Global constraints threaten higher Chinese growth
Michael Pettis Michael Pettis is a senior fellow at Carnegie China · Nov 8, 2023
While Chinese policymakers debate over whether or not debt levels will limit the country’s ability to maintain many more years of high, investment-driven economic growth, it’s not just internal constraints that matter. External ones will count just as much, even if they are less discussed both inside and outside China and less well understood.
Some simple arithmetic is useful here. Investment accounts for roughly 24 per cent of global gross domestic product, and consumption the remaining 76 per cent. Even in the highest investing economies, the actual investment share of GDP rarely exceeds 32-34 per cent, except for short periods of time.
China, however, is an extreme outlier. Investment last year accounted for about 43 per cent of its GDP and has averaged well over 40 per cent for the past 30 years. Consumption, on the other hand, accounts for roughly 54 per cent of China’s GDP (with its trade surplus making up the balance).
Put another way, while China accounts for 18 per cent of global GDP, it accounts for only 13 per cent of global consumption and an astonishing 32 per cent of global investment.
Every dollar of investment in the global economy is balanced by $3.2 dollars of consumption and by $4.1 in the world excluding China. In China, however, it is offset by only $1.3 of consumption.
What is more, if China were to grow by 4-5 per cent a year on average for the next decade, while maintaining its current reliance on investment to drive that growth, its share of global GDP would rise to 21 per cent over the decade but its share of global investment would rise much more — to 37 per cent.
Alternatively, if we assume that every dollar of investment globally should continue to be balanced by roughly $3.2 dollars of consumption, the rest of the world would have to cut the investment share of its own GDP by a full percentage point a year to accommodate China.
Is that likely? Probably not, given that the US, India, the EU and several other major economies have made very explicit their intentions to expand the role of investment in their economies.
But without this kind of accommodation from the rest of the world, any major expansion in China’s share of global investment risks generating much more global supply than demand. It will be especially painful for low-consuming economies that will be competing producers, even perhaps for China itself.
The imbalance may be an even bigger problem when we consider that, since 2021, China has been shifting investment away from the bloated property sector towards infrastructure and manufacturing. In the past two years, while investment in China’s property sector has declined — and is expected to fall further — total investment hasn’t.
This is in part because of an increase in the amount of investment directed by Beijing into industry and manufacturing. The result has been — after a decade of decline — a rising manufacturing share of China’s GDP.
But if China’s share of global GDP rises over the next decade, driven by a continued reliance on manufacturing, how easily can the rest of the world absorb the country’s expansion?
Currently, the manufacturing sector globally comprises roughly 16 per cent of the world’s GDP and as little as 11 per cent of the US economy. China is once again an outlier with a manufacturing share of GDP at 27 per cent — higher than that of any other major country.
If its economy were to grow over the next decade at 4-5 per cent a year even without a further increase in the manufacturing share of the country’s GDP, China’s share of global manufacturing will rise from 30 per cent to 37 per cent.
Can the rest of the world absorb such an increase? Only if it is willing to accommodate the rise in Chinese manufacturing by allowing its own manufacturing share of GDP to decline by half a percentage point or more.
The point is that, without a major and politically difficult restructuring of its sources of growth away from investment and manufacturing and towards an increasing reliance on consumption, China cannot lift its share of global GDP without an accommodation from an increasingly reluctant rest of the world.
Without that contentious accommodation, the global economy would find it extremely difficult to absorb further Chinese growth.
Many more years of high growth in China are possible only if the country were to implement a major restructuring of its economy in which a much greater role for domestic consumption replaces its over-reliance on investment and manufacturing.