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PubPol 751-001, Lecture 7 The Chinese Economy and Economic Policy Shanghai Pudong 2010 Lecture 7 Can China Maintain its Trend of Growth? 7.1 Macroeconomic Trend and Fundamentals for Growth 7.2 Challenges and Constraints 7.3 Strategies for Future 7.1 Macroeconomic Trend and Fundamentals for Growth Main features of China’s macroeconomy Growth trend slowed down, soft landing achieved, growth rate turning to moderate. The fundamentals for economic growth are still healthy. Some constraints for faster growth are not easy to break, uncertainty increased. 3 The performance of main macro indictors Indicators in good status o Growth soft landing achieved o Inflation under control o Unemployment under control o Manufacturing sector is stable o Grain production is steady 4 Indictors not in good status o Growth relies too much on investment o Income distribution gap gets wider o Profit margin of firms are narrowing o Potential of export driving is exhausting 5 China’s GDP Growth Composition Consum Pulling ption GDP, % Investment Pulling GDP, % Net export Pulling GDP, % 1978 39.4 4.6 66.0 7.7 -5.4 -0.6 1980 71.8 5.6 26.4 2.1 1.8 0.1 1985 85.5 11.5 80.9 10.9 -66.4 -8.9 1990 47.8 1.8 1.8 0.1 50.4 1.9 1995 44.7 4.9 55.0 6.0 0.3 2000 65.1 5.5 22.4 1.9 12.5 1.0 2005 37.9 4.3 39.0 4.4 23.1 2.6 2010 43.1 4.5 52.9 5.5 4.0 0.4 2011 56.5 5.3 47.7 4.4 -4.2 -0.4 2012 55.1 4.2 47.0 3.6 -2.1 -0.1 2013 50.0 3.9 54.4 4.2 -4.4 -0.3 6 China and US Consumption as % of GDP U.S. China 2011年1月17日 2009年10月20日 7 The pros and cons for future growth Advantages o Overall, China has accumulated moderately amount of capital, technology and management skill. o There is a substantial improvement in infrastructure construction. o Manufacturing competitiveness still strong. o The fundamentals for future growth is healthy. 8 Disadvantages o Weak external demands due to the slow recovery of developed economies. o US changed global strategy and island disputes with Japan. o Tightening social tension due to the widening income gap. o Environment pressure and supply constraints of natural resources. o Pressure of government function improvement. 9 The fundamentals for growth in Chinese economy Labor:primary industry still hires about 31% of labor force, and labor cost in manufacture in 2013 was only US$3.8 per hour. Capital: high savings rate in Chinese economy guarantees capital supply not heavily relying on FDIs. Developing economy: strong demand for durable goods. Scale economy in manufacturing and cheap research cost. 10 7.2 Challenges and Constraints Challenges from outside Stagnant external demand from EU, US and Japan. High cost and limited supply of energy. Tension relationship by land and sea islands disputes. 11 Challenges from inside of China Widening of income distribution gap. Political and government reform to accommodate the economic development. Environment deterioration and overconsumption of resources. Corruptions of government officials. High local government debts. 12 Constraints or Shortcomings in the current China’s market economy: Incomplete regulations and ineffective implementation of the regulations. Incomplete legal system and ineffective implementation of the legal system. Positive or negative local governments behaviors. “Guanxi” is a still a popular way in doing business. Corruption in bureaucratic systems. Price distortion in production factors caused by the current economic institutions lowed the economic efficiency Cheap labor due to the lack of social security. Cheap land due to the land ownership system and land acquisition law. Highly discriminated capital price for SOEs and for private firms due to the government monopolized financial system. 14 Depressed factor prices lowed production cost and resulted significant trade surplus. 15 High national savings means less consumption and less factor payment. 16 Composition of National Savings in PRC, 1992–2007, (% of GDP) 17 Mal-function of local government policy resulted in social moral deterioration After the announcement of new restrictions on property transaction in early 2013, people queue to divorce. 18 Mal-regulated market caused a lot of market disorder and inefficiency. Food safety Fake products Minic products Over-competition Over-advertising Misleading advertising Food safety is a problem rooted in political system, not simply a regulation matter. 19 Minic product is a result of non-mature trade mark regulation. 20 21 Distortions by Cultural Reason Over-education Over speculation Over luxurying Over packing. A school in Hunan, students are preparing for exam 22 Fake product, fraud documents are problems of non-effective legal system. Fraud document is not only a social moral deterioration problem, but also a problem caused by the rent seeking behavior of the troublesome bureaucratic system. 23 The poison milk: Who’s fault? The 2008 Chinese milk scandal was a food safety incident in the People's Republic of China involving milk and infant formula, and other food materials and components, adulterated with melamine. By November 2008 China reported an estimated 300,000 victims, six infants dying from kidney stones and other kidney damage, and a further 860 babies hospitalized. The paper tiger: Can we get the truth? Is that a real tiger in the bushes? It took two years to answer such a question. 2007-10-12 China news agency reported farmer Zhou Zhenglong found the extinct Huanan tiger. Twenty thousand yuan bonus. China Focus: China’s “Naked Officials” Move Their Wealth Overseas, NTDTV, June 6, 2012 It appears that large numbers of Chinese government and Party officials are preparing to leave China by moving their families and wealth overseas first. This phenomenon of officials—who live in China but have prepared to move elsewhere—is so common that there is even a name for them in Chinese: "naked officials" (裸官). Roughly 90 percent of Politburo Central Committee members and Central Discipline Inspection Commission members have family working or living overseas, according to Hong Kong's Trend Magazine. Many Party and government officials have already fled, often with ill-gotten gains. According to the Chinese Academy of Social Sciences, between 1995 and 2008 as many as 18,000 Chinese government and Party officials fled China—transferring stolen assets worth $130 billion. Why is this phenomenon so widespread? And what are ordinary Chinese saying about it? 7.3 Strategies for Future Ten years goal Double of per capita income. Across the middle income level. Realize social equity in income increase. Strategy Maintain moderate growth, adjust economic structure, change growth model. 27 Main measures Promotion of domestic demand:Balancing the internal and external demand. Upgrade industrial structure:Balancing the high and low tech industrial structure, reducing energy and resources consumption. Expanding relations with new partners: Russia, India, Latin American countries, African countries and East European countries. Speed up urbanization. 28 Detailed Policy To maintain moderate growth trend: o Slightly loose financial supply given the balance of inflation and unemployment. o Release more institutional reform potential for growth: financial reform, household registration reform and government function reform. o Promote urbanization development. o Keep appropriate investment in infrastructure o Narrow down the income gap to promote domestic demand. 29 To adjust the industrial structure: o Promotion domestic demand:improve self growth ability, realize the balance of internal and external demand. o Upgrading industrial structure:Promotion of seven main strategic new industries, to realize balance of high and low industry composition and to realize the energy and resources saving economy. o Opening up of the western areas:to realize the balance development of regions. 30 To change the growth model: o To improve the growth quality: pay less attention to the pure growth rate. o Energy saving economy: green industry, new materials. o Resource saving economy. o Better quality of products. 31 Prospects Fundamentals for growth are good and potentials for growth are still large. Moderate growth for coming 10-15 years is possible. High risks exists in how to control the growing local government debts and not to evolve into financial crisis. Risk also exists in whether the anti-corruption movement realizes the goal in improving the public administration efficiency. Overall conclusion is that it is highly possible that China can achieve the goal of steady moderate growth for coming 10-15 years! 32 End