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In industries such as financial services and telecommunications, where barriers to entry and preferential policies for state-owned enterprises deter competition, China remains far behind developed-world competitors.
Prospects for an era of productivity-led expansion hinge on President Xi Jinping’s one-year-old policy blueprint to spur market forces and restructure the financial system so capital is allocated on the basis of potential returns rather than public directive. Underscoring the
challenge: productivity growth has plunged after a post-financial crisis stimulus binge.
“The potential is still very great,” said Zhu Xiaodong, an economics professor at the University of Toronto. “My home town is Wuhan and I keep comparing it with Shanghai. It’s not very poor now, but to reach Shanghai’s level will take 10 to 15 years -- that’s a lot of growth.”
China’s productivity is about 13 percent the U.S. level, way below Japan’s 56 percent in 1950 or South Korea’s 43 percent and Taiwan’s 50 percent in 1965, Zhu wrote in a 2012 paper. Japan’s productivity soared to 83 percent of the U.S. level by 1975, while by 1990 South Korea’s reached 63 percent and Taiwan’s 80 percent.
Even if China’s past growth trajectory continues for another two decades, its productivity level would still rise to only 40 percent of the U.S. level, Zhu said.
New Era
China’s three decades of 10 percent annual average growth was driven by the largest urbanization in mankind’s history as labor shifted from the countryside to cities and factories. With rising incomes now curbing competitiveness and government policies aimed at reining in debt risks, the task now is to wring expansion from more efficient capital allocation.The Conference Board’s Beijing-based economist Andrew Polk estimates $15 trillion is at stake by 2025, almost the size of the U.S. economy last year. Without optimized productivity improvements, he forecasts average growth of 5.5 percent per year from 2015 to 2019 and 3.9 percent for 2020 to 2025.
In the U.S., as much as a half of total factor productivity gains -- or improvements that don’t stem from inputs such as capital and labor -- come from competition within industries that drives out inefficient businesses and sees resources end up in more capable ones, said Cai Fang, vice president of the Chinese Academy of Social Sciences in Beijing. In China, that productivity force is non-existent.
Dog Eat Dog
“We totally haven’t gained those efficiencies,” said Cai. “If we can have those enterprises who don’t perform well exiting and other enterprises take their place, despite their ownership, we can double the current total factor productivity growth.”China’s average incomes have risen to a level at which many countries saw their growth trajectory stagnate or slump.
Shifting from a middle-income to high-income economy by building innovation- and services-led industries has been achieved by only five economies -- Japan, South Korea, Taiwan, Hong Kong and Singapore -- while maintaining relatively high growth rates, according to Nobel laureate Michael Spence, a professor at New York University’s Stern School of Business.
Whether China avoids the middle-income trap will be determined by the effectiveness and implementation of President Xi’s pro-market policies outlined a year ago.
Comprehensive changes to land policies, public finances and the household registration system that restricts labor mobility could increase China’s potential growth by about 0.8 of a percentage point in the first year and by a cumulative 3.5 percentage points over 5 years, the World Bank said in a report last week. It forecast a 7.2 percent expansion next year.
Productivity Decelerates
China’s labor productivity growth has fallen from 8.8 percent in 2011 to 7.1 percent last year, according to the Conference Board. Though that’s still a faster pace than the average 4.3 percent for major emerging markets and Indonesia’s 3.6 percent, China is seen decelerating to 6.7 percent this year while nations from Russia to Brazil accelerate gains.Total factor productivity’s contribution to China’s expansion slumped from an average 3.1 percentage point from 2007 to 2011 to zero last year, the Conference Board says.
“China has a productivity crisis,” said Polk. “The bulk of the problem is down to institutional factors, from the way credit is allocated disproportionately to state enterprises, to the incentives for provincial officials to invest in buildings rather than education, to widespread corruption.”
The prospect of China’s manufacturing juggernaut becoming a highly efficient competitor in medium-technology industries including machinery, equipment, gas turbines, trains and cars is a daunting one for foreign companies, said Louis Kuijs, Royal Bank of Scotland Group Plc’s chief Greater China economist in Hong Kong.
“Chinese competitors have a much more favorable cost base,” said Kuijs, who formerly worked at the International Monetary Fund and World Bank. “It’s not guaranteed that China will get it right, but it is something that people in those industries are on the watch out for.”
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