Even If GDP Gap Closes, Lack of Innovation Will Keep China From Becoming Developed Nation

This article by Li Xunlei discusses China's lack of innovation and why even if China achieves high income status (about a 50% increase in per capita GDP from current levels) it still may not qualify as fully developed.

2015, China's GDP reached 67.67 trillion, per capita GDP was 49,351 yuan, even though according to 1: 6.2 exchange rate basis, or less than $ 8,000. If the next five years the average annual nominal GDP growth rate of 7%, the US dollar against the RMB exchange rate at the current level of 1: 6.5 remain unchanged, the per capita GDP 2020 was $ 10,400, still with the high income of $ 12616 national threshold is not a small gap.

So, the next decade China should always entered the ranks of high-income countries, right? It may not. If the next decade, the average growth rate of nominal GDP to 6% (15-year 6.3 per cent), in 2025 the US dollar against the RMB exchange rate is 1: 7, the per capita GDP in 2025 was $ 12,100, or not entered high income threshold countries. Even if the economic situation over the next decade than assumed good, real GNI per capita of more than $ 12616, but do not rule out raise income countries on the World Bank standards possible.

China can grind its way to high income at present growth rates (but do you believe official numbers...), but that doesn't mean there aren't problems.

Therefore, the future of China to become a high-income countries, there were three major obstacles:

First, the future ability to maintain GDP growth of around 6% level.

No surprises to China watchers, but he gives three reasons for why slower than expected growth is possible:

In fact, I have always thought that the Chinese economy should see three dimensions, one demographic factors (labor supply and consumer demand), two structural factors (the degree of match between the factors of production), three environmental factors (the global economy) . Currently, the status of these three dimensions is not optimistic.

Next the currency:

Second, whether the RMB exchange rate remained stable.

...the ability to stabilize the exchange rate at 7:1 also doubtful.

The target is also moving:

Third, the high-income countries will raise the standard over the next decade.

...The next decade, as governments around the world compete to adopt looser monetary policy, money flooding phenomenon is difficult to change, so, 10 years after the high-income countries to US $ 14 000 standard is a conservative estimate.

The article goes on to discuss the structure of the Chinese economy, the continued reliance on fixed asset investment and lack of innovation. The cost of investment is rising, requiring ever more credit growth to achieve the same level of GDP growth. This leads to a cycle that ends in currency devaluation:

High GDP growth> high investment> easy Money> high debt> Fiscal deficit> assets shift from real to imaginary> asset misallocation> asset bubbles> inflation> devalue.

Li then looks at local economies:

Although we should have been declared China an innovation-driven economy. Although the Chinese economy has bright spots of innovation, but innovation contribute much, how high technology content, the statistics speak for themselves.

NBS 15 years of statistical bulletin, add a data, that is, high-tech industrial investment 3.2598 trillion yuan, an increase of 17.0%, accounting for investment in fixed assets (excluding rural households) accounted for 5.9%. The so-called high-tech industry investment, including pharmaceutical manufacturing, aerospace vehicles and equipment manufacturing, and other six major categories of high-tech manufacturing and investment information services, e-commerce services and other nine categories of high-tech services investments.

Low proportion of high-tech industry investment, also shows that China is still very far away from the innovation-driven stage. Although China's Internet industry is developing rapidly, but are bigger transactions or information platforms, such as BAT, Jingdong, Ctrip and so on. Investment in fixed assets, the majority of investments are low, both short-term or long-term rate of return on rate of return is very low. If a high rate of return, the corporate debt should not grow rapidly.

We therefore compared with developed countries, the gap is still very large. For example, in the national provincial Tianjin region, the per capita GDP of the first, but this is mainly driven by investment, the proportion of investment in GDP is too high, while the per capita disposable income is much lower than the deep north. Chongqing has the same problem, a high GDP growth rate, but fixed asset investment accounted for more than 90% of GDP, actually, did not attract huge investment and population concentration, population but is in outflow.

Shenzhen is the only developed country in the crowd were shoulder to shoulder, the added value such as high-tech industry in Shenzhen 15 years created GDP ratio reached 32 percent, modern accounting services to 39%. Shanghai mainly by financial , real estate, automobile manufacturing and other traditional advantages and economic advantages of agglomeration, high-tech industry contribution to GDP is not large.

This chart alone can make the argument: it shows fixed asset investment as a share of GDP.

Shenzhen is the only truly innovative city major city, with Shanghai relying on its status as financial center and Beijing on government. The next chart shows the push to change the economy has been failing for over a decade, with the share of investment rising at the same rate as areas such as the West, which lagged behind in development and was targeted for massive infrastructure investment.

The only bright spot is the uptick in the northeast after the economy began to slow substantially in 2014, though the implication for the Chinese economy is not positive if rebalancing means fixed asset investment suddenly collapses and drags GDP lower with it.

Li closes with a comparison to the Great Leap Forward:

If the only goal is to have GDP catch up with the Anglo-American standard, it seems to have similarities with the Great Leap Forward and the people all smelting steel. Even if the GDP were to catch up, we are still lagging behind in many other aspects. In fact, since the reform and opening up, China has done great, as long as we adhere to being people-centered, narrow the gap between rich and poor, it has been pretty good so far.

iFeng: GDP高增长真相：中国离发达国家还有多远？