From May 16 to 21, I travelled to China to meet with government officials, economists and major companies in several cities including Beijing, Changchun, Qingdao and Shanghai. The following are my thoughts about the meetings.
The most striking aspect of my visit to China was that I confirmed the government’s stance on austerity measures for the second half of the year. I found the so-called Beijing Consensus was not so different from Korea’s perception. That is, Chinese leaders and their Korean counterparts share the view that inflationary pressure in China will ease from the second half and consequently soften the intensity of belt-tightening.
What was interesting was the comparison made between the present and 2008. In 2008, the Chinese government introduced severe austerity measures to curb inflation stemming from a rise in commodity prices but they noted that this eventually led the economy into a deep recession. Accordingly, Chinese leaders appear very cautious about not repeating the same policy mistakes as they did in 2008.
Chinese leaders agreed that inflation will be structurally higher than in the past. Given that inflation the compound annual growth rate (CAGR) was 2 percent over the past 10 years, they project it to reach 4 percent going forward.
This is mostly attributable to the recent considerable rise in income among low and middle-class workers including urban migrant workers. The Chinese government is especially attentive to the rising wages of migrant workers as they said the increase partly stems from a growing number of strikes since 2010. But they said the biggest reason was that fewer and fewer migrant workers are moving to cities.
However, I think there is a significant contradiction in the Chinese government’s claims. In China’s 12th Five-Year Plan, Beijing lowered its economic growth target to 7 percent from 8 percent to gear the economy toward quality rather than quantity.
But lowering the growth forecast while lifting inflation just do not add up, in my opinion. I felt that Chinese leaders were still thirsty for greater economic growth. That is, even though they view balanced growth and curbing inflation as key matters, they still place strong growth above all else. This is why they said inflation of 4 percent, which is much higher than the past, is reasonable.
I found a surprising consensus among Chinese leaders on the importance of domestic demand as an economic growth driver. The leaders emphasized on several occasions that China is already a domestic-driven economy, saying the current account relative to GDP is at a significantly low level compared to the past.
They predicted the trend is sustainable over the long-term and believed a recent increase in wages should be the largest contributor in this regard. But I believe the growth of domestic demand raises questions about the renminbi.
Given that the center of the economy has shifted to domestic demand and China seeks to establish the renminbi as a global currency, I asked why China is sticking to gradual appreciation, a valid step only for an exports-driven economy. But their answer was a textbook response that the renminbi is not undervalued due to the low current account as a percentage of GDP. I found it a self-contradictory answer, which points to the growing possibility of sharp renminbi appreciation.
China is in short supply of electricity. The Beijing Capital International Airport was rather dim and street lights were mostly out along the road from Changchun Airport to downtown. The skyline of Changchun was very dark even though it is a major city in northeast China. The first thing I noticed in China was not just the shortage of electricity but also infrastructure such as airports and roads. Although China has been a big spender on infrastructure, its investment still falls short of serving the huge population. As such, China has no choice but to keep investing in high-speed railways, pipelines, airports and roads. It also explains China’s obsession with energy.
I believe China is making every effort to reinvent itself as a global power. It is growing fast and likely to continue to do so given its policy emphasis on economic growth. In the process, the economic structure is shifting from exports to domestic demand and investment. China’s perception of the renminbi should fast change down the road.