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Francis T. Lui
Professor of Economics at Hong Kong University of Science and Technology Business School and a member of China Economics Award Experts Nomination Committee
As the economists predicted, the debt crises in Europe and the US are having impact on the global economy. Quite recently China has announced about its slowing growth and potential financial troubles. Dukascopy Bank has interviewed an expert in Chinese economy, Professor Francis Lui, to learn about what is actually going on in China at the moment and what are the second largest economy's growth prospects.
1) How would you assess the current economic situation of China and its growth's slowdown?
China's economic rule will still continue for quite a long time, although currently it is facing some difficulties in the short run. One of the main difficulties is certainly what has been happening in Europe and the US whose financial crisis is still going on. Western troubles can cause some negative effect on the exports of China, which is why I expect that China finds a way to increase the domestic demand. That is a major problem because there are a lot of manufacturing companies in China and the kind of goods that these companies are producing are usually marked "for exports". The consumer goods that will be needed domestically in China will be somewhat different, so that the exporters will have to find some ways to redesign the products, as well as compete with the manufacturers that have been selling the goods domestically.
The competition is not something very simple. This is this because the exporters who have been selling the goods all over the world used to have a kind of comparative advantage in the sense that China's labour is cheap. Therefore, in terms of competition, they can defeat most of the competitors in the western world.
However, when they try to go inland, inside the China, all the competitors also would have access to cheap labour, consequently, this kind of comparative advantage that the exporters have been enjoying would disappear. If they cannot succeed, that could cause a lot of unemployment. What the exporters need to improve now is the technology and the products they have been producing, so as to suit the needs of the domestic consumers.
Economy of China has also been driven by other forces: one of them is that the country has been relying hugely on building more infrastructures. China has a plan to build another 54 airports and the high speed railroads all the way up to 50,000 kilometres before the year 2020. It also has a plan to build another 36 million low-cost housing units within the next five years. These kinds of projects may help to pull China's economic development for a bit longer.
Nevertheless, there is a problem here because of the law of diminishing returns. It implies that if you build the first highway, the contribution from the highway could be important, but if you have already built almost 100 highways, the next one that you will build is going to make a much weaker contribution to the economy.
Consequently, the additional highway will not pull the GDP as much. Up till now China has already invested in the infrastructure a lot, but, to my mind, it cannot rely on the construction and infrastructure only to support the country's economic growth.
Therefore, China has to figure some other alternatives in order to push GDP forward. This would require a much bigger investment in the education of the people and also in technology, research and development. China has not been doing well in improving the educational system. The public expenditure on education as a percentage of GDP is less than 2.5% of the GDP. It is among the lowest values in the world and I believe that China has to do something in this regard.
Moreover, due to the fact that China has been relying significantly on the infrastructure, the global prices on the natural resources, steel and energy, will go up. The cost of construction will necessarily accelerate. That would impose a restraint on the speed of the further development in China.
In my view, China has to spend resources on protecting the environment and also to come up with decrease in production of energy intensive goods.
2) How would you evaluate the situation with the housing boom?
China has been trying to impose a lot of measures to control the housing prices, but I do not think that those policies have been implemented properly. It results in a lot of repercussions in society, having already created quite a bit of negative effect on this year's GDP.
For end of this year I think that probably the growth of GDP will be 9% or even lower than that. For the next year it may be a bit harder. Many people will say that China will be able to get the GDP growth of about 8%. It might be feasible, but it depends a lot on what kind of monetary policy China is going to adopt.
3) What are the prospects for Chinese economy's long-term growth?
Overall, I am still optimistic about the Chinese economy. It has been saving a lot in the past: the savings rate is the highest in the world. It saves about 52% of the GDP and is very different from other countries. China's investment rate, for instance, is 50% of the GDP. It means that for every one hundred dollars produced, Chinese government and private people consume around 48 dollars. The total consumption is about 48%, whereas the other 52% are saved.
And as such, even if there is an economic problem, China may have the resources to deal with it. China has an enormous amount of foreign reserves which amounts to 3.2 trillion US Dollars which is half of the GDP. Due to the fact that the currency in China has been appreciating, therefore, China is losing money because of holding of the large amount of reserves and it needs to handle this difficulty.