Standard Life Investments

Weekly Economic Briefing

Emerging Markets

Quality over quantity


One of the key tenets of Chinese president Xi Jinping’s economic policy is a shift from high-speed growth to high-quality growth. While there is no official definition of high-quality growth, it loosely purports a move away from targeting an absolute rate of economic growth to pursuing growth that is less destructive to the environment, more socially inclusive and less credit intensive. Importantly it also aims to support industries that can absorb China’s millions of annual university graduates. The timing of this shift makes sense; China’s growth model has undoubtedly lifted millions out of poverty but at the expense of damaging pollution, high inequality and sky-high urban house prices.

Record high confidence Reversing progress

This dynamic is perhaps most evident in the UN’s happiness index which shows that despite enormous increases in per capita incomes over the past 25 years, China is no happier than it was 25 years ago. Achieving the aims of less polluting, less credit-intensive growth would require a larger share of economic gains accruing to households, as services and consumption rise in importance. But beyond households taking a larger share of national wealth, the goals of higher-quality growth also imply improvements such as less polluted air and water, improved healthcare and education systems, and policies that further liberalise capital markets to reduce the dominance of real estate as an investment destination.

Having first discussed transitioning to higher quality growth in statements through 2017, what progress has been made? And with China posting surprisingly strong growth over the past year and a half, how have households fared? In this vein we attempt to identify indicators that could gauge both how households are faring but also whether growth is becoming higher quality. First, looking at survey data, households are showing record high levels of consumer confidence. According to the Union Pay Consumer Confidence Index, confidence has bounced back to an all-time high following the drop in 2016 (see Chart 10). This confidence is likely to have been bolstered by strong recent wage growth; after falling consistently since 2014 wage growth began to accelerate in 2017 for both urban and rural households. While these shifts are positive, it masks deteriorating underlying trends. Despite overall positive wage growth, wages have consistently lagged nominal GDP growth, suggesting most of the gains from the growth spurt were captured by the corporate and state sector. As a result, the household income share of GDP actually declined last year following positive gains since the financial crisis (see Chart 11). Progress is also mixed on other quality measures as well. According to the Global Carbon Project, emissions in China increased in 2017 following three years of no growth, signifying that growth perhaps had a larger impact on overall emissions than China’s own targets. On the other hand, China’s air quality index (using a non-weighted average of major cities) showed gradual improvement over the past year. Lastly, investment and state spending in education, healthcare and social security are all on upward trajectories both in absolute terms and as a share of total spending and investment. Although, households failed to capture much of the 2017 growth boost, other indicators are pointing towards some progress, albeit mixed, on higher quality growth.

Alex Wolf, Senior EM Economist