Download Discussion of “Policy Perspectives from the Bottom Do?” by Loren Brandt

Discussion of “Policy Perspectives from the Bottom
Up: What Do Firm-level Data Tell Us China Needs to
Do?” by Loren Brandt
Session 5: China’s Growth Prospects1
Tao Zha
FRB Atlanta, Emory University, and NBER
2015 Asia Economic Policy Conference
Federal Reserve Bank of San Francisco
November 19-20, 2015
1
c 2015 by T. Zha. The views expressed herein are those of the authors and do
Copyright
not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve
System or the National Bureau of Economic Research.
T. Zha
China’s Growth Prospects
November 19-20, 2015
1/5
What is a trade-off between short-run and long-run growth prospects?
At what level China’s economic growth is sustainable in the long run will
probably depend, to a large extent, on how successful financial reforms are,
which I will elaborate later.
T. Zha
China’s Growth Prospects
November 19-20, 2015
2/5
What is a trade-off between short-run and long-run growth prospects?
At what level China’s economic growth is sustainable in the long run will
probably depend, to a large extent, on how successful financial reforms are,
which I will elaborate later.
One thing is clear: there will be a painful trade-off between short-run and
long-run growth prospects.
T. Zha
China’s Growth Prospects
November 19-20, 2015
2/5
What is a trade-off between short-run and long-run growth prospects?
At what level China’s economic growth is sustainable in the long run will
probably depend, to a large extent, on how successful financial reforms are,
which I will elaborate later.
One thing is clear: there will be a painful trade-off between short-run and
long-run growth prospects.
According to our time-series model forecasts, it is reasonable to expect
China’s GDP growth to slow down to 6% if the government is willing to
reduce growth of fixed-asset investment (FAI) to 8%.
T. Zha
China’s Growth Prospects
November 19-20, 2015
2/5
What is a trade-off between short-run and long-run growth prospects?
At what level China’s economic growth is sustainable in the long run will
probably depend, to a large extent, on how successful financial reforms are,
which I will elaborate later.
One thing is clear: there will be a painful trade-off between short-run and
long-run growth prospects.
According to our time-series model forecasts, it is reasonable to expect
China’s GDP growth to slow down to 6% if the government is willing to
reduce growth of fixed-asset investment (FAI) to 8%.
Out-of-sample performance of GDP growth: The RMSE error over the
4-year horizon is only 0.924%, compared to the 2.33% error produced by the
random-walk model.
T. Zha
China’s Growth Prospects
November 19-20, 2015
2/5
What is a trade-off between short-run and long-run growth prospects?
At what level China’s economic growth is sustainable in the long run will
probably depend, to a large extent, on how successful financial reforms are,
which I will elaborate later.
One thing is clear: there will be a painful trade-off between short-run and
long-run growth prospects.
According to our time-series model forecasts, it is reasonable to expect
China’s GDP growth to slow down to 6% if the government is willing to
reduce growth of fixed-asset investment (FAI) to 8%.
Out-of-sample performance of GDP growth: The RMSE error over the
4-year horizon is only 0.924%, compared to the 2.33% error produced by the
random-walk model.
According to our estimation, a 5-percentage-point reduction from the
current FAI growth rate leads to a half percentage point fall in GDP growth
in the short and medium run (over 1-5 years), but increases the
consumption-output ratio by 20% over the 5-year horizon from the current
level.
T. Zha
China’s Growth Prospects
November 19-20, 2015
2/5
What is a trade-off between short-run and long-run growth prospects?
At what level China’s economic growth is sustainable in the long run will
probably depend, to a large extent, on how successful financial reforms are,
which I will elaborate later.
One thing is clear: there will be a painful trade-off between short-run and
long-run growth prospects.
According to our time-series model forecasts, it is reasonable to expect
China’s GDP growth to slow down to 6% if the government is willing to
reduce growth of fixed-asset investment (FAI) to 8%.
Out-of-sample performance of GDP growth: The RMSE error over the
4-year horizon is only 0.924%, compared to the 2.33% error produced by the
random-walk model.
According to our estimation, a 5-percentage-point reduction from the
current FAI growth rate leads to a half percentage point fall in GDP growth
in the short and medium run (over 1-5 years), but increases the
consumption-output ratio by 20% over the 5-year horizon from the current
level.
As the same time, our simulations indicate that rapid adjustments in
reducing investment growth run a risk of significantly slowing down the
economy in the short and medium run.
T. Zha
China’s Growth Prospects
November 19-20, 2015
2/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
Between 1998 and 2013, the investment-to-GDP ratio increased rapidly at
the cost of consumption, as the consumption-to-GDP ratio declined during
the same period.
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
Between 1998 and 2013, the investment-to-GDP ratio increased rapidly at
the cost of consumption, as the consumption-to-GDP ratio declined during
the same period.
This conspicuous pattern does not change no matter how one adjusts the
Chinese time-series data.
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
Between 1998 and 2013, the investment-to-GDP ratio increased rapidly at
the cost of consumption, as the consumption-to-GDP ratio declined during
the same period.
This conspicuous pattern does not change no matter how one adjusts the
Chinese time-series data.
It is not a mystery that China’s growth has been driven by a boom in
investment.
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
Between 1998 and 2013, the investment-to-GDP ratio increased rapidly at
the cost of consumption, as the consumption-to-GDP ratio declined during
the same period.
This conspicuous pattern does not change no matter how one adjusts the
Chinese time-series data.
It is not a mystery that China’s growth has been driven by a boom in
investment.
A growth-accounting exercise confirms that capital deepening (investment)
accounts for a majority of GDP growth, about 73.9% between 1998 and
2011.
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
Between 1998 and 2013, the investment-to-GDP ratio increased rapidly at
the cost of consumption, as the consumption-to-GDP ratio declined during
the same period.
This conspicuous pattern does not change no matter how one adjusts the
Chinese time-series data.
It is not a mystery that China’s growth has been driven by a boom in
investment.
A growth-accounting exercise confirms that capital deepening (investment)
accounts for a majority of GDP growth, about 73.9% between 1998 and
2011.
What is less unknown is that much of such unprecedented investment boom
has gone into overcapacity and real-estate sectors.
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
Between 1998 and 2013, the investment-to-GDP ratio increased rapidly at
the cost of consumption, as the consumption-to-GDP ratio declined during
the same period.
This conspicuous pattern does not change no matter how one adjusts the
Chinese time-series data.
It is not a mystery that China’s growth has been driven by a boom in
investment.
A growth-accounting exercise confirms that capital deepening (investment)
accounts for a majority of GDP growth, about 73.9% between 1998 and
2011.
What is less unknown is that much of such unprecedented investment boom
has gone into overcapacity and real-estate sectors.
Such unbalanced growth is a negative consequence of resources misallocated
from the productive light (labor-intensive) sector to the less productive
heavy (capital-intensive) sector (Chang, Chen, Waggoner, and Zha,
2015—CCWZ).
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
Why does China’s spectacular growth in the past fail to continue?
An answer to this question lies in understanding how unbalanced China’s
growth has been.
Between 1998 and 2013, the investment-to-GDP ratio increased rapidly at
the cost of consumption, as the consumption-to-GDP ratio declined during
the same period.
This conspicuous pattern does not change no matter how one adjusts the
Chinese time-series data.
It is not a mystery that China’s growth has been driven by a boom in
investment.
A growth-accounting exercise confirms that capital deepening (investment)
accounts for a majority of GDP growth, about 73.9% between 1998 and
2011.
What is less unknown is that much of such unprecedented investment boom
has gone into overcapacity and real-estate sectors.
Such unbalanced growth is a negative consequence of resources misallocated
from the productive light (labor-intensive) sector to the less productive
heavy (capital-intensive) sector (Chang, Chen, Waggoner, and Zha,
2015—CCWZ).
Unless this misallocation is reduced and eventually eliminated, China’s
growth prospects continue to face serous problems.
T. Zha
China’s Growth Prospects
November 19-20, 2015
3/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
This paradox has been recognized by the media and researchers alike, but
how was this problem created in the first place?
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
This paradox has been recognized by the media and researchers alike, but
how was this problem created in the first place?
Over-investment in China’s heavy industry would not have taken place
without carefully-designed government policy.
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
This paradox has been recognized by the media and researchers alike, but
how was this problem created in the first place?
Over-investment in China’s heavy industry would not have taken place
without carefully-designed government policy.
Since the late 1990s, the government has been actively promoting the heavy
industry as part of its strategic plan.
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
This paradox has been recognized by the media and researchers alike, but
how was this problem created in the first place?
Over-investment in China’s heavy industry would not have taken place
without carefully-designed government policy.
Since the late 1990s, the government has been actively promoting the heavy
industry as part of its strategic plan.
Encouraged by the central government’s policy, local governments made
implicit guarantees of long-term bank loans to the heavy industry.
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
This paradox has been recognized by the media and researchers alike, but
how was this problem created in the first place?
Over-investment in China’s heavy industry would not have taken place
without carefully-designed government policy.
Since the late 1990s, the government has been actively promoting the heavy
industry as part of its strategic plan.
Encouraged by the central government’s policy, local governments made
implicit guarantees of long-term bank loans to the heavy industry.
As argued by CCWZ, the easy access to long-term loans distorted business
finance and crowded out short-term loans needed by productive small firms.
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
This paradox has been recognized by the media and researchers alike, but
how was this problem created in the first place?
Over-investment in China’s heavy industry would not have taken place
without carefully-designed government policy.
Since the late 1990s, the government has been actively promoting the heavy
industry as part of its strategic plan.
Encouraged by the central government’s policy, local governments made
implicit guarantees of long-term bank loans to the heavy industry.
As argued by CCWZ, the easy access to long-term loans distorted business
finance and crowded out short-term loans needed by productive small firms.
Indeed, the correlation between long-term and short-term loans are −0.4 for
China (an anomaly) and by contrast 0.6 for the U.S. economy.
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
What macroeconomic policy is mainly responsible for over-investment?
One serious problem is over-investment in the heavy industry on the one
hand and the difficulty of obtaining bank loans by vibrant and productive
small firms on the other.
This paradox has been recognized by the media and researchers alike, but
how was this problem created in the first place?
Over-investment in China’s heavy industry would not have taken place
without carefully-designed government policy.
Since the late 1990s, the government has been actively promoting the heavy
industry as part of its strategic plan.
Encouraged by the central government’s policy, local governments made
implicit guarantees of long-term bank loans to the heavy industry.
As argued by CCWZ, the easy access to long-term loans distorted business
finance and crowded out short-term loans needed by productive small firms.
Indeed, the correlation between long-term and short-term loans are −0.4 for
China (an anomaly) and by contrast 0.6 for the U.S. economy.
In short, such preferential credit policy was largely responsible for credit
distortion of large versus small businesses and of productive versus
unproductive firms.
T. Zha
China’s Growth Prospects
November 19-20, 2015
4/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
The 8th National People’s Congress passed a historic long-term plan in
March 1996 to adjust the industrial structure for the next 15 years in favor
of strengthening the heavy industry.
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
The 8th National People’s Congress passed a historic long-term plan in
March 1996 to adjust the industrial structure for the next 15 years in favor
of strengthening the heavy industry.
This strategic plan, coupled with the preferential credit policy in favor of
large firms, brought forth the success of China’s past growth.
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
The 8th National People’s Congress passed a historic long-term plan in
March 1996 to adjust the industrial structure for the next 15 years in favor
of strengthening the heavy industry.
This strategic plan, coupled with the preferential credit policy in favor of
large firms, brought forth the success of China’s past growth.
At the same time, ironically, the same financial arrangements turned out to
be the thin edge of a wedge driven into the heart of the problem faced by
China in the future: the sustainability of past investment-led growth.
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
The 8th National People’s Congress passed a historic long-term plan in
March 1996 to adjust the industrial structure for the next 15 years in favor
of strengthening the heavy industry.
This strategic plan, coupled with the preferential credit policy in favor of
large firms, brought forth the success of China’s past growth.
At the same time, ironically, the same financial arrangements turned out to
be the thin edge of a wedge driven into the heart of the problem faced by
China in the future: the sustainability of past investment-led growth.
Brandt touched on the “widening inequality” problem created by “resource
redistribution.”
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
The 8th National People’s Congress passed a historic long-term plan in
March 1996 to adjust the industrial structure for the next 15 years in favor
of strengthening the heavy industry.
This strategic plan, coupled with the preferential credit policy in favor of
large firms, brought forth the success of China’s past growth.
At the same time, ironically, the same financial arrangements turned out to
be the thin edge of a wedge driven into the heart of the problem faced by
China in the future: the sustainability of past investment-led growth.
Brandt touched on the “widening inequality” problem created by “resource
redistribution.”
While this is certainly true for the 2th moment, resource misallocation I’ve
argued above is a principal source of the first-order problem: much slower
growth in average consumption (the 1st moment) than investment growth
during the investment boom period between 1998 and 2013.
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
The 8th National People’s Congress passed a historic long-term plan in
March 1996 to adjust the industrial structure for the next 15 years in favor
of strengthening the heavy industry.
This strategic plan, coupled with the preferential credit policy in favor of
large firms, brought forth the success of China’s past growth.
At the same time, ironically, the same financial arrangements turned out to
be the thin edge of a wedge driven into the heart of the problem faced by
China in the future: the sustainability of past investment-led growth.
Brandt touched on the “widening inequality” problem created by “resource
redistribution.”
While this is certainly true for the 2th moment, resource misallocation I’ve
argued above is a principal source of the first-order problem: much slower
growth in average consumption (the 1st moment) than investment growth
during the investment boom period between 1998 and 2013.
No wonder that the 18th National People’s Congress in 2012 explicitly
expressed concerns about low consumption and income growth in China.
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5
Why are financial reforms crucial to achieve sustainable growth in the future?
The seeds of this distorted credit policy were sown in the later part of the
1990s.
The 8th National People’s Congress passed a historic long-term plan in
March 1996 to adjust the industrial structure for the next 15 years in favor
of strengthening the heavy industry.
This strategic plan, coupled with the preferential credit policy in favor of
large firms, brought forth the success of China’s past growth.
At the same time, ironically, the same financial arrangements turned out to
be the thin edge of a wedge driven into the heart of the problem faced by
China in the future: the sustainability of past investment-led growth.
Brandt touched on the “widening inequality” problem created by “resource
redistribution.”
While this is certainly true for the 2th moment, resource misallocation I’ve
argued above is a principal source of the first-order problem: much slower
growth in average consumption (the 1st moment) than investment growth
during the investment boom period between 1998 and 2013.
No wonder that the 18th National People’s Congress in 2012 explicitly
expressed concerns about low consumption and income growth in China.
In a nutshell, unbalanced growth in the past may have had more to do with
deliberate macroeconomic and credit policies of China than improvements in
productivity .
T. Zha
China’s Growth Prospects
November 19-20, 2015
5/5