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Is China’s Economy on a Balanced Path?

An analysis of the "aggregate supply and demand" based on government released economic data.

[Editor’s note: This is an article translated from Boxun ( Analysis of the aggregate supply and aggregate demand with the statistical data from China’s offical publication indicated a potential imbalance within the economic system. The original article was written in 2002. In order to reflect the current changes, the editor has updated the article with most recent data available, while keeping original analysis intact.]

The mainstream economists and the press have left the public the following impression about China’s economy: the speed of economic development is extremely fast, once termed "taking flight" and now using the buzzword "8%"; the Chinese people live a relatively comfortable life; and China’s GDP and its foreign trade have resulted in record numbers. Some media claimed that the achievements we have made in our national economy in the past thirteen years have not happened in two hundred years. It sounds like some miracles have been performed in China. While many economies in the world are decelerating and some even in recession, it sounds like only China’s economy is an exception, and it is growing rapidly in a "healthy, stable and continuous" mannerit can sustain this growth until the middle of the century until it exceeds that of the United States, presently the largest and the premier economy in the world.

Looking back at China’s history, when its economy was truly in good shape, such as the economic adjustment period between 1963 and 1965, the press usually did not hype the success. On the other hand, when the national economy was in dire straits in 1960, major media reported on a daily basis that "the situation is great", "the situation is extremely good", or "the situation is excellent across the board." Between July and September of 1967, when the whole country was in chaos and embroiled in violent riots, the media stated unanimously, "The situation is not simply good, but is great, and in fact, it has never been better!" It is apparent that one cannot judge the situation of the national economy merely by reading what the state media say.

Furthermore, many aspects of the macroeconomic data about the Chinese economy are hardly convincing.

For instance, while China’s economy is said to be developing at a healthy pace, how can one determine if a national economy is truly healthy? In my opinion, the first criterion should not be the speed of development, but whether the aggregate supply and aggregate demand is in balance. This is analogous to the growth of a child. When the child grows too fast, he gets taller, becomes very skinny, and his body loses the balance and thus may not necessarily be healthy. In comparison, let us look at the supply and demand on the development path.
Aggregate supply

Many renowned economists have addressed in the TV programs that China has two treasures-investment growth and foreign trade. "With these two treasures, China’s economic growth is balanced and the supply and demand are balanced," they claim. However, such reasoning is not logical. With the growth of investments and foreign trade, there is no guarantee that the economy is balanced in terms of overall supply and demand. As the data shows, the overall supply in China far exceeds the overall demand, and it results in a tremendous imbalance. This year, there is no supply shortage in any single merchandise, and the supply of 86% of Chinese products exceeds the demand, with the total value of the overstocked inventory reaching as high as 4 trillion yuan (~$482 billion). This number was 1.33 trillion yuan (~$160 billion) back in 1996 and 3 trillion yuan (~$361 billion) in year 2001. Within one year, it exploded to 4 trillion yuan (~$482 billion), which is equivalent to 41% of the GDP. This is a terrifying ratio, yet in China, nobody seems to be worried. On the contrary, everybody seems to be exuberant in celebrating the success. To put this in perspective, this ratio generally does not exceed 1% in Western countries.

Let’s look at this from another angle and examine new residential home sales. According to statistical figures, in the first five months of 1999, both real estate investment and the total square footage of newly constructed homes are 30% higher than those for the same period of the prior year. However, the square footage sold increased only by 13.65%. In other words, the non-occupancy rate is very high. The real estate supply in the three years between 1995 and 1997 was 440 million square meters, with non-occupancy rate of 16%, a "dangerous rate" called by experts. However, this was ignored. As predicted, the non-occupied areas of the newly constructed homes reached as high as 120 million square meters at the end of July 2002. This is 30 million square meters more than three years ago. The non-occupancy rate reached 26% – 4 times as high as that of the U.S., 8 times that of Hong Kong, and 2.5 times the internationally recognized alert level. Nevertheless, even today, new structures are being built across the country. Every construction firm is racing to build luxurious skyscrapers, and new home sale prices refuse to decline in spite of the high non-occupancy rate. From January to July of 2004, the total square footage of newly constructed homes is 118 million square meters, a 12.9% jump over the same period last year. The square footage of unoccupied commodity housing amounted to 96.8 million square meters at the end of July 20041.

As good indicators of aggregate supply, the domestic inventory rate and non-occupancy rate of commodity housing only show the supply is far beyond the demand. With the ongoing construction of "basic infrastructure" and enormous investment in power plants, gas pipelines, large ethylene projects, or manufacturing industries, the already great aggregate supply will surely become even greater as compared to the demand.
So as investments and production increase, the overall supply builds up. With less overall demand, merchandise is harder to sell, the businesses environment becomes even more challenging, and so on. The end result is the proverbial vicious cycle.

The obvious solution to the problem is to expand the overall demand, to provide an outlet for the overall supply and circulate the corporate capital. This way, businesses will be able to continue to produce and make profits to avoid bad loans, which in turn will improve the capital and labor market. To expand the overall demand, economists have been appealing for "expanding the domestic demand". This is certainly the right idea, because China’s exports account for only 20% of its GDP. While this is much greater than United States’ 7%, it is not much better than that of the European nations. In spite of the global economic depression, the total amount exported has grown significantly. Ultimately, 80% of the GDP must still come from domestic demand.

So how is China’s domestic demand?

Aggregate demand

Let us first look at the Chinese people’s purchasing power. As a starting point, let us take a look at the total amount of wages paid, which is presumably the majority of the legal income in the country. This number in 1999 was 987.545 billion yuan (~$119 billion) and reached 1.066 trillion yuan (~$128 billion) in 2000. I was unable to locate the 2001 figure. My estimate is that it was about 1.2 trillion yuan (~$144.58 billion) in 2002 and should not be much higher than that, as no major raises were executed nationally. The nationwide pay raise in 2001 cost the government 70 billion yuan (~$8.43 billion) for the 45 million workers. Even if all of the 70 billion yuan went back to the consumer markets, it is still a trivial amount compared to the 3 to 4 trillion yuan worth of overstocked merchandise.

The table in the previous page contains the calculation for the wage ratio leading up to the year 2003 based on the data from China’s Statistical Yearbook and State Statistic Bureau.

The above figures are all based on the prices for that year, and they do not include the inflationary adjustment. Therefore they are not "comparable prices" and cannot be used to represent an indicator for increment or decrement. Note that total wage figure includes the sum of all workers’ wages from state-owned, collectively owned enterprises and other economic entities. The wages include: 1) Hourly wages; 2) Base wages; 3) Position wages; 4) Piece rate wages and additional piece rate wages; 5) Yields; 6) Various subsidies; 7) Overtime wages; 8) Other wages. In the China’s Statistical Yearbook, in addition to various economic entities, state-owned economic entities also include: 1) Government organizations, Organizations of various political parties and social organizations; 2) Organizations for scientific research and technological services; 3) Organizations for education, entertainment, arts, various broadcasting, film, and TV industries; 4) Healthcare and sports industries and social benefits; 5) Other services.
The above figure clearly shows that the total wages account for only a small portion of the GDP. In addition, its ratio relative to the GDP has decreased in most of the years since the economic reform.

The national average monthly wage for salaried employees was short of 460 yuan (~$55.4) in 1995. Even in 2001, that number was around 780 yuan (~$94.0). In Beijing, where the cost of living is fairly high, the average monthly wage was around 1000 yuan (~$120.5). Note that these numbers do not take into account inflationary factors, but raw numbers for those years.

In 2004, the average monthly wage is about 1,183 yuan (~$142.5), but still low compared with wages in other countries. In 2003, the United States’ average monthly wage was 45.8 times, Japan’s was 28.2 times and Korea’s 13.7 times that of China’s3. Korea’s average GDP growth rate in the twenty years of "miraculous" economic development between 1962 and 1982 was merely 8.3%, compared with the China’s average growth rate of 9.6%, as calculated based on GDP figures from 1978 to 1999. In the early 1960s, Korea’s per capita national income was around $90, with a lower average growth rate for 20 years, how come its average monthly wage is more than 10 times higher than China? Where did the rest of our money go, given that our wages make up such a small portion of the GDP?

Outside of salaried employees, most urban residents do not have high incomes. According to public records, 2001 was considered a year where urban families had significant improvements in their income. The average annual disposable income of urban families totaled 6,860 yuan (~$826.5) in 2001, which was 8.5% higher than that of 2000 after inflation was factored in. Assuming the average head count in a family to be 3.58, the average monthly disposable income per capita was a miserable 159.68 yuan (~$19.2).

Disposable income is defined as "the actual remaining income of the surveyed urban families after income tax, property taxes and other routine repeated payments are subtracted." However, the disposable income number is often inconsistent with the national total wage, even though both numbers were officially published by the central government.

As reported on the Internet, a spokesman from the State Statistical Bureau claimed that the average per capita disposable income of urban residents in the first quarter of 2002 was 1,752 yuan (~$211.08), a 7.5% increase on an annual basis. It was a 6.9% increase after inflation was factored in. This really puzzled me, because the annual average per capita income should have been 7,008 yuan (~$844.34), so that the total disposable income of the 360 million to 380 million urban residents would have totaled 2.5 to 2.7 trillion yuan (~$301.1 to 325.3 billion). In reality, the total national wage amount was only 1.1 to 1.2 trillion yuan (~$132.5 to 144.6 billion). I once suspected that the spokesman had mistaken per family with per capita, but such an assumption still does not make sense, because the total disposable income based on "per family" would end up at 0.69 to 0.75 trillion yuan (~$8.31 to 9.04 billion), which would be too low. By and large, the numbers are inconsistent. If the number came from a random sampling, then the per capita disposable income of 7,000 yuan (~$843.37) would result in a total urban income that was 1.5 times higher than the national total wage. Could it be that the urban residents’ "extra income" would total 1.5 trillion yuan (~$180.7 billion)?
Now let us look at what makes up the income of farmersthe core of the Chinese labor force.

The State Statistical Bureau also claimed that in the first quarter of 2004,the per capita income of Chinese farmers was 834.3 yuan (~$100.5), a year-over-year growth of 13% in current price. This number, I believe, was a bit exaggerated. If the number were true, the annual per capita cash income of the farmers would be 3,337.2 yuan (~$402.1). With a rural population of about 1 billion, the total income of all the rural residents would wind up at 3.3 trillion yuan (~$401.2 billion) – a quarter of the GDP. Is this possible4?

Even according to the State Statistical Bureau, the per capita income of farmers was only one third of that of urban residents. Since 1990, the farmers’ saving ratio has been consistently decliningat a rate of 5% decline every five years. In 1999, only 23.7% of their income was saved. Therefore, the total savings of China’s farmers totaled 1.4 trillion yuan (~$169 billion) in 1999, or 1,400 yuan (~$169) per capita. The State Statistical Bureau and the Central Bank have not published the increase of rural savings in recent years. The farmers are very unlikely to have spent 3.3 trillion yuan (~$401.2 billion) in a year. As a result, the total purchasing power of the farmers is probably slightly less than that of the urban residents.

We now turn to the situation of the Chinese people’s savings from a macroeconomic perspective.

From the beginning of the economic reform till 1999, with the exception of 1995, the incremental savings rate has never exceeded the total wage. However, the incremental savings were still incredibly high. It was almost equivalent to 80% to 90% of the total wage. In 1995, the year-over-year incremental resident savings unbelievably surpassed the total wage of that year, 4.4 billion yuan (~$530 million) higher than the total wage of that year.

As I learned that resident savings set a new record of 8 trillion yuan (~$964 billion) at the end of May 2002, and the fixed term savings ratio increased from 26.3% in late 2001 to 56.1% in May 2002, I realized that these facts strongly signaled that corruption was rapidly spreading across the country. In the three quarters from September 2001 to May 2002, the resident savings in China increased by one trillion yuanfrom 7 trillion to 8 trillion! This is equivalent to 1.25 trillion yuan (~$151 billion) on a yearly basis. As we discussed above, the total wage of the country was only 0.98 trillion yuan (~$118 billion) in 1999, 1.06 trillion yuan (~$128 billion) in 2000. What is clear is that the increased savings will far exceed the total amount of wages. The savings exceeded the total wage by only 4.4 billion yuan (~$530 million) back in 1999. In 2002, it was at least 100 billion yuan (~$12.05 billion) more.

In January 2003, the residential saving reached 9.1 trillion yuan (~$1.1 trillion). One year later, in January 2004, the number jumped to 10.9 trillion yuan (~$1.3 trillion). The 1.8 trillion yuan (~$220 billion) increase in saving again exceeded the 1.16 trillion yuan (~$140 billion) of total wages in 20035. It is apparent that unknown sources of funds are pouring into the savings of ordinary residents. Given the widespread reports of corruption, it is apparently accelerating even more rapidly.
The degree that the wealthiest Chinese are corrupt was especially alarming in 2002. Two issues are particularly clear:

1) Wages are how laborers survive from day to day. It cannot all flow into residential savings. According to inflated calculations by modern economists, even assuming that the percentage for food expenditure according to Engel’s Curve has reached 50% and China has made great achievements, China’s salaried residents must use at least 500 billion yuan (~$60.24 billion) for food, and farmers’ food costs amount to a big number. Among the urban population of 360 million, each person will spend on average 109 to 115 yuan for food each month. In addition, one person will spend an average of 120 yuan on clothing, transportation, education, medical expenses, and housing. These routine expenses will almost use up the total wage, not counting illegitimate sources of income.

How much can an ordinary urban resident save each year? How much can an ordinary farmer save each year? In my estimate, if the annual growth of the total long-term savings from all of our residents can reach 200 billion yuan (~$24.1 billion), it would be a reasonable number, accounting for one tenth of the total wage. In contrast, the actual net increase of the savings on a year over year basis reaches 1.45 trillion yuan (~$174.7 billion), which is 14 to 15 times higher than expected. This means that more than 90% of the newly saved money in banks, especially the fixed-term savings, does not come from salary.

2) Given that the newly added resident savings do not come from normal wages, where do the 1.3 trillion yuan a year of additional savings come from? The only likely answer is corruption.

China’s official data of economic statistics is probably not the most reliable source for conducting serious studies on the country’s economic issues. However, those figures from the published statistics did show us some alarming potential problems in the economy. The results from the analysis clearly indicate that the growth of China’s economy is far from a balanced one. Adding to the problem is the rampant corruption. We don’t know how much of the excessive aggregate supply is absorbed by corruption. Even if large portion of it are absorbed, the economy is still away from a stable and healthy track.

1. Data updated by the editor.
2. Table updated by the editor, the chart created with the data in the table.
3. The calculation updated with 2003 data by the editor.
4. 2004 data is provided by the editor.
5. Recent years’ data added by the editor.

Li Zhining is a scholar from Institute of Economic Research, Chinese Academy of Social Sciences