A ale o wo Models
China’s ormula or success over the past 30 years has beendominated by an externally oriented growth model. wo sectors—exports and ixed investment—more than doubled theircombined shares o GDP by soaring rom 34% in 1979to a peak o approximately 75% in 2007. At the margin,the export dynamic was, by ar, the most powerul source o incremental growth, going rom 5% to 36% o Chinese GDPover the 1979 to 2006 interval. At the same time, the ixedinvestment share went rom 30% to over 40% during thisspan o nearly three decades (
see Figure 1
Figure 1: ChiNa’s growth MiraCle
050403020105255586164677073767982858891949700030609Fixed Investment as % of GDPExports as % of GDP
Source: CEIC, Morgan Stanley Research
hese two sectors are joined at the hip in driving the all-powerul Chinese export machine. Export lows, whichincreased nearly six-old since the turn o the century—romabout US$250 in 2000 to over $1,400 billion in 2008—recently surpassed those o Germany, making China now thelargest exporter on the world. But the export surge didn’t occurin a vacuum. It was acilitated by investments in state-o theart inrastructure and manuacturing acilities in coastal China.In other words, the investment surge was part and parcelo the export boom—providing the building blocks or theproduction, assembly, supply-chain logistics, and distributiono China’s large and still rapidly expanding export platorm.China’s externally oriented growth model also beneitedrom two important exogenous developments—the nation’saccession to the World rade Organization in 2001 and anunprecedented burst in global trade that took world exportsrom 24% o global GDP in 2001 to a record 32% in 2008.he Chinese export model was in the right place at the righttime—resulting in a spectacular dividend or the economy as a whole. he export share o Chinese GDP nearly doubled in theshort span o seven years—rising rom 20% o GDP in 2001 to36% in 2007. As a result, real GDP growth surged well aboveits 30-year average o 10%—hitting nearly 12% over the 2005-07 period and spiking to 13% in 2007, alone. he export-ledChina miracle was hard to deny. Who could ask or more?In act, none other than Premier Wen Jiabao has been quitevocal in asking or a good deal more rom the Chineseeconomy. And with good reason. While he has been quick todraw great satisaction rom China’s top-down perormance,the Premier has been equally rank in warning o an economy that looked ar more problematic beneath the surace. In hisview, as irst publicly expressed three years ago, the export-and investment-led growth dynamic let the Chineseeconomy increasingly “unstable, unbalanced, uncoordinated,and ultimately unsustainable.” his critique relected Premier Wen’s well-placed concerns over excess resource consumption,pollution and environmental degradation, widening incomeinequalities, capacity overhangs, and a serious shortall o internal private consumption. While the old growth modeldelivered spectacular top-down results over the past 30 years,the Premier has cautioned that it may well be incapable o taking China to the next stage o its development journey.
China needs to shift its model from export-andinvestment-led growth to consumer-led growth.
hat poses the alternative o a very dierent approach toChinese economic growth—a consumer-led growth model that would draw increasing support rom the internal demand o 1.3 billion Chinese people. Not only would that allow Chinato wean itsel rom excessive reliance on external demand,but it would also shit the growth bias away rom capital- andresource-intensive manuacturing activity toward labor-intensiveservices. his would be nothing short o a undamental rewiringo China's long successul growth paradigm.wo numbers underscore the open-ended upside o apro-consumption Chinese growth model—a 35% privateconsumption share o GDP and a 40% services portion o theeconomy (
see Figure 2
). Both o these shares represent majorshortalls rom the optimal macro structure o any majoreconomy. China’s consumption share—currently at a recordlow - was above 50% in the early 1990s. he services share was on an upward trajectory until 2002 beore lattening outat the 40% level in the past several years—well below normsin the 50% to 60% range.
Figure 2: ChiNa’s MaCro DeFiCieNCies
8070605040302010525660646872768084889296000408Personal Consumption as % of GDPServices as % of GDP
Source: CEIC, Morgan Stanley Research1. See “Unstable, Unbalanced, Uncoordinated, and Unsustainable,” in Stephen S. Roach,
The Next Asia
, John Wiley & Sons, Inc., 2009.