China’s successes and missteps emphatically illustrate what works and what doesn’t

Our political transformation mothered a misconceived economy, while our national bickering is too overwhelmed by accusations to spot opportunities. Fortunately, China’s successes and missteps emphatically illustrate what works and what doesn’t.

International trade has become as integral to broad prosperity as the adoption of assembly lines a century ago, and for the same reason: enormous efficiency gains. Just as peasant-to-factory-worker migrations resulted in a surge in productivity, integrating poorly educated young workers in developing nations into global supply chains unleashes similarly astounding benefits. If China hadn’t rejected its long-standing localisation model in the late 1970s to pursue value-added exporting, its economic prowess would have remained meagre. 

Whereas the growth of highly developed economies mostly rides on their ability to increase worker productivity, high-poverty countries can sustain far higher growth rates by exploiting their lower labour costs to spur high-volume, value-added exporting. They can rapidly import productivity-enhancing technologies while selling into deep overseas reservoirs of discretionary consumer spending.

China followed this path and swiftly became the world’s largest manufacturer and the top goods exporter. Its per capita GDP is 25 times what it was before its pivot towards global integration. So why does China still lack sufficient domestic discretionary income to support adequate growth?

Purchasing power 

According to a media release from the Brazil, Russia, India, China and SA bloc, “The Brics economies account for 32.1% of the global GDP on purchasing power parity [PPP].” While using PPP data is useful for tracking living standards, it is dangerously misleading for navigating a nation’s economy. Sustaining high growth requires access to abundant discretionary purchasing power. 

Households that barely make it from pay cheque to pay cheque or that depend on grants can’t spur rapid growth. Whereas Africa’s median per capita annual income barely exceeds $2,000, its PPP is three times higher. But invoices aren’t settled with PPP statistics. Nor can a government with a junk credit rating incite sustainable growth by borrowing at high rates to fund sub-subsistence grant payments for idled would-be workers. 

Like China in the 1970s, Africa’s potential is unrelated to its modest purchasing capacity. Neither the Sub-Saharan region’s nor SA’s economic prospects can be noticeably upgraded without integrating significant numbers of young workers into global supply chains. Delusions of investment-led growth amid a localisation policy regime are tragically naive.

While definitions of discretionary income vary, some commonly used estimates have the West accounting for two-thirds of the world’s total. Targeting this market was central to the success of China’s value-added exporting model. But whereas the area with the largest cluster of underused young adults had been Asia, it is now Africa — and now many Western nations have a dearth of young workers. Companies as prominent as Amazon and Cisco are fishing in our waters to find young people to train.

Household wealth

Despite China’s economic model sustaining remarkable GDP growth, it was vastly less effective at broadly growing household discretionary income and wealth. Rather, forms of financial repression suppressed the rates paid on savings and restricted access to foreign exchange to invest in foreign assets.

China needed to greatly expand its infrastructure and housing stock, so it initially made sense to aggressively funnel investment flows towards these areas. It had become clear that there needed to be a substantial course correction, but then the great financial crisis of 2008 led to China doubling down. 

Rather than shifting policies to support household wealth accumulation, China borrowed aggressively to fund more infrastructure and housing. Many commentators at the time credited China’s leadership for resuscitating the global economy. A few years later, the Chinese Communist Party (CCP) chose as the country’s next president a man who has long proclaimed that China’s economic model, and its principles, are superior to Western counterparts.

Instead of restructuring its economy, China’s authoritarian leader seeks to alter the global order. The Belt & Road initiative is President Xi Jinping’s signature project. Meanwhile, if there is one belief that is shared among US Democrats and Republicans as well as the CCP, it is that home ownership is highly beneficial. Politicians erring on the side of excessively encouraging home ownership is understandable, yet such errors can be very costly. 

Property bubbles

Property bubbles are not easily deflated. The US approach has tended to be fast and furious. Conversely, as Japan has favoured a gradual adjustment, that country’s housing market still hasn’t fully recovered from its early 1990s bubble. 

Since China’s communist leaders prioritise stability, they have little appetite for a market-led correction to rebalance their economy’s excessive reliance on constructing houses and infrastructure. But they have an oversupply of housing amid a rapidly declining and ageing population. Unlike in the US, Japan or Europe, the vast majority of Chinese households have extremely modest discretionary purchasing power — and their high savings rate has mostly funded home ownership. Ouch.

China’s economic success has demonstrated how high growth can be sustained through increasing the productivity of low-skilled young workers by integrating them into global supply chains. That country’s current economic woes are no less instructive. Relying on domestic consumption to sustain healthy growth is a high bar to clear. It requires a large, financially sound middle class. 

China’s lessons for SA are being learnt not by our leaders but by school leavers earning micro-credentials online and then earning a living online. Such experiences are still rare but they have high proof of concept value. Contrary to SA’s geopolitical alignments, the supply chains they are joining overwhelmingly serve Western consumers.