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China’s Response to the Challenge of Global Economic Recession Prof. Xingmin Yin School of Economics, Fudan University December 2009 1 Topic A. Challenges of global economic recession B. Discussion on China’s major policies C. How much will the government actually spend? D. What is the GDP impact of this CNY four trillion? E. 2009:Looking for the future? 2 A. Challenges of Global Economic Recession □ How bad will it be in 2009, and will there be a recovery in 2010?The boom of recent years seems like a distant memory, with the world economy slowing significantly through 2008 and appearing to fall off the edge of a cliff in the last few months. □ The biggest recent problem is the slowdown in world trade. In the last couple of months, the expectation of a US recession and global downturn has been exacerbated by a significant contraction in credit and finance for trade, having a profound and immediate impact. □ There are many structural problems in the US and Europe, such as the overhang of debt, that suggest the recession may not be followed by an early or strong rebound. 3 Economic Crisis and Recession □ A financial firestorm has been sweeping through the world, with its epicenter on Wall Street. Each day new markets seized up and new regions are infected. □ A bearish view on the US economy. □ Can China escape the global firestorm? □ Consumption-led recession in the US and Europe, and weakness in Japan exacerbated by housing bubble collapses in the US and the UK. 4 □ Growth is negative one in European in both Q3 and Q4, and while the US had a dazzling Q2 in terms of GDP growth, unemployment is clearly on the rise and consumption has clearly fallen. □ Business investment has held up in the US, but corporate confidence is weakening. It enters into a deep recession in both areas already. □ It looks like the world is going to experience a longer, deeper slowdown than we feared. 5 Economic Growth for Major Developed Economies 4.50 4.00 3.50 3.00 % 2.50 2.00 1.50 1.00 0.50 0.00 2000 2001 2002 2003 United States 2004 2005 Euro Area 2006 2007 2008 Japan 6 Unemployment Rate for Major Developed Economies 10.00 9.00 8.00 7.00 % 6.00 5.00 4.00 3.00 2000 2001 2002 2003 United States 2004 2005 Euro Area 2006 2007 2008 Japan 7 2008/1/1 2007/1/1 2006/1/1 2005/1/1 2004/1/1 2003/1/1 2002/1/1 2001/1/1 % 2000/1/1 Fed Rate 08/8/11 08/2/11 07/8/11 07/2/11 06/8/11 06/2/11 05/8/11 05/2/11 04/8/11 US 04/2/11 03/8/11 03/2/11 1.00 02/8/11 2.00 02/2/11 3.00 01/8/11 5.00 01/2/11 6.00 00/8/11 2008/8/2 2008/2/2 2007/8/2 2007/2/2 2006/8/2 2006/2/2 2005/8/2 2005/2/2 2004/8/2 2004/2/2 2003/8/2 2003/2/2 2002/8/2 2002/2/2 2001/8/2 2001/2/2 0.00 2000/8/2 2000/2/2 % 1999/1/1 Zero Interest Rates? Japan 7.00 0.60 0.50 4.00 0.40 % 0.30 0.20 0.10 0.00 Rate Euro Area 4.50 4.30 4.10 3.90 3.70 3.50 3.30 3.10 2.90 2.70 2.50 Main ref inancing operations % 8 Discussion □ We forecast that US unemployment will rise to 9.5% in 2009, but it could go significantly higher; European unemployment is already at these levels. □ Japan and UK …… 9 B. Discussion on China’s Major Policies □ It was always the case that a US downturn would impact China, and this was both directly through slower exports and indirectly through equity markets and confidence. □ China’s economy is slowing, growing 9% y/y in real terms in Q3. All three growth engines exports, investment, and consumption – have spluttered. □ Despite the slowdown, China will still be growing faster than many other economies in 2009. 10 Major Policies for Stimulating China’s Economy □ A package of fiscal policies…… □ Major targets for the government policies: ☆ Economic growth ☆ Industrial restructuring supports ☆ The extension of welfare system to lowincome urban citizens and rural farmers □ More …… 11 A Package of Policies □ The state council has announced a CNY four trillion (USD 590 billion) spending program covering the period Q4 2008 to year-end 2010. □ The statement names a whole series of areas that would receive the money including roads, health, rural infrastructure, railways, low-cost housing, food subsides, Western development, and rural subsides, among others. □ Certainly this kind of announcement is important to prevent sentiment from deteriorating further. The statement is clearly an attempt to change the tone of public debate and to raise confidence in the government’s willingness to support the economy through spending. 12 Government Revenue and Expenditure □ China fiscal system in general □ Higher growth rate for government revenue than expenditure…… □ More taxes have been levied in the past four years. 13 6000 35 5000 30 billion yuan 25 4000 20 3000 15 2000 % 10 1000 5 0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Gov. revenue Gov. expenditure Gov. revenue growth rate Gov. expenditure growth rate 14 Tax Growth Rates Growth rate (%) 40 35 30 25 20 15 10 5 0 -5 -10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total Value-added Business tax Co. income tax 15 Key Infrastructure Investments Investment programs Amount, CNY billion Roads, airports, waterways etc. (excluding railway) 2,000 Railways 800 - 2,000 Building of low-cost houses 900 A new policy Airports 550 This money should be spent over 2009 – 10. Earthquake zone 1,000 Total spending in reconstruction Notes more 16 C. How Much will the Government Actually Spend? □ The central government is going to spend CNY 1.2 trillion (USD 180 billion) and is planning for local government and others provide the rest. □ Do local governments have enough resources to take part? □ Local government cannot issue bonds or borrow from other resources. Many will be feeling the fiscal strain in 2009 as their land sales, as well as enterprise tax and valueadded tax revenue, fall. □ The 0.3y/y decline in fiscal revenue in Oct. 2008 is likely to be causing more worry in the provinces than in Beijing. 17 Fiscal Positions for the Central and locals Revenue ratio of the central and local government Expenditure ratio of the central and local government 23% 45.90% 54.10% 77% Central Local Central Local 18 Comments on the Government Targets for Investments □ □ □ □ □ □ □ □ Public housing Rural infrastructure investment Transport infrastructure Health and education Environment, including sewage, energy, etc. R&D Earthquake zone reconstruction Rural income supports 19 Public Housing □ The plan with large-scale construction low-cost rental housing, as well as, economic housing (which is usually sold). □ CNY 900 billion (USD 132 billion) will be spent over three years. □ It would kill several birds with one stone: it boosts construction investment, it saves the real estate sector, it triggers large-scale demand for steel and cement, and it enables China to properly urbanize. □ The aim is to provide subsidized housing for migrants to cities. If successful, this new policy would change the shape of urban China, allowing migrants to move permanently to the cities rather than temporarily sharing dormitories with others. □ The policy also has the benefit of serving up some demand for steel, cement and construction workers. 20 Floor Space Started and Sold of Residential Buildings 60 50 40 30 20 Growth rate % Space million sq.m 900 800 700 600 500 400 300 200 100 0 10 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Floor space started Floor space sold Floor space started Floor space sold 21 Rural Infrastructure Investment □ Rural infrastructure investment, which includes things like irrigation, roads, and electrification of villages. □ A large chunk of this funding is coming from central government nowadays. 22 Transport Infrastructure Investment □ Transport infrastructure includes railways, roads, airports, and the power grid. □ CNY 2 trillion for railway infrastructure. □ Total CNY 5 trillion investment over three to five years. □ It will be extremely infrastructure-heavy. 23 10000 km 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 Length of China’s Railways and Highways 9 8 7 6 5 4 3 2 1 0 Railways Highways 24 R&D and Industrial Restructuring Investment □ This segment is unlikely to attract much funding. □ There are still more problems for industrial restructuring funding and other related institutional constraints. □ How to increase labor productivity growth? 25 R&D Expenditure and Its Ratio to GDP billion yuan 450 400 350 300 250 200 150 100 50 0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2001 2002 2003 2004 R&D expenditure 2005 2006 2007 2008 Ratio to GDP 26 Target for Manufacturing Adjustment Industry Share of manufacturing output (%) 2001 2007 Labor (2007) (10000 persons) share (%) Textile 6.67 5.30 626.26 9.14 Apparel 3.08 2.15 414.19 6.04 Leather products 1.86 1.46 256.98 3.75 Chemical industry 7.47 7.58 380.28 5.55 Drug 2.42 1.80 137.34 2.00 Steel 6.76 9.53 304.43 4.44 Machinery 6.94 8.20 677.22 9.88 Transport equipment 7.67 7.68 408.59 5.96 Electrical machinery 6.49 6.79 449.15 6.55 10.65 11.09 587.92 8.58 IT & Electronic products 27 Rural Income Support □ This policy, including boosting grain procurement prices, and other subsides, including rural low-income payment. □ As grain and meat prices fall, the ministry of finance is looking as spending much more here. □ The package also includes unspecified measures to boost bank loans to governmentsponsored projects, rural infrastructure, SMEs, mergers, and consumers. This is obviously not a fiscal item. 28 Per capita income of rural household (2007) By Income Quintile Low Low middle Middle Upper High Per capita annual income (Yuan) 2555 3718 5042 6798 12927 29 Where is the GDP Impact of This CNY 4 Trillion? □ It is not likely to be bigger than 2 pps of real GDP growth. □ Analysts have assumed that the CNY 4 trillion is all government investment. □ All the money goes into fixed capital investment. □ What can be learnt from China’s historical experience? 30 Growth Rates of Three Components of GDP Consumption Household Gov. Capital Net exports 2000 10.57 9.39 14.18 5.74 2.42 2001 8.72 7.32 12.79 14.14 2.13 2002 7.20 6.82 8.24 14.57 2.57 2003 8.03 8.11 7.82 22.82 2.19 2004 12.37 12.32 12.54 23.60 2.55 2005 12.40 11.57 14.68 16.33 5.42 2006 12.87 12.50 13.86 16.95 7.53 2007 16.14 15.96 16.63 16.72 8.30 31 Industrial Output and Labor growth 20 15 10 5 0 -5 -10 -15 -20 -25 growth rate % million person 90 80 70 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Industrial labor Industrial output Industrial labor 32 Number of new students enrollment 10000 persons 1000 900 800 700 600 500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 High education High school Vacational secondary school 33 E. 2009-2010: Looking for the Future? • Impact of Fiscal Packages on Economic Growth • High Pressure on Job Creation 34 Can China keep its high economic growth rate? 14 ! 12 10 % 8 6 4 2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Growth rate 35 Thank You! 36