THE NEXT ASIA: THE 4 "UNS" OF THE CHINESE ECONOMY

This is the issue in China right now.  The path that they’re on, as spectacular as its been, its dominated by exports, its dominated by investment, they’re under consumers, they’re over savers, its very destabilizing, and they’ve got to address it.  And this crisis that the world is in right now, I think is their wake up call that they have no choice but to get on with the heavy lifting of addressing these issues.”- Stephen Roach

THE FOUR “UNs”

In a statement following the conclusion of the National People’s Congress in March 2007, Premier Wen Jiabao acknowledged that the Chinese economy looked extremely strong on the surface, especially in terms of GDP and employment growth.  However, beneath the surface, he cautioned such strength was far more questionable. He warned that the PRC economy was increasingly, “unbalanced, unstable, uncoordinated, and unsustainable.”  This quote has come to be known as the “four uns”.

In his book The Next Asia, the former Chairman of Morgan Stanley Asia, Stephen Roach, has used the four uns as a template to describe the changes that need to occur if the PRC (as well as other countries in Asia) is going to prosper in the 21st century.  Roach writes that, “Despite the extraordinary successes of the past decade, Asia now faces a new set of formidable challenges. Just as the financial crisis of the late 1990s was a wake-up call for the region to put its financial house in order, the global crisis and recession of 2008-2009 is a strong signal for Asia to refocus the basic structure of its economic development model.”

With respect to China, Roach notes that the Premier’s statement underscores that it is time for China to focus on the quality of its economic growth, as opposed to the quantity of growth.  In his book, subsequent interviews, and the speech below to the Council on Foreign Relations, Roach provides in-depth explanations on each of the four uns and possible solutions.  The list below is a summary of each of Roach’s points and the solutions that he proposes:

So why is it important for the United States to worry about the four uns? After all, right now, we are worried about another “un”, unemployment.  At some point in the future, the Chinese economy will be bigger than that the United States (although not per capita).  Economic growth in China and in other parts of Asia will be very beneficial to American companies, especially if they can provide high-quality, high-value added products that are made in America.  The four uns serve as a template to understand the news coming out of China every day and for American firms to form market entry strategies into China.

China has attempted to remedy the four uns in its 12th Five Year Plan which was released in March 2011. However, only time will tell if China make this important adjustments.  As Columbia Professor and Nobel Laureate Joseph Stiglitz said to Roach after the Premier’s speech in 2007, “China always adopts new models at key transition points in its development journey.  This is one of those times.

UNBALANCED

By unbalanced, the Premier was voicing concerns over urban-rural and east-west disparities.

Most unbalanced: “This probably the most unbalanced economy of any of the big economies in the world today. And they are compounding the imbalances as we speak. This crisis, to me, is all about the unsustainability of imbalances.”

Lack of internal demand: “As of right now literally 80% of the country’s GDP is concentrated in two sectors, exports and export-led fixed investment. By contrast the internal private consumption share of the Chinese GDP was 35 % last year and fell below that by the middle this year. It is an economy; as a result, that is more about supply, than demand - an economy that directs an increasing portion of its production to external markets rather than one that is supported by internal markets.”

Solution: “They have got to provide a lot of stimulus to the 700-800 million Chinese who live in rural communities and they really need to inject some life into rural agricultural productivity and income generation."

UNSTABLE

By unstable, the Premier was referring to overheated investment, excess liquidity, and sharply widening current-account surplus.

Saving to excess: “Chinese households save to excess.  Their savings rate for the household sector in the year 2000 was about 27%. In the year 2008 it was 37%.  The more income they get, the more they save. The reason they save is that they have no social safety net.  Their national social security fund, the pillar of their retirement system, has about $82 billion dollars of assets under management.  That’s $90 a worker of lifetime social security benefits.  They did a medical care plan in 2009, $30 a person for 3 years.  When you don’t have any security for the future, and your medical benefits don’t cover your average expenses, you have got to save and that inhibits the growth of a broadly based consumer culture.”

Growth is the antidote for everything: “They have made the determination that they need rapid growth to absorb surplus labor and maintain social stability.  Without that rapid growth, they worry about destabilizing events in their population.  They’ve had plenty of them recently, they had ethnic violence in Shenyang province, they had it in Tibet, and they had massive layoffs in Guangdong province because of the export collapse.  Growth right now is the antidote for everything. They have done so well that they need to rethink this growth paradigm.”

Currency: “China is an export lead economy.  They need a competitive currency to support their export business.  If they were to sell their dollars right now, their currency the RMB would go up, it would undermine their export competitiveness, they’d lose jobs, and they’d run the risk of social instability .”

Solution: “They’ve got to deal with surplus household saving, and to do that they have got to build a social safety net, and that’s social security, private pensions, unemployment, and medical insurance."

UNCOORDINATED

By uncoordinated, the Premier was drawing attention to the regional fragmentation of the macro economy, to the sharp contrasts between excess manufacturing and an undeveloped services sector, and to the disparities between excess investment and deficient consumption.

Fragmentation: “There is an old Chinese proverb, the mountains are high and the Emperor is so far away.  The guys in Beijing, they may give an order but beyond Beijing people do whatever the heck they want. I think that is very true – very fragmented banking system...system of regional governance.  They are trying to pull that together and they are actually making some progress.”

Lack of national cohesion: “A lack of coordination undermines that national cohesion that any economy needs to accomplish broad objectives.”

Deficient consumption: “Private consumption as a share of Chinese GDP is only about 36%, literally half that of the United States.  Over the next five to ten years, that share has got to move up. And with a consumer society, comes more free and open communication, freedom of choice, upward mobility – it is hard to accomplish those goals without a more open and free political system. And that’s going to be an enormous challenge for the next China.”

Solution: “They’ve got to stimulate new sources of job creation.  The manufacturing economy is very capital intensive and labor saving.  They have got to move to a labor intensive services model and they are nowhere on the services front.”

UNSUSTAINABLE

By unsustainable, the Premier was highlighting the twin perils of environmental degradation and excess resource absorption, as well as persistent tensions in income distribution.

Too much growth has negative side effects: “There is a growing consciousness in China that open ended growth has negative side effects. Excess resource consumption, oil consumption, and pollution are all clearly the most obvious of these negative externalities.  The question is, are they really doing something about it?”

Insatiable demand for commodities: “The commodity intensity of the Chinese per-unit of GDP is more than double that of the typical economy in developing Asia and more than four times that of the typical developed economy.  China has a seemingly insatiable demand for natural resources that its being stressed right now in its outward bound foreign direct investment in trying to acquire strategic resources in Australia, in South America, and in Africa.  Of course this insatiable demand for commodities has played a role in driving the prices of these commodities that a resource inefficient China needs more and more of to source its economic growth.”

Solution: “There is certainly a lot of advance going on in alternative energy technologies in China. Because of the nature of their system of governance, they can do nuclear in a way in a society like the U.S. couldn’t.  They can move very aggressively in these areas, but the bottom line is that as long as they have this growth model that is fixated on exports, fixated on investment, its dominated by the industrial production smokestack type industries which are very, very biased toward pollution and excess energy consumption.  They have got to get out of that model.”

Sources:

1. Charlie Rose Interview with Stephen Roach, Morgan Stanley Asia, broadcast on October 23, 2009.
2. Charlie Rose Interview on China’s Economy with James Fallows and Stephen Roach, broadcast August 16, 2010.
3. Speech by Stephen Roach at the Council on Foreign Relations, “China’s Economic Future” originally recorded October 19, 2009.