Yesterday I attended a talk by Professor Nicolas R. Lardy at The University of Hong Kong on the topic of how China can sustain its economic growth. He offered refreshing insights into the topic, especially in the context after global financial crisis.
Professor Lardy showed us a graph about the lagging consumption demand with respect to GDP growth. The phenomenon is caused by both the slow increase in real income and by the tendency of the Chinese citizens to save more especially after 2002/2003. Why do they want to save more? Because the real returns on savings deposits are negative. The inflation rate can be higher than the interest rate, and citizens’ returns on bank deposits deteriorate. Moreover, Chinese people seem to be target savers, saving more when returns are low. Another reason is that they have to save to buy a house.
Investment in housing has high returns in the recent years; stock exchange market is still not mature; China has relatively strict capital controls. All the above have limited Chinese citizens in their choices of investment.
The property investment is now the single drive to Chian’s development, and this is by no means sustainable. There are several reasons. Firstly, the household indebtedness has been going up dramatically, and there has to be ceiling to it. Secondly, the share of household wealth in housing has gone up greatly, but eventually Chinese households will diversify their investments to secure their returns. Thirdly, the Shanghai Stock Exchange is likely to improve, and therefore stocks can be a better alternative to housing as investment in the future. Fourthly, currently the Chinese banks are highly exposed to the housing market (in terms of loans and mortgages), and they are likely to cut back lending in property purchase. Lastly, the RMB convertibility is likely to improve in the future and Chinese people will have more access to investments denoted in foreign currencies.
Professor Lardy suggested that Chinese governments should gradually liberalize the interest rate to increase private consumption. Indeed the policy was once launched in the 1990s, but was pushed to a stop in 2003.
A more general account on this topic here.