China’s Economic Policy: The search for a new growth model

Economic Reform

• Since 1978, economy growing at 10% per annum• China as the second largest economy in the world• China has rebounded effectively from the global

financial crisis with the help of the stimulus package

• 2011 economic growth 9.2%, with inflation at 5.3%

• IMF—China’s GDP will surpass US in 2016 on PPP basis

• Economist –in dollar terms, converted at market exchange rates = 2018

Economic Reform

• Caution with the growth figures• 2005, China’s GDP = 1/5 of the US = GDP per

capita of 41,700 = USA in 1850• With the current growth rate in 2020, China’s per

capita income will = Malaysia in 2007 and by 2030 will reach the level of Hungary and the Czech Republic in 2007

• This year = South Africa, Botswana and Jamaica• Growth derives from two main transitions

– Shift from low productivity to higher productivity work– Shift from central planning to a more market-influence

economy

Stimulus Package

– Stimulus package of 4 trillion yuan ($570 billion)—November 2008

– Produced reasonably broad-based growth, a classic V-shaped recovery

– 1st quarter 2009 GDP rose 6.2% and by 10.7% in 4th quarter—annual growth of 8.7%

– Thus, January 2010, tightening of monetary policy and control over banks

– Lending was up 30% in 2009

• Originally: Public infrastructure (38%--actual 23%); Post-earthquake reconstruction (25%--actual 14%); social welfare (10%); rural development (9%); technology investment (9%); sustainable development (5%); education and culture (4%)

Stimulus Package

• Some of the amounts listed were already ear-marked– The money for the Wenchuan earthquake– Money budgeted for railway investment 2006-10– 120 billion a year of corporate value-added tax cuts– Amounts to perhaps 2-2.3 trillion yuan– Deutsche Bank calculate that 90% of the funding was already in prior

investment plans

• The stimulus was a fiscal stimulus of between 1.5 and 1.7% of GDP– 18 Beijing Summer Olympics

Stimulus Program

• Stimulus worked but are there long-term negative effects?– Distorted the economy by reversing the long-term for state

retreat from economic engagement and for greater private engagement

– Will bad loans rise again?– Has it deflected the policy attempts to develop consumption

as the main economic driver?– Jan. 2008 Xinhua reported that consumption replaced

investment as main driver of growth in 2007—growth was 11.4%; 4.4% from consumer spending; 4.3% from investment; 2.7% from net exports

– But 2009: of 8.7% growth—8% from investment, 4.6% from consumption, and -3.9% from net exports

– 2011, moving back to better balance: 9.2% growth—5% from investment, 4.5% from consumption and -0.01% from net exports

– Other criticisms: risk of rising inflation, property and equity market bubbles; and excess industrial capacity

Stimulus Program

– Did not advantage SOEs at expense of private firms– Did not alter long-term trend with private firms becoming the most

important driver of economic growth– 2009-10 bank loans did not flow primarily to SOEs– Access of private firms and household businesses to bank credit

improved considerably

Stimulus ProgramNeglect of Consumption

Investment was expanded to offset decline in trade Consumption growth in 2009 was robust and was almost same as

GDP growth Investment boom created jobs in construction Wages continued to rise Pension and MLSS payments Led to 9.8% increase in disposable income of urban residents and 8.5%

for rural (2009) Measures to encourage consumption: car sales, home appliance subsidy

program Increases in household borrowing But 2010—household consumption down as share of GDP by 1.2% to all-

time low of 33.85 Thus, claim exaggerated for 2009 but valid for 2010

Return of the State?

• Since 2003, market strengthening reform slowed• But in 2009-10, loans did not go overwhelmingly to SOEs and

household business borrowing expanded fastest• 1995—SOEs = 2/3 of exports, by 2008 = 18% and 14% by 2010• Private firm share doubled to 30%--most important source of

growth in exports• SOEs maintained monopoly in telecommunications, finance,

petroleum etc.

New Growth Model?

• Formed the core of the new five-year plan: emphasizes quality of growth over quantity

• Four Primary Initiatives:– Lower economic growth targets– Increase consumption– Energy savings and environmental protection– Promote strategic industries

New Growth Model?Growth

• 2012 = 8%; FYP = 7.5%• 11th FYP called for 7.5% but was closer to 10% • Beijing and Shanghai only announced growth rates close to

target and some provinces announced 13% or higher• Concern over below 8% growth for covering employment

demands

1960 Start of Rapid Growth*

Year GDP per capita (PPP)

China 704.63 1978 779.15

Vietnam 905.91 (1970) 1989 1405.59

Indonesia 1035.82 1967 990.02

Thailand 1184.02 1957 1020.8

Taiwan 1584.05 1960 1584.05

South Korea 1744.35 1963 1925.63

Malaysia 2178.14 1959 2088.89

Philippines 2191.2 n.a. n.a.

Hong Kong 3848.76 ** 3848.76Singapore 4151.17 ** 4151.17

Japan 5492.81 1950 2741.79

Ethiopia 789.45 n.a. n.a.

Chad 1643.84 n.a. n.a.

Haiti 1877.43 n.a. n.a.

Per Capita GDP at the Beginning of the High Growth Period

Dating the End of High Growth

Table 6

Country Year start Period Growth Period Growth PPP GDPExch Rate

of slowing before Rate after Rate per cap at GDP at

slowdown Before slowdown After slowdown slowdown

(2005 prices)

Japan 1971 1968-1970 10.72 1971-78 2.605 13800 16500

Taiwan 1990 1980-89 8.56 1990-99 6.304 13370 10880

Korea 1992 1982-91 9.05 1992-2005 5.28 13370 8810

New Growth Model?Increased Consumption

• Investment and Foreign trade have been major drivers of growth

• Trade:– Post-WTO imports grown 17% p.a., exports grown 15% = 5x higher

than growth in world trade– Trade declined from 70% of GDP to 63% in 2007 and 44% in 2009

• Investment– 1978-88 36% of GDP roughly same as other East Asian successes– 2003– over 40%– 2003-10 investment = average of 54% of economic growth

New Growth Model?Increased Consumption

• First half of 1980s consumption growth was 4/5 of economic expansion but 2003-10 averaged barely 2/5

• New FYP calls for household disposable income to increase by 7%

• BUT expansion held in check by high savings rate—over 40%, US under 1%, OECD average = 10%; Singapore similar

• Raise consumption from 35.1% to 41% of GDP– Low compared to other countries– US = 71%– Brazil = 63%– India = 54%

New Growth Model?Increased Consumption

• Measures to boost consumption– Raise minimum wages– Personal income tax reform– Improve land distribution– Expand social welfare initiatives– Increase dividends paid by SOEs to their owner, i.e. the state

• Elimination of remaining government controls on interest rates on both deposits and loans

• Appreciation on the currency

New Growth Model?Strategic Industries

• Investment in “Strategic Emerging Industries”• 7 industries with 14 trillion yuan to be invested to raise

contribution from 5% of GDP to 8% by 2015 and 15% by 2020– Biotechnology– New energy– High-end equipment manufacturing– Energy conservation and environmental protection– Clean-energy vehicles– New materials– Next generation IT

New Growth Model?Political Opposition

• Coalition of vested interests that have blocked reforms– Export and import competing industries– Coastal provinces– Real estate and construction industries– China’s commercial banks