Download Chinese Economy: Current Issues and Future Scenarios

Chinese Economy:
Current Issues and Future Scenarios
FAN Gang
National Economic Research Institute
China Reform Foundation
November, 2004
Trends or Scenarios:
• Short-run: possible soft-landing:
Government took actions much quicker;
• Long-run: Possibility of high growth for
another decade—fundamentals are still
favorable.
Short-run Growth Cycles
There has been a Over-heating again
GDP Growth, China
10.5
10
9.5
9
8.5
8
7.5
7
6.5
6
1997 1998 1999 2000 2001 2002 03.Q1 03.Q2 03.Q3 03.Q4 04.Q1 04.Q2 04.Q3
The main contributor: Investment Boom
40
35
30
25
20
15
10
5
0
1997
1998
GDP Growth rates %
1999
2000
2001
2002
03.Q1
03.Q2
Real growth of Gross domestic investment %
03.Q3
03.Q4
04.Q1
04.Q2
04.Q3
Real growth of retail sale of consumer goods %
Price Indece
12
%
CPI
Input PI
6
0
-6
1997
1998
1999
2000
2001
2002
03.Q1 03.Q2 03.Q3 03.Q4 04.Q1 04.Q2 04.Q3
China's Trade balance
US$ bn
60
30
0
-30
1997
1998
1999
2000
2001
2002
Year
2003
04.Q1
04.Q2
04.Q3
Why should (Chinese) economists worry
about?
• Potential growth rate: 8-9%;
• Early find-tuning to stop the acceleration!
• The economy is vulnerable to the
fluctuations;
A nice Soft-landing is highly likely
• Government was quite quick to respond,
so the over-heating was not fully
developed;
• Realistic policies, including administrative
ones;
• No hard-landing, if policy-making with
normal wisdom.
What will be the next?
• With the growth rate back to the zone of 89%, China may continue the current boom
for next 2-3 years;
• While macroeconomic stability stays, more
reforms will take place: banking, capital
market, taxation…..
Long-Run Development
China is full of Problems and difficulties: Two Sets
Set I. As a developing country
-- Per capita GDP US$1,000 by 2002; 65% of population
are rural.
* Industrialization
* Modern corporate system
* Financial market development
* Rule of law
* Rural-urban difference and urbanization
* Regional disparity and migration
* Opening and competition
* Unemployment: various categories
* Democratization …………
Set II. As the economy in transition
-- Legacy of Soviet-type system, currently 80
millions working as state employees.
* The state owned enterprise (SOEs)
* The state banking system
* Social security system
* Planning to Market
* Government reform and political changes
……
Achievements or Reasons for Achievements
• No longer as a State company dominated
economy (up to 70% of GDP comes from Nonstate sectors, most of small SOEs privatized);
• Opening up (trade and FDI, WTO);
• Decentralization of decision-making and
diversification of society.
Major concerns
There are many concerns about if China’s growth
would be interrupted by any kind of crises or
upside downs.
2 biggest selected:
– Financial crisis: NPL, etc,
– Social crisis: Unemployment and social instability;
Financial Risks
• Financial Reform is seriously lagged behind as a
bottleneck;
• Foreign participation may cause financial
difficulties for the state banks, but may improve
the overall quality of financial assets, and
therefore reduce the risk;
• For the state banks, the NPL risk is still
manageable.
Indicators of Financial Risks of Chinese Economy (%)
NPL over GDP – official statement
Liability of AMCs over GDP
Government domestic debt over GDP
Total foreign debt over GDP ratio
Short-term commercial debt over GDP ratio
“Overall National Contingent Liability”
“Short-term NCL”
GDP Growth rate
Budget deficit as % of GDP
Interest rate on government bonds (1 year)
Growth rate of budget revenue (3 year average)
Current account balance US$ billion
Capital account balance US$ billion
Foreign exchange reserve, US$ billion
Inflation rate
* Most of figures
2000
25.0
16.0
14.5
15
4.3
70.5
59.8
8
2.8
2.4
19
20.5
19.2
16.5.1
0
2001
27.3
13.4
16.3
14.8
4.5
71.8
61.5
7.4
3.0
1.75
20
17.4
34.7
210.0
0
for the end of 2003 are estimated based on the data of previous quarters.
2003*
23.6
10.0
17.2
13.9
4.9
64.7
55.7
9.1
2.2
1.75
20
35.0
79.0
403.3
1.7
Unemployment
and
Social Stability
Basic facts:
• 25 millions of state workers were laid off in past
5-6 years; 6 millions still unemployed; at least 20
mil. More to come.
• 45% of labor force, or 350—400 millions, are
still dependent on farming, mostly underemployed;
• 15 millions new non-farming jobs created by 78% growth per year;
Why is still there the social stability
• Special programs for the laid-off state workers;
• New job creation by the growth;
• Improvement of labor mobility;
• Rural land system serving as China’s special
social security for the rural unemployment;
The realistic policies:
• Prepared to go through a painful historical process of
modernization;
• Do not raise the expectations for the government
subsidies;
• Do more for education within the budgetary affordability;
• Increase gradually the medical protection of the rural
poor.
Foreign Exchange Issues
• Most South-East Asian currencies have
been floating after 1997;
• But China was forced to return to fixed
regime since then.
Market speculation still strong
Foreign Exchange Reserve (US$bn)
600
100
90
80
70
60
50
40
30
20
10
0
500
400
300
200
100
20
02
03
.Q
1
03
.Q
2
03
.Q
3
03
.Q
4
04
.Q
1
04
.Q
2
04
.Q
3
20
01
20
00
19
99
19
98
19
97
0
Foreign Reserve (US$bn)
Growth of FX reserve quarterly
Revaluation seems less urgent in past months:
-- Overall trade balance;
-- Inflation is increasing;
-- Uncertainty about the oil price and its
impacts;
-- US$ was not fast weakening until recently
The real Issues:
• How to de-peg from US$, and change to a
basket-pegging system with higher flexibility? –
That is China’s self-interest, not others’.
• How to minimize the speculation;
• How to catch up the good opportunity in the
market to do so?