Countless books have been written on China’s rise. Almost none of them considers the Chinese population’s hard work and thrift as factors leading to its success. The factors commonly cited are all institutional (market reforms leading to capital accumulation and higher productivity). The belief is that other countries implementing the exact same policies as China would also grow by an average of 8 to 10 percent for 40 years.
China’s meteoric rise since the 1980’s has been rightly attributed to market reforms and opening up to the world, acquiring vital know-how in that process and exporting manufactured goods. Those factors have indeed had an enormous impact on the Chinese economy. But they do not explain the extent to which China’s economy has grown for more than 30 years. Many countries have implemented similar market reforms but did not witness their economy double in size every seven years or so over multiple decades. China could not have grown as much as it did without the inherent industriousness and thriftiness of its population.
Starting from a very young age, this focus on hard work common in all Confucian societies has allowed China to top international rankings on education. Various tales extolling the virtues of determination and perseverance are symptomatic (and not just anecdotal) of the importance of hard work. Virtually everyone in China knows the story of 90-year-old Yu Gong (愚公), a man who lived in a remote village with two nearby mountains blocking access into the valley. Eventually the Gods in heaven were moved by his hard work and perseverance and took the two mountains away. China has been moving mountains for the past 30 years.
In “Values at the Core,” we describe how China’s very high savings rate, one of the highest in the world, is due to several factors, among which the one-child policy and, in the case of Chinese companies, the fact that wages had not kept up with the country’s productivity gains. But thrift, in our view, provides another explanation as to why households save as much as they do. The desire to save as much has been there for a long time, but people were unable to save during the three decades following the 1949 Revolution because their incomes were far too low. As the economy improved, people and businesses were able to save much more and align their actual savings rate to the one they desired, in part based on their level of thrift.
Savings make their way into investments. The country has grown by investing in property, infrastructure, factories, machinery and, increasingly, research. Investments may be high, but during most years they remain below what the country saves. As a result, excess savings are ‘exported’ to international markets, generating large current account surpluses. As the country opened up to the world and joined the World Trade Organization in 2001, exports soared as China capitalized on its cheap and industrious labor.
People spending more, but slowly
Over the past decade, China has tried to move away from an economy fueled by investments and exports to one that is more consumer-driven. The need to ‘rebalance’ the economy stems in part from rising debt and unproductive investments that are not conducive to sustainable growth, but also by the need to be less reliant on foreign factors, such as the 2008 global financial crisis or the ongoing trade wars. An export-led growth strategy depends on global demand for Chinese products and services; that demand is volatile and difficult to control. Any swing in global demand directly affects local exporters and the wider Chinese economy.
But rebalancing the economy will take time. A thrifty population is not going to change its habits overnight. One structural factor with the potential to reduce savings rates is a rapidly ageing population. But in China, retirees remain as frugal as they have been throughout their lives and benefit from financial support from their children and grandchildren. Most of them live with their family, in effect reducing their living costs to a minimum. An ageing Chinese population is therefore unlikely to significantly reduce national savings rates, at least not in the near future.
Another structural factor that is starting to have an impact is consumerism by a new generation. Young adults are much more willing to spend than their parents or grandparents were. We should however not conclude that young adults in China are becoming as spendthrift as their US counterparts. On average, they still save a much higher portion of their income, but they do spend more than their parents or grandparents did. As a result, consumption in China is rising and now represents the largest component of GDP as well as the main driver of GDP growth. But the rise is a very gradual one and should remain so.
Markets in the balance
Ever since China began its economic revival, many in the West have been predicting its imminent downfall. They would observe the country’s economic and political model, compare it to what they perceived to be the only path to sustainable growth, and dismiss China’s economy as one that would inevitably decline if it did not conform to the predominant western consensus, in which democracy and the withdrawal of the state featured as vital preconditions.
Gloomy observers were (and still are) making two mistakes. First, a strong government is no impediment to growth, as long as market principles, among which fair competition and a level-playing field between participants, are upheld. Second, most observers dismiss the idea that human values play any role in economic growth, yet they cannot provide an explanation as to why poor Chinese migrants eventually enjoy higher standards of living compared to local populations wherever they relocate. International observers too often fail to acknowledge that the inherent qualities of the Chinese people have contributed immensely to the rise of their nation and will continue to do so.
The greatest threat to China’s continued economic success is not the trade wars, nor is it a rapidly ageing population, high levels of debt or an inability to move up the value chain. Some of those challenges can certainly lead to slower growth. Yet none of them looks insurmountable to a Chinese leadership that has systematically and aptly responded to them, learning from the rest of the world but also pursuing its own approach, such as its policy of strong intervention in weathering economic cycles that could serve as a model for other nations. The main threat to the Chinese economy would be to roll back the gradual market reforms implemented over the past three decades, reneging on market principles that have transformed its economic landscape. When it comes to economic decisions, a pragmatic approach will always work better than an ideological one; catching mice with white cats alone will yield inferior results.
If market reforms are not reversed, the future for China looks very bright. With a hard-working and thrifty population, it is unlikely to fall into the middle-income trap that has affected so many other emerging countries. Despite inevitable bumps along the way and a society that will have to become more innovative and consumerist, China should continue to rise and eventually reach standards of living comparable to the wealthiest nations.
Thomas Grandjean and ChinHwee Tan are the co-authors of Values at the Core, a Financial Times’ 2021 Best Summer Books. ChinHwee Tan is the Asia-Pacific CEO of a global Fortune 500 company. Thomas Grandjean has worked in the commodities sector for the past 15 years.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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