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<\/p>\nLook at productivity in China, not growth. to see where China is really headed.<\/p>\n
With iron ore prices already sitting at five year lows, a further slowdown in Chinese growth is not the sort of news that Australian policy-makers need. What is of greater concern is whether we are seeing the beginning of something more permanent. Will China have a similar trajectory to Japan since the early 1990s? This would impact the rise of China\u2019s middle class.<\/p>\n
In the long run economic growth is delivered when productivity climbs. That means finding better ways of doing things. The only other way to produce more output is to use more inputs. However, the problem is diminishing returns. Building a rail link that connects an inland city with a port brings enormous benefits but once built, there is little need for another..<\/p>\n
Productivity struggles to attract the attention of commentators because it is hard to calculate. Professor Chris O\u2019Donnell and James Laurenceson found evidence of rapid productivity growth across most provinces. This is good news but also no surprise – China had access to easy sources of productivity gains such as borrowing technology from overseas.<\/p>\n
The key question is whether productivity can continue to improve as the economy matures?\u00a0 The government has spent much on human capital and the results are significant. China\u2019s universities are now second only to the US in terms of their total research output.<\/p>\n
But for truly rich productivity gains to be unlocked, reforms are needed that shift the economy away from its dependence upon investment. For consumers to take the lead they need more income. Getting state-owned banks to pay the household sector market rates of return on their savings deposits is one example of the type of policy that is sorely needed.<\/p>\n
Facing a downturn in economic activity, the first instinct of China\u2019s leaders is to pull policy levers that pump up aggregate demand. But temporary measures to boost growth such as expanding the supply of credit have largely run their course and are no longer sustainable.<\/p>\n
When pushed they have also shown themselves to be nothing if not pragmatic. President Xi Jinping\u2019s aggressive tackling of official corruption in response to public anger is a case in point. If stalled living standards are to be avoided, committing to a productivity-enhancing reform agenda is really the only option that China has left.<\/p>\n
Focus\u00a0 on what the data says about the trajectory of productivity. Through the first half of 2014 consumption contributed 54% of GDP growth, while investment chimed in with 49% (net exports were responsible for -3%).<\/p>\n
The overall growth rate may be disappointing but if there is a widening of the gap in favour of consumption then this is exactly the sort of news that China and Australia needs.<\/p>\n
Look at productivity in China, not growth. to see where China is really headed. With iron ore prices already sitting at five year lows, a further slowdown in Chinese growth is not the sort of news that Australian policy-makers need. … Continue reading ![\"Productivity](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/11\/Productivity-in-China-300x240.jpg\")
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