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China’s Singapore-like economic growth model

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The Wall Street Journal’s blog (yeah even newspapers have blogs these days) published an interesting article regarding China’s economic growth model.  In some sense it’s a lot like Singapore’s:

China’s economy is fueled primarily by fixed asset investment, which includes everything from buildings to roads to factories to foreign investment. But factories face overcapacity worries and industrialists are scaling back investments in new facilities.That could mean, for the first time in over a decade, the small and medium sized enterprises that create 90% of China’s jobs may not much juice China’s economy. Foreign direct investment and construction have cooled too.
Fixed asset investment was already around 42% of gross domestic product in 2008, according to estimates by J.P. Morgan strategist Jing Ulrich. It could rise to 45% this year. And as a factor in GDP growth, investment could provide up to half, while exports drag on economy.

Headline figures on China’s investment don’t make it very clear how the economic driver has shifted toward the government. But it’s no secret where China’s investment power is coming from: the government’s drive to build roads, bridges and rails.

The central government lifted investment 40.3% in the first two months of this year from the same period in 2008, compared with 26.1% growth for all of last year. It poured money into major infrastructure projects, from railway to coal mines. Investment by local governments grew 25%, about the same as average for 2008.

Like Singapore, domestic consumption in China has remained fairly low and as you can see from the graph above, it actually dipped in this decade, which is remarkably similar to Singapore.  So it isn’t too much of a stretch to say that China is modelling their economy after Singapore’s, and with stunning success too.  Linda Lim, a professor at the University of Michigan noted likewise:

 What has this to do with Singapore? It turns out that both China and Singapore have the world’s lowest shares of consumption in GDP—about 40%, with the state havingownership or control over most of the remainder, including investment by foreign multinationals which is largely controlled and incentivized by the state.

The WSJ concurs as well:

The problem is too little private consumption, despite encouraging signs from shoes to appliances that retail sales are holding up well. Instead of unlocking the buying power of its 1.3 billion people, for instance by deregulating services like health care or media, the government takes the lead with often billion-dollar bets. It was a good strategy to get infrastructure built, but it is an expensive one to sustain.

At around 35% of GDP, China’s private consumption in 2007 was less than those of other major countries: 71% of GDP in the U.S., 64% in the U.K. and around 56-57% in Australia, Canada, France, Germany and Japan, according to JP Morgan .

If this sounds familiar is because for years the Singapore government has practiced the same approach.  Mandatory savings, one which takes up a third of the salaried Singaporean worker monthy payroll income has fueled state investments by Temasek Holdings and GIC Singapore, which also sits on top of Singapore’s vast vaunted foreign reserves.  Indeed, it’s hard not to draw the conclusion that China may be doing nothing more than copying Singapore.  To take a case in point, China’s CIC (China Investment Corporation), established in 2007, was modelled after Singapore’s Temasek Holdings.  Unlike Temasek Holdings, however, CIC stayed away from Merrill Lynch after it got its fingers burnt in Morgan Stanley, which was one of its earliest investments.  As noted earlier, CIC’s prudence has allowed it to burst onto the global investment stage recently, seeking to buy up stakes in foundering resource-based companies.

Unlike Singapore, however, China is also trying to rev up domestic consumption to diversify it’s economic growth. Unlike China, our relatively tiny population size doesn’t allow much room for domestic consumption to play a role in spearheading the economy, though it may arguably act as a buffer against external shocks like the current fall in foreign demand.  Just like Singapore’s in earlier times, China’s economy has a long way to go before it peaks and stabilises.  The only question is what Singapore will do once China has successfully emulated them and more on the global stage.

Written by defennder

March 28, 2009 at 9:25 PM

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