A new model for Chinese growth

China’s economic growth this year will lag behind the rest of Asia for the first time since 1990. If this forecast by the World Bank comes true, it will not just signal a slowdown in global wealth accumulation. As President Xi Jinping is set to be anointed for a third term at a Communist Party convention beginning next weekend, he is also challenging Beijing to find new sources of fuel for the world’s second-largest economy.

China has suffered from slowdowns in the past, but this time its key problems are structural. Although the country’s controversial “zero-Covid” policy has dealt a severe blow, longer-term vulnerabilities arise from cratering in the property market and the growing strain on local government finances. Even after an expected post-Covid recovery, these strains on the economy are likely to continue. In addition, there is a rapidly aging society and a birth rate that fell by around 45 percent between 2012 and 2021.

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Similarly, an ebb in the violent tides of rural-urban migration that have fueled China’s manufacturing boom is draining the momentum behind urban development. Inefficiency in the allocation of capital reduces 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 hurt its competitiveness over time.

All of these problems are structural to some extent. They predict an economic future that could be very different from China’s past three decades. If the World Bank’s forecast of 2.8 percent growth this year is confirmed, it will mean a significant reduction from Beijing’s official target of 5.5 percent. It could also anticipate much slower growth rates over the longer term.

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

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The very high saving of Chinese households is one reason for China’s high gross national savings rate – which is 44 percent of gross domestic product, compared to an OECD average of 22.5 percent. The motives that drive families to salt more than in almost any other country are revealing.

The collapse of the state-run economy in the late 1980s shattered an “iron rice bowl” of housing, health care, pensions and other benefits and created a sense of insecurity. Hundreds of millions of workers who have migrated from farms to factories in recent decades are ineligible for city benefits, forcing them to economize. The one-child policy introduced in the 1980s meant that parents could not expect to be able to rely on a large family in old age.

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These pressures – combined with underfunded state pensions, the rising costs of education and medical treatment (exacerbated by hospital corruption) – reinforce a savings mindset. This limits consumer spending, especially when most assets fall along with house prices and stock market indices. Building a more sophisticated financial system could ensure that even a less gargantuan amount of savings would fund more productive investments.

If China wants to make its growth more sustainable, it must empower its consumers. In particular, Beijing should provide hefty tax transfers into state pension funds for urban and rural residents. That will cost a lot. But if Xi is serious about creating “shared prosperity” for future generations, he should make it a priority.

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