[ccebook.cn]The World in 2010

Luckily there are some important differences between China today and Japan during
its bubble era, which make it less likely that China’s boom will end in a prolonged
economic bust. China’s GDP per head is less than one-tenth of that of Japan or
America. Its economy is still in the early stages of development, with ample room to
play catch-up with rich countries by adding to its capital stock and lifting
productivity. A successful developing economy should have a higher rate of
investment because it starts with much less capital than advanced economies.
China’s capital stock is barely half as big as Japan’s in relation to output; capital per
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
Some analysts
claim that China
today looks
ominously like
Japan in the late
1980s
person is only 5% of that in Japan. In addition, with almost half of its labour force still in agriculture, China
still has plenty of scope to lift productivity by moving surplus labour into industry and services. This is very
different from Japan in the 1980s.
China does have excess capacity in a few sectors, most notably steel. But concerns about overinvestment are
exaggerated. During 2009, new investment in industries with overcapacity was relatively modest; most money
went into infrastructure. And unlike Japan, which built roads to nowhere to prop up its economy, China still
needs more public infrastructure. In general, investment in roads, railways and the power grid will help China
to sustain future rapid growth.
Over the next decade, China’s annual growth will slow from the 10%-plus pace of the past few years to
perhaps 7%—still one of the fastest rates in the world. But future growth will be less dependent on exports.
As China’s share of world exports hits 10% in 2010, up from 4% in 2000, Japan’s experience will be
instructive. It suggests that there are limits to a country’s global market share: after reaching 10%, its share
of world markets fell as the yen strengthened. Likewise, China will be under foreign pressure to allow the yuan
to resume its climb against the dollar in 2010.
More of China’s growth will therefore need to come from consumption. Infrastructure investment was the best
way to boost domestic demand quickly, but in the longer term the government needs to lift consumer
spending by shifting income from firms to households and by improving welfare support and health care.
Slower export growth and stronger domestic spending will cause China’s current-account surplus to shrink
below 5% of GDP in 2010, less than half its peak in 2007.
Slower future growth, based on more domestic spending and a smaller trade surplus, would direct China to a
more sustainable path. Over the past 20 years, China has made an unprecedented leap from being the world’s
tenth-biggest economy to becoming number two. At some point, before it leapfrogs America, China may well
suffer a nasty slump—but not in 2010.
Pam Woodall: Asia economics editor, The Economist
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