A new model for Chinese growth

China’s economic growth rate this year is set to fall behind the rest of Asia for the first time since 1990. This forecast by the World Bank, if it materialises, not only signals a cooling in global wealth creation. With President Xi Jinping set to be anointed to a third term by a Communist party congress starting next weekend, it also challenges Beijing to find new sources of propulsion for the world’s second-largest economy.

China has suffered slowdowns in the past but this time its defining problems are structural. Although the country’s controversial “zero-Covid” policies have dealt a heavy blow, longer-term vulnerabilities derive from the cratering of the property market and growing stress in local government finances. Even after an expected post-Covid rebound, these drags on the economy are likely to persist. They are accentuated by a rapidly ageing society and a birth rate that has slumped by 45 per cent between 2012 and 2021.

Similarly, an ebb in the vast tides of rural-urban migration that fuelled China’s manufacturing boom is withering the impetus behind city construction. Inefficiency in allocating capital is diminishing the returns from deploying a vast pool of national savings. And while China’s role in international trade remains strong, US sanctions on trade and technology could impact its competitiveness over time.

All these problems are, to some degree, structural. They presage an economic future that may be very different from China’s past three decades. If the World Bank’s forecast of 2.8 per cent growth this year is borne out, it will represent a sharp reduction from Beijing’s official target of 5.5 per cent. It could also foreshadow significantly slower growth rates in the longer term.

Conventional wisdom has long been that the solution is for China to aim to boost consumer spending. Doing that will require more redistribution to poorer and middle-income households, and leaving them with more disposable income to spend on themselves — in part by reducing factors that drive them to save a huge chunk of their income.

The very high level of Chinese household savings is one reason behind China’s high gross national savings rate — which stands at 44 per cent of gross domestic product compared to an OECD average of 22.5 per cent. The motives driving families to salt away more than in almost any other country on earth are revealing.

The break-up of the state-run economy from the late 1980s smashed an “iron rice bowl” of housing, healthcare, pension and other benefits, inculcating a sense of insecurity. The hundreds of millions of workers who have migrated from farms to factories in recent decades do not qualify for city welfare benefits, forcing them to save. The one-child policy, introduced in the 1980s, meant that parents could not expect to rely on an extended family in old age.

These stresses — combined with underfunded state pensions, the spiralling costs of education and medical treatments (exacerbated by hospital corruption) — reinforce a savings mindset. This is crimping consumer spending, especially when most asset values are falling along with property prices and stock market indices. Building a more sophisticated financial system could ensure that even a less gargantuan amount of savings would finance more productive investments.

If China is to put growth onto a more sustainable footing, it needs to empower its consumers. In particular, Beijing should allocate hefty fiscal transfers into state pension funds for both city and rural dwellers. This will cost a great deal. But if Xi is serious about creating “common prosperity” for future generations, he should make it a priority.