Lawrence Lau: Optimistic over China’s Future Growth

Despite some Western analysts’ claim that China’s economy is stalling, Hong Kong economist Prof. Lawrence J. Lau expresses optimism about China’s economic future, believing that the country will have no difficulty in achieving an average annual GDP growth rate of around 7 percent in the next decade and beyond.

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK

Prof. Lawrence Lau counts the reasons why he is optimistic about China’s economic future in a lecture organized by CUHK’s Institute of Global Economic and Finance.

Professor Lawrence J. Lau, the former Vice-Chancellor of The Chinese University of Hong Kong (CUHK), who specializes in economic developments and growth of East Asia, including that of China, shares his observations and views on China’s economic outlook at a speech titled “What Makes China Grow” at CUHK on November 24, 2014. The speech marked the second of the “Lau Chor Tak Distinguished Lectures on Global Economics and Finance,” organized annually by CUHK’s Institute of Global Economic and Finance. The lecture series feature eminent scholars and policymakers from the around the world, who share their insights into current economic and financial topics.

China has become the fastest growing economy in the world, averaging 9.8 percent per year since it began its economic reform in 1978. It is historically unprecedented for an economy to grow at such a high rate over such a long period of time, said Prof. Lau in his lecture.

Why has China been able to do that? Prof. Lau pointed out three main reasons, all related to China’s favorable economic fundamentals:

First, the Chinese national savings rate has consistently ranged between 30-50 percent since 1978, enabling a high domestic investment rate and hence a rapidly growing tangible capital stock. “China is one of the highest-saving countries in the world, which makes it possible for it to achieve significant investment levels without relying on foreign capital flows,” Prof. Lau explained.

Second, China is endowed with an unlimited supply of surplus labor. Despite the drop in China’s birth rate and concerns over the country’s shrinking domestic workforce in recent years, Prof. Lau believes that there will be no labor shortage any time soon in China. He emphasized that the easing of the One Child Policy and the plan to delay the retirement age will be effective tools to address the labor problem. “China’s current retirement age is much earlier than that of other countries. Actually, the older generation can still contribute to society with their experience and skills,” said Prof. Lau. “I don’t think labor is a serious issue in China.”

“China is one of the highest-saving countries in the world, which makes it possible for it to achieve significant investment levels without relying on foreign capital flows.” – Prof. Lawrence Lau

Last but not least, Prof. Lau stressed that the huge Chinese domestic market has enabled significant economies of scale based on domestic demand alone. “Domestic demand has always been the main driving force behind China’s economic growth,” he said. “A huge market with 1.3 billion people is a substantial advantage for any economy.”

While favorable economic fundamentals are necessary for growth, they are by no means sufficient in the long run. An effective economic transformation from mandatory central planning to market economy is key, according to Prof. Lau. He said that China’s transition from a planned to a market economy had granted autonomy to manufacturers and incentivized them to produce, which in principle led to a spike in the growth of real GDP. However, Instead of dismantling mandatory central planning all at once, China has adopted a “dual-track” approach, introducing free markets on the margin while continuing to enforce the existing central planning, which helped ensure a smooth transition. By the end of the last century, the Chinese economy had grown sufficiently that central planning became no longer important and was thus phased out. “I think it’s fair to say that everyone in China benefits from the economic reform,” Prof. Lau said. “I don’t think anyone would like to go back to the 1970s.”

Prof. Lau then introduced China’s economic development in the early 2000s. During this period, national savings and investment rates began to gradually rise from 40 percent to almost 50 percent. Many of the local governments were under pressure to raise the local GDP through financing the development of local manufacturing industries, resulting in huge excess manufacturing capacities almost everywhere. Prof. Lau commented that China has become not only a surplus-labor economy but also a surplus-capital economy, suggesting that the real GDP is aggregate-demand-constrained, meaning, as long as there is aggregate demand, the supply will be there to meet the demand. As such, he said, the Chinese economy can continue to grow on the basis of domestic demand growth, and the government can exert its influence through fiscal and monetary policies.

Will China continue to grow at a high rate in the future? Prof. Lau believes China’s national savings rate will remain high and surplus labor will continue to exist for a few decades, as will the advantages of a huge domestic market. The Chinese capital-to-labor ratio is still relatively low for the country as a whole. As a result of these favorable conditions, there remains a great deal of room for tangible input-driven economic growth and eventually for intangible capital-driven growth as investments in human capital and R&D capital continue to rise.

“There should be no problem that China will be able to continue growing at an average annual rate of around 7 percent, more or less independently of what happens in the rest of the world,” Prof. Lau concluded.