Yellen says China is too big to export its way to rapid growth,  How far this is true

This question is not on me. I actually borrowed this question to answer. U.S. Treasury Secretary Janet Yellen said that China is too large to try to export its way to rapid growth and would benefit by reducing excess industrial capacity that is pressuring other economies. Janet Yellen did her studies at Harvard University, the London School of Economics, the University of California, Berkeley, the National Bureau of Economic Research, and the Brookings Institution in the field of Macroeconomics and Labor economics. So far her alma mater is concerned nobody would dare to say that she doesn’t understand economics, the way quite often people say that our honourable finance minister doesn’t understand economics or the economy.

I agree her statement would take many by surprise and possibly many would get antagonised.

Meanwhile, I believe part of your question

“

China should import its way to rapid growth like the US” is incorrect, Janet Yellen has not made any such suggestion.

As such I believe Janet Yellen didn’t say anything wrong when she said that China is too large to try to export its way to rapid growth and would benefit by reducing excess industrial capacity that is pressuring other economies. In my view, the Chinese economic model has already created a huge disparity which the US economy had gone through post World War II, very specifically since the sixties.

China must be having great economists in its thin tank to rise so fast. But for them also it's not possible to defy the law of economics. Let me go fundamentals of economics to explain this.

Forewarning

- since this answer will dash into the fundamentals of economics, it could be a little subject-heavy. However, I strongly believe that economics is a very easy subject if we pay a little attention.

In my evaluation also it is not possible for China to achieve rapid growth from where it is standing now and even a growth rate of growth rate of 5-6% will be extremely difficult.

In my view also, the Chinese economy will have to struggle to achieve anything above 4% real volumetric growth. Volumetric growth is a little different than value-based growth when the GDP is converted into money value. For example, you manufacture 1000 units of automobiles and sell them for a value of Rs.50 Cr. Suppose you produce the same number of cars, but increase the price and sell them for Rs.55 Cr. with 105 increase in price. So there is no volumetric growth in production, but there is a production growth when we go by value-based evaluation.

Now this value-based growth could be achieved in another way. Instead of increasing the price, you could go for the production of more number upper-segment cars. This is done under three circumstances - 1. When there are constraints in increasing manufacturing. 2. There is no scope for increasing your market share in numbers or volumetric terms. 3. There is no market growth in terms of buyers. However, this value-based growth also may not be possible if there is no increase in purchasing in the market. As such market or market growth always means purchasing power and its growth.

The Chinese economy is the 2nd largest economy in the world with a GDP size of $18.560 trillion (nominal; 2024 est.).

That means if it has to grow at 6% annually it has to add a GDP of $1.11 trillion every year in simple growth. And if we consider growth compounded monthly then it has to add $1.14 trillion every year. if we look at the Chinese economy it is definitely capable of producing an additional GDP of $1.11–$1.14. However, for the next year, the same growth will be calculated on the base of $19.67 trillion. So the asking rate will only go up. The problem is sustaining the massive GDP and maintaining its growth.

Chinese President Xi Jinping speaks in Beijing's Great Hall of the People in 2017.

Lintao Zhang/Getty

The GDP compositions of China are as - Private consumption: 37.17%, Government consumption: 16.12%, Gross capital formation: 43.48% Exports of goods and services: 20.66% Imports of goods and services: 17.48% Net exports: 3.22% (2022)

United States Private Consumption accounted for 68.2 % of its Nominal GDP in Dec 2023, compared with a ratio of 67.5 % in the previous quarter. The data reached an all-time high of 68.8 % in Dec 2011 and a record low of 57.7 % in Mar 1952.

Can you see where the problem in the Chinese economy is? The problem of the Chinese economy lies in the low share of private consumption of

37.17% in the GDP composition

. Compare this with the US economy, and you will understand why China will face difficulties in sustaining GDP growth. This is despite China being a producing economy. The private consumption in China is the 2nd lowest in the world. Brunei ranks first at 27.6% ( Sept 2023). Brunei being an oil-producing country, we can understand the reason for a lower share of private consumption in GDP composition. However, Brunei makes up the loss with a GDP per Capita of 28954.06 Dec 2022. Even if the percentage is low, a higher GDP compensates for the value. But with less than half of Brunei’s (GDP) per Capita China has no way to sustain GDP growth. China’s GDP per capita was 12,621.721 USD in Dec 2023.

Now if we go extra deep the problem looks more intense. China’s private consumption as a share of GDP has declined from around 55 percent in the early 1980s to around 37 percent in 2008 (Source IMF).

What kind of economic growth is it where despite massive GDP growth and population growth, the share of private consumption has gone down drastically? There must be something seriously wrong with the Chinese economic model.

Coming to the highest contributing factor to Chinese GDP is gross capital formation which contributes 43.48%. This seems dicey.

Why is such a high share contributed by gross capital formation? What goes into it? And what are ROCE and ROA (return on capital employed and return on asset created) If the return is high then it will reflect on domestic private consumption as well as in export promotion. Whereas China’s Export-Import net gap is only 3.22% (2022)

China is focusing on gross capital formation which has driven over production.

At the end of 2023, China had the capacity to build 861 gigawatts of solar modules per year, more than double the global total installed capacity of 390 million gigawatts. Another 500-600 gigawatts of annual capacity is forecast to come online this year -- enough to supply all global demand through 2032, according to energy research firm Wood Mackenzie. The situation in China's solar panel sector may be worse, where overproduction pushed prices down 42% last year.

We have discussed volumetric production growth and value growth in the beginning. We have a reverse case here. Despite a massive production volume growth, we do not have value growth. So it will not lead to GDP growth. Though they may show GDP growth by increasing investment/expenditures in capital formation. But unless the additional capital formation doesn’t generate production growth in value terms how will the GDP growth? This is the picture of most industry sectors of China. They are loaded with overproduction capacity that can not be discharged in the market since there is no growth in domestic private consumption. Plus there is a limitation increase in export.

Export promotion is limited by existing worldwide purchasing power. The pie of the global market demand or purchasing power has not been increasing in proportion to China’s growth expectation. The following are GDP growth estimated by the IMF

Emerging market and developing economies 4%

Advanced economies 1.4%

World 2.9 %

For the year 2024, the world GDP growth is estimated at 2.9%. the emerging mater and the developing economies are expected to grow by around 4% and the Advanced economies are expected to grow by 1.4%. So China can not increase its export growth beyond 4%. Secondly, Net Exports contribute only around 3% of the GDP composition of China. The domestic private consumption of China is not increasing. How would China achieve GDP growth above 4%/ Had it been a small economy, it might have been possible as an exceptional case. But China is the 2nd largest economy in the world, it can not defy the global market depression.

Anything above the 4% GDP growth of China could be dubious.

The second thing that U.S. Treasury Secretary Janet Yellen very correctly said is that China would benefit by reducing excess industrial capacity that is pressuring other economies.

China unnecessarily disturbs other economies by offloading the additional production volume at a substantially reduced cost. It is imperative that the world economy as a whole need to grow. Without that, a big economy like China can not sustain rapid growth. This is because of the disparity. That is exactly the reason the US economy could not sustain growth beyond a period. The US economy is holding base because of high per capita income and the high share of domestic private consumption. China needs to focus on increasing domestic private consumption.