‘Rebalancing’ Aggregate Demand- Chinese Economy at Present

China needs to return to the original formula of the “four modernisations” propounded by Zhou Enlai.

It is generally agreed that China’s economic growth is now no longer being fuelled by net exports of goods and services to the extent that it was in the few years prior to the 2008 great financial crisis, but gross capital formation has been an even greater contributor to such growth than before. Perhaps what was eventually inevitable has now struck in the form of immense overcapacity and non-performing loans. Over investment in commercial and high-end residential property, steel, cement and automobile capacities  and in other manufacturing sub-sectors is starkly visible, especially in the new uninhabited “ghost towns.” For economists, the fact that producer prices, especially the prices of manufactured goods in terms of their valuation at the time of despatch from the factories, have fallen month after month over the last three years, drives home the point.

The question one needs to ask is: Where is this very signifi cant overinvestment leading to and what needs to be done?

In terms of the components of aggregate demand, what economic observers have been advocating for quite some time is that China should “rebalance” its over-reliance on net exports and investment in favour of consumption. The fact that the share of net exports in China’s gross domestic product (GDP) has come down quite signifi cantly is, of course, the result of the external demand constraint, especially from the world’s two largest markets, the United States and Western Europe. But,

regarding investment, one needs to recall that China was the most adept of the world’s economies in bringing itself out of the slump that followed the great fi nancial crisis of 2008. The Chinese government launched a massive $585 billion stimulus plan and urged the state-owned banks to be liberal in dishing out new loans, the two leading to a massive increase in investment in the years that followed, making up for the decline in the share of net exports of goods and services in GDP. The share of household consumption expenditure in GDP has fallen dramatically from something like 44% in 2002 to 34% in 2013.

The massive increase in investment spending (as a proportion of GDP) is what has kept China’s real GDP growth rate high, though not as high as the 10.5% average annual fi gure for the first decade of the 21st century. The trend in growth rates now seems downward, that is, if one were to also include what has been forecast—from 7.7% in 2012 and 2013 to 7.4% (estimated) in 2014, the lowest in 24 years, and 7.0% (7.1% forecast earlier) in 2015, a fi gure announced on 5 March by the Chinese Premier Li Keqiang in his opening address to the annual National People’s Congress in Beijing last week. The fi scal defi cit is expected to rise this year but the chairperson of the government’s planning agency, Xu Shaoshi, has stressed that this should not be viewed as a massive stimulus—it involves an investment spending of 1.6 trillion renminbi ($260 billion) on infrastructural development, including railways and water conservancy projects, which, in magnitude, is less than half of the massive stimulus announced in November 2008.

The lowering of the 2015 target GDP growth rate to 7.0% from the 7.1% targeted earlier, and the fact that the earlier official forecasts for 2016 and 2017 expected a further decline reflects a number of developments, national and international. First, the steady fall in producer prices of manufactured goods over the last three years in the face of massive excess capacities in a number of manufacturing sub-sectors evokes the apprehension of deflation.

Second, in the face of the fall in the value of a number of major currencies (e g, the Japanese yen, the euro, the Brazilian real) vis-à-vis the dollar and the Chinese renminbi, the Chinese central bank, the People’s Bank of China, anticipating currency wars, has considered it prudent not to engage in competitive depreciation. Third, the credit elasticity of aggregate demand seems to have gone down quite signifi cantly with creditors using much of the additional loans to roll over existing debt. And lastly, the lower Chinese GDP forecasts seem to also take into account the fact that despite massive quantitative easing by the US Federal Reserve earlier, and now the European Central Bank and the Bank of Japan, the world’s major economies have failed to recover. With the economies of the Triad (North America, Western Europe, and Japan) mired in stagnation, China’s economy has been widely viewed as one of the principal means of lifting the world economy. The suggested way in the form of China’s economy rebalancing the components of aggregate demand, namely, the sum of investment and net exports in favour of household consumption, is fraught with a fundamental contradiction. It requires a dismantling of the low-wage, “global labour arbitrage” model of capital accumulation in global supply chains wherein China is the world’s assembly hub, for it is only with a very significant increase in the real wage rate that the path of economic growth can shift to a mass consumption-led track. 

Nevertheless, one needs to be reminded, that the “four modernisations” as originally propounded by Zhou Enlai in 1963 and adopted by Deng Xiaoping in 1978 were to be implemented by the adoption of policies based on the so-called “three imperatives”— social justice, regional balance and command over external relations. Sure, China does not have the kind of mass poverty, misery and degradation that one encounters in other parts of the Third World, but surely social justice calls for a return to the “clay” and “iron rice” bowls, albeit redesigned, and a redistribution of income in favour of workers and peasants.

(Published in www.epw.in)