you have to pay your workers enough to buy the products they are producing. That's not yet happened in China on anything like the scale necessary to prompt a virtuous circle of growth. Limited access to credit further prevents the development of sustained domestic demand.
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