By: Steve Dickinson
The PRC Statistics Bureau has issued its preliminary report on the status of the Chinese economy [in Chinese] for the year 2010. As the report states, 2010 was “all good” for the Chinese economy. This is a remarkable achievement considering that 2010 was a recovery year from the most significant worldwide recession since 1950.
Key facts reported are:
• The Chinese economy grew by 10.3% in 2010. The total GDP for the year was about 40 trillion RMB. This translates to a GDP of about $US 6.0 trillion, vaulting China ahead of Japan as the second largest economy in the world. On a PPP (purchasing power parity) basis, China’s economy is now about 10.3 trillion U.S. dollars, far ahead of its other competitors in the world and quite close to the U.S. GDP of about $14.0 trillion.
The continued growth of the Chinese economy cements its place as one of the significant economies in the world. Before one gets overly excited about China’s vault to the number two economy in the world, we should consider several factors:
• On a per capita GDP basis, China remains a poor country. As rated by the CIA on a PPP basis, the China per person GDP is $7,400 per person. This ranks China at number 128 out of 230 countries. If the official exchange rate were used, the ranking would be even lower. China is thus ranked on a per capita basis with countries like Albania, Algeria and Turkmenistan. This is hardly anything to get excited about.
The reason for the large Chinese GDP is simple: China has the largest population in the world. It is therefore rather easy for China to have a large aggregate GDP. On the other hand, it is difficult for China to have a large per capita GDP. Pushing true wealth down to the people is one of the challenges China faces over the next ten years. This provides a partial explanation for China’s continued strong growth rate. China continues to grow from a very low base. It also explains why foreign companies have an interest in the Chinese domestic market. Prospects for growth appear to be unlimited within the normal business planning time frames.
• China is not only a poor country; the distribution of income is extremely uneven. Income disparity is measured by the Gini coefficient. The higher the number, the greater the disparity. As measured by the United Nations, the Chinese Gini coefficient is 46.9. This number indicates a high disparity in income distribution. For comparison, the Gini for Japan is 24.9 and the Gini for Germany is 28.3. Even the U.S., a country of great income disparity, does better than China with a Gini of 40.8. China’s 46.9 Gini ranks it number 94 out of 128 countries measured by the UN. This places China much worse than the U.S. and on the level of countries such as Rwanda and Guinea-Bissau.
China thus faces two significant issues in the area of income. The first is that on an absolute level, the per capita income of the Chinese people remains quite low. The second is that the distribution of the meager income that is earned is distributed in a very unequal manner.This issue is discussed with great clarity in a recent article by Professor Huang Yasheng of the MIT Sloan School of Management, entitled “Rethinking the Beijing Consensus.” Figure 2 on Page 11 of this article uses China’s own statistics to show a truly shocking development: In Guangdong, from 1992 to 2008, real GDP per capita increased by a factor of ten. However, real income of factory workers did not increase at all. In other words, the increase in GDP did not benefit the workers.
As noted, Huang’s data comes from a Chinese source. The point here is that the Chinese people are becoming very well aware that their wages have not increased in tandem with the increase in GDP. Several recent books make all of this very clear. In “China’s 12th Five Year Plan: The Coming Storm On Wages,” I discussed the work of Lang Xianping, who posed the question “If we are so rich, why is our life so hard?” More recently, Liu Zhirong 刘植荣 has published a book with a similar theme, whose title is: The Wages of 85% of the People Should Increase: Why are our wages so low [85%的人应该涨工资：我们的工资为什么这样低？]. Liu’s work is taken from his popular blog and is well known in China. Both books are best sellers at our local Xinhua bookstore.
What does this mean for foreign businesses in or looking at China?
The message is actually potentially positive. Many observers get far too excited about Chinese GDP growth and fail to focus on the reality of the Chinese economy. Though China GDP continues to maintain strong growth, that growth comes from a very low base. China remains a very poor country with very unequal income distribution. The officials who manage the Chinese economy are aware of this issue. The Chinese people are also aware of the issue. Since the Chinese leaders actually do care about what the people think, plans for the next ten years of development in China will focus on increasing income and on reducing income disparity.
Assume that China will succeed in this program. On the negative side, this means that Chinese wages will rise dramatically. On the positive side, in conjunction with this increase in wages, the prospects for the China domestic market for all goods will improve dramatically. The China retail market is far from mature. As worker income begins to rise, the possibilities for foreign players in this market are vast. The rational response will be that North American and European companies will progressively move from their mature markets to markets like that of China which have just started on their growth curve.
Is it time to start salivating over China’s 1.3 billion consumers?
