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Why you should take a broader view of China’s economy

Why you should take a broader view of China’s economy · CNBC
Dr. Michael Ivanovitch

Wild guesses from one economic indicator to the next are not providing relevant and useful analysis of China's economy. They are simply leads to equally wild trading bets.

The world's second-largest economy is underpinned by strong fundamentals and is reasonably well run. It deserves a broader look at its short-term (i.e., a one-year time horizon) and medium-term (i.e., a period of up to five years) outlook for growth and price stability.

If you want a short-cut, and a good point of departure in that kind of analysis, you may wish to think of China's widely shared medium-term growth forecast of about 6 percent.

But here is a warning: As a long-time practitioner of formal economic model building, I would advise not to get hung up on that or any particular point forecast without a probability range.

I would prefer a simple question: Do the Chinese have what it takes to stabilize and maintain demand and output on a relatively high-growth trajectory in the years to come?

The Chinese certainly have the money. With a savings rate of 49 percent of GDP, China has plenty of readily available internal sources of finance to support growing investments in its stock of physical capital.

And in the human capital, too, where, oddly, they may have a spot of a problem. The latest population surveys show that the active civilian labor force grew at an average annual rate of only 0.12 percent during the five years to 2015. That was down from 0.27 percent in the previous five-year period.

China's productivity challenge

The upshot is that China needs an average total factor (labor plus capital) productivity growth of 5.8-5.9 percent to maintain the economy's noninflationary growth potential of 6 percent over the medium term.

Is that possible? Here are some numbers. China's average annual GDP growth of 7.8 percent over the five years to 2015, and its average annual labor force growth of 0.12 percent (over the same period), clearly indicate that a total factor productivity growth of more than 6 percent was part of that story.

I know that there will be people screaming that the Chinese numbers are fabrications. I would stay out of that, and so should you, as long as these numbers have the imprimatur of official international organizations which examine the Chinese economy.

But quite apart from that, I believe that Beijing is fully aware of what they are up against. All of China's current structural changes (reforms) are aimed at enhancing the efficiency of its human capital (through education and vocational training) and at fostering technological innovation to raise the quality of its (physical) capital stock.

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