My piece in last Thursday’s Fin is over the fold
The number eight is regarded is auspicious in China, particularly in financial matters, because the word for ‘eight’ rhymes with that for ‘prosperity’ or ‘wealth’. ‘Four’, on the other hand is unlucky, differing only in intonation from the word for ‘death’.
By chance or otherwise, these associations seem particularly apposite in assessing the prospects for the Chinese economy over the next few years. The Chinese economy (or at least the modern sector represented in the national accounts) has experienced economic growth rates of eight per cent or more for the last two decades.
The growth rate may be accounted for, in about equal measures by growth in labour and capital inputs, and growth in total factor productivity arising from the modernisation of the economy. The rate of productivity growth may decline a little as the easy gains from catching up to the developed world are exhausted, but it is unlikely to fall much below 4 per cent.
The effective labour force is also growing at around 3 per cent, thanks to demographic transition and migration from rural areas. High investment rates mean that capital labour ratios are also rising.
The result is that a growth rate of 8 per cent is the minimum needed to absorb the growth in the labour force, and even then, Chinese employment officials warn that migrants who returned to the countryside in the wake of the economic crisis will find it hard to get new jobs.
A rate of 4 per cent, more than respectable in most economies, would imply no growth at all in labour demand, with disastrous implications for unemployment rates and for the social harmony so prized by the Chinese government.
It is unsurprising then, that the government has seized on the positive associations of the number ‘eight’ with its slogan ‘bao ba’ or ‘protect eight’. It has backed this slogan with a stimulus package larger, relative to the economy, than those in the US or Australia.
The stimulus package has been effective in reversing the slowdown associated with sharp reductions in exports. Most experts predict that the goal of eight per cent growth will be attained. But a good deal of the stimulus has leaked into the housing market, putting more air into a bubble that was beginning to deflate. Prices are so high that Chinese investors are looking to the Australian market (itself overpriced on most measures) to provide better value.
The need to keep the economy growing strongly while avoiding a dangerous housing bubble presents Chinese policy makers with a difficult task. The balancing act becomes even more difficult when climate change is taken into account. ?As long as the Bush Administration was in office, China could largely ignore the climate change problem. The Bush approach, ably supported by the Howard government, was to encourage the most intransigent elements in the Chinese government to resist any movement on climate policy, then point to that intransigence as an excuse for US (and Australian) inaction.
But even in the Bush era, China saw investment in renewable energy as a strategic imperative, announcing a 20 per cent target for 2020 at a time when the Howard government was still dithering. The huge investment programs associated with the stimulus package have provided more opportunities to steer the Chinese economy away from reliance on coal.
The fact that even after three decades of reform, China has a decidedly mixed economy, has made the management of the crisis easier. State-owned banks have done most of the lending and, with many foreign investors forced to the sidelined, state-owned corporations have undertaken large-scale investments in areas such as clean energy.
In the leadup to Copenhagen, the Chinese have made it clear they intend to claim the moral high ground. As well as comparing the programs they already have in place to the promises made, but mostly not yet delivered, by the Obama Administration, they have announced that expect their own emissions of greenhouse gases to peak by 2030. Assuming comparable measures by other developing countries, this would probably be consistent with stabilising global concentrations of greenhouse gases at around 550 parts per million.
As with the relatively weak commitments announced so far by developed countries, that’s not enough to prevent damaging climate change, but it gives some hope of avoiding the catastrophic implications of ‘business as usual’. And if Copenhagen produces even an imperfect agreement encompassing China and the developed countries, the prospects of a stronger deal later on, including limits on the emissions of all countries, will be greatly enhanced.
John Quiggin is an ARC Federation Fellow at the University of Queensland. He is currently visiting East Asia.