Download China and the G 20

Comments on
China and the Future of G 20
Yiping Huang
Peking University
Alok Sheel
Secretary, Economic Advisory Council of the Prime Minister of India*
*Views are personal and do not reflect those of the Indian Government
China’s New Growth Model
• The recently concluded 18th Party Congress indicates that China’s new
central leadership (President Xi Jinpeng and Premier Li Kequiang) is
strongly committed to a new model of growth to be achieved by
2020.
• This new model is based on the vision of its 12th V Year Plan (201116): rebalancing growth away from dependence on investment and
manufacturing exports to domestic consumption and services.
• Reasons for the shift could be:
•
•
•
•
Weak external demand – lingering crisis in major export markets
Services more labour intensive as manufacturing becomes more K intensive
Avoid the middle income trap – needs to grow rich before its grows old
Social tensions – high levels of inequality
Alok Sheel
2
Progress on the New Growth Model
• The author argues that progress has already been made in
rebalancing the Chinese economy:
• Current Account Surplus has declined from over 10% of GDP to under 3%
• Income distribution has started to improve – lower Gini index
• Household consumption/GDP rising since 2011.
• Contrarian view:
• the root of China’s imbalance lies in low household consumption and high
savings and investment, and this pattern has not materially changed since the
onset of the GFC – indeed worsened in some respects
• XI V Year Plan (2006-10) had also identified its imbalanced growth model as a
problem needing corrective action – no progress
Alok Sheel
3
Global Imbalances have indeed declined, but ….
How much of this is cyclical because of lower global growth and how
much is structural?
Alok Sheel
4
The case for cyclical decline of global
imbalances
• The decline in exports has been countervailed by
higher domestic investment in China
• In the US, declining household consumption has
been countervailed by rising government
consumption.
• In other words, rebalancing demand from
consumption to Investment in the US, and from
investment to consumption in China, has still to
happen. This alone will make global growth ‘strong,
sustainable and balanced’ : the core G 20 agenda
Alok Sheel
5
Chinese rebalancing data: WSJ May 22, 2013
Alok Sheel
6
Prognosis
• There appears to be a broad consensus on the New Growth Model within
the new central leadership.
• China has a track record of efficiently implementing policy decisions.
• However, such a major structural shift will take time and would need to
overcome hurdles in the way, such as:
• Powerful SOEs controlled by local leaders who have been major beneficiaries of
financial repression.
• Danger that with declining investment growth could decline particularly sharply as
China’s capital input-output ratio is low.
• Leadership would need to hold its nerve to manage the transition as trend growth
could decline – pressure to shift back to higher trajectory could mount.
• Social backlash – the influential and relatively affluent urban middle class might feel
threatened by abolition of the hukou system.
Alok Sheel
7
Global Implications of Chinese Rebalancing
• Author : first china induced global recession? However,
• Immediate impact would be to supplement demand in a demand deficit
global economy – therefore would serve to lift global growth.
• long-term -- as the relative size of the Chinese economy grows, possible to
envisage a Chinese downturn depressing global growth. At present the
reverse position prevails.
• If China rebalances and the US does not, other countries would need
to generate similar surpluses (Eurozone?), or global growth would
remain weak, US treasury yields would rise and the dollar weaken.
• Failure of Chinese and US rebalancing – back to asset and credit
fuelled unsustainable booms.
Alok Sheel
8
China and the G 20
• Along with Germany, perhaps the biggest beneficiary of the rise of the G
20. A G-3 within the G 20?
• China widely perceived to be responsive on the rebalancing issue –
actual rebalancing would enhance its standing even more – seen to be
sharing the global burden. PBOC also wants China to move to capital
account convertibility by 2020.
• China mostly responding to rather than setting the G 20 agenda.
• Now wants to contribute to agenda setting, therefore more willing to
engage on rebalancing, currency and trade (wants to be part of TPP,
even though this goes beyond current WTO rules)
• If it wants to be more active in agenda setting within the G 20 – for this
it would need to carry other developing G 20 countries along.
Alok Sheel
9