The Chinese government says that the economy is showing signs of stabilizing and that the desired 7.5 percent rate of growth appears to be attainable. The recent purchasing manager’s indices (PMIs) for manufacturing suggest that the manufacturing sector is rebounding after a period of uncertainty. A PMI for manufacturing published by HSBC and Markit increased from 47.7 in July to 50.1 in August.1 The shift above 50.0 indicates modest growth of the sector after a period of decline. Moreover, this was the biggest month-to-month gain in the PMI in three years. In addition, an official PMI published by the government increased to a 16-month high of 51.0. There was yet another sign that the Chinese economy is stabilizing: It was reported that, in July, industrial company profits were up 11.0 percent from a year earlier.2 This was far better than the 6.3 percent increase in June. On the other hand, a sub-index of the PMI for export orders was in negative territory, suggesting that any improvement in China’s economy is coming from domestic rather than external demand.
As for the stabilization of growth, government incentives for small businesses and infrastructure investment appear to be working. Moreover, the continued expansion of credit through the sale of wealth management products by banks is fueling investment in fixed assets, especially property. Of course, the economy is suffering from weak export demand, credit market difficulties, and a declining labor force. However, the factors that are likely to sustain growth in the future include strong consumer demand, increasing urbanization, and catch-up growth in less developed regions of China. The biggest risk to the Chinese economy is the excessive level of debt and the problems servicing that debt. With respect to that issue, the China Banking Regulatory Commission is encouraging banks to securitize troubled loans in order to remove them from bank balance sheets. These securities will necessarily be priced at a discount. Still, ultimately financial market pricing will have to be liberalized in order to prevent future imbalances from developing. Meanwhile, bank profit margins are very high as banks unload loans through securitization.
While the government sees a huge potential positive return from urbanization, there is growing concern about the potential costs of urbanization.
The Chinese government has set November as the date for the Communist Party’s next plenary meeting. This is expected to be the meeting at which the leadership will approve a detailed set of reforms. Among the areas likely to be addressed are financial market liberalization, privatization of state-owned enterprises, reform of the household registration system (hukou), and labor market regulations. This will be an opportunity for the leadership to set the agenda for the next five years. This is widely anticipated especially because the government has signaled that it is more concerned with structural reforms than short- term stimulus.
One of the important drivers of economic growth that the leadership wants to promote is urbanization. Given that China has already engaged in massive urbanization, this may seem odd. After all, in the last 20 years, the urban share of China’s population increased from less than 30 percent to more than 50 percent. Yet more will be needed to sustain growth. The view is that when workers move from farms to factories or offices, their productivity increases strongly, thereby helping to drive strong economic growth. This is critically important because, due to the lagged impact of the one-child policy, the working-age population has stopped growing. Thus boosting the urban labor force will require more migration. Yet the pace of migration has dwindled due to worker frustration with low wages, poor living conditions, and second-class status owing to the hukou system. This slower pace is one reason that the government is likely to reform the hukou system.
While the government sees a huge potential positive return from urbanization, there is growing concern about the potential costs of urbanization. A new report prepared jointly by the United Nations and a Chinese government think tank says that, over the next two decades, it will cost at least 41 trillion Chinese yuan ($6.8 trillion) to facilitate the migration of 210 million workers.3 The study anticipates that China’s urban population will rise from 666 million in 2010 to 976 million in 2030. It also says that the costs could be even higher if investments are undertaken to close the gap between migrants and others in terms of living standards. The question arises as to how to fund this investment. Already local governments are awash in debt that they may not be able to service. The challenge will be to use the positive return on migration to finance the cost of migration. Premier Li Keqiang recently said, “Urbanization will usher in a huge amount of consumption and investment demand, increase job opportunities, create wealth for farmers, and bring benefits to the people.”4 All true, but many challenges remain, including financing the infrastructure needed for migrants as well as dealing with the social disruption that comes from mass migration.
- Markit, “HSBC China Manufacturing PMI,” September 2, 2013, http://www.markiteconomics.com/Survey/PressRelease.mvc/ddf3bd97162247348ab421d1f65527fb, accessed September 11, 2013.
- National Bureau of Statistics of China, “Industrial profits from principal business increased from January to July,” August 27, 2013, http://www.stats.gov.cn/english/pressrelease/t20130827_402922433.htm, accessed September 11, 2013.
- UNDP China and Institute of Urban and Environmental Studies of Chinese Academy of Social Sciences, China National Human Development Report 2013, http://www.undp.org/content/dam/china/docs/Publications/UNDP-CH_2013%20NHDR_EN.pdf, accessed September 3, 2013.
- Bloomberg News, “China urban migrants’ cost seen at least $6.8 trillion: Economy,” August 28, 2013, http://www.bloomberg.com/news/2013-08-28/china-urban-migrants-cost-seen-at-least-6-8-trillion-economy.html, accessed September 3, 2013.