Michael Pettis: Chinese GDP Has To Drop Even More
But in a new Financial Times column Michael Pettis, China expert and professor at Peking University, thinks GDP growth needs to slow much further.
He also argues that many China experts are wrong to assume that slower growth will cause social unrest.
Instead, he believes the number that everyone should watch and that is important for China if it is to rebalance it's economy is median household income. From FT:
"The consumption rate is low mainly as a consequence of policies that systematically transferred resources from the household sector to subsidize rapid growth. This forced down the household income share of GDP which, at about 50 per cent, is among the lowest ever recorded in the world. There is no sustainable way to boost household consumption without boosting household income.
"This suggests that consumption growth of 10-11 per cent requires similar growth in household income. In principle China could have this by paying workers much higher wages and sharply raising the deposit rates paid by banks. But since low wages and cheap capital are at the heart of China’s growth model, raising wages and deposit rates enough to rebalance the economy would cause growth to collapse. Only a continued, and ultimately self-defeating, surge in debt can get household income to grow quickly enough to accommodate both high GDP growth rates and a rebalancing economy. ..This is why GDP growth rates must drop further."
If China is to avoid social unrest while rebalance its economy, it is median household income that needs to grow. Real disposable income has been climbing at over 7% a year on average, and needs to keep going at this pace or stronger to prevent social unrest. "If China is to rebalance meaningfully, GDP must grow by “only” 3-4 per cent."