XBMA-ChineseEconomy-2016

8/20/2019 XBMA-ChineseEconomy-2016

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Current Developments of Chinese

Economy

Hongbin Cai

Guanghua School of Management

Peking University

March 1 , 2016


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The stock market has been eventful since

last year

0

1,000

2,000

3,000

4,000

5,000

6,000

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Shanghai Stock Exchange

Composite index


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Exchange Rate Instability and Capital

Outflow Lead to Declining Foreign Reserve

3,000

3,100

3,200

3,300

3,400

3,500

3,600

3,700

3,800

3,900

4,000

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

unit: USD bn


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Housing Market: Great Divergence

• Over-capacity and extremely soft markets in the

rest of the country:

– Financially distressed developers

– Shortfalls of city fiscal revenues

– Banks and financial institutions

• Even hotter housing market in a few megacities: Beijing, Shanghai, Guangzhou and

Shenzhen, etc.


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Growth Rate Continues to Slide

6

8

1 0

1 2

G D P G r o w t h R

a t e ( % )

2008/09 2010/09 2012/09 2013/12 2014/09


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Weak Demand Leads to Deflation

• Cumulatively, PPI has declined more than15%.

• Price level has been low or going down

• CPI has been falling from 2013, andhas been below 2 since June 2012.

• PPI has been negative since March 2012.


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Consumer Price Index

- 4

- 2

0

2

4

6

8

1 0

C P I

2008/10 2010/10 2012/10 2014/01 2014/10


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Producer Price Index

- 8

- 6

-

4

- 2

0

2

4

6

8

1 0

P P I

2008/10 2010/10 2012/10 2014/01 2014/10


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The Global Markets and Economy are not

quite either

• Many hot spots: North Korea, terrorist

movements, ……

• Oil and commodity markets

• Turbulent world stock markets

• Weak growth prospects almost everywhere


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What is going on? ??

• “Five little monkeys jumping on the bed,…..”

• According to the Chinese, it is the year ofthe Monkey.

• It is an integrated world, so you canalways blame your problems on others.


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Key Factors for Chinese Economy

• Success or Failure in rebalancing theeconomy (too much investment, too littleconsumption)

• China’s ability or inability to manage theever more complex economy


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China’s inability to manage the economy?

•

“Forget everything you’ve heard about their brilliance andforesightedness. Judging by their current flailing, theyhave no clue what they’re doing”.

• Paul Krugman : “China’s Naked Emperors” (NYT,2015-07-31)

•

“China’s remarkable success over the past 25 yearsnotwithstanding, the nation’s rulers have no idea whatthey’re doing”.


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Economic policy-making in China is quite

different

• China: – weak micro-foundation: systematic reforms are needed

– strong macro-control: a very large tool box

• Monetary policy (PBOC)

•

Fiscal policy (MOF)• State-controlled Banks

• Local governments

• SOEs

• ………..

• Mature Market Economy- strong micro-foundation: labor and capital markets, R&D, humancapital, innovation, ….- weak macro-control: monetary (Central Bank), fiscal (Congress)


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Economic policy-making process in China

• A model of lobby at a higher level?

PBOC DRC MOF

Decision maker

........

Information Private interest


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When decision-making can be effective

• This is the “brilliance and foresightedness” referred to byPaul Krugman.

• Given the unusually large tool box, effective economic

policy-making requires:Clear and coherent policy direction by the decision makerTimely and objective information about the economic situationGood balance among diverse interests (incentive compatible)Capacity to coordinate actions by various regulators

• Examples: growth stimulus (1989-1991, 1998-1999, 2008-2009)


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Ineffective economic policy-making

• It is not “they have no clue,” they have too many clues!

• In this model, economic policy-making can be ineffective if

any of these fails to hold- Clear and coherent policy direction by the decision maker- Timely and objective information about the economic situation- Good balance among diverse interests (incentive compatible)- Capacity to coordinate actions by various regulators

• In particular, if information is very scattered andinterests are very diverse (as in the case of the stockmarket), effective policy-making can be enormously

difficult.


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How does China improve on economic

policy-making

• Better communication with the market is needed.

• Decision-maker’s tool box is way too large, systematicreforms are needed (e.g., SOE reform, Banking sectorreform, local government reforms, …)

•

Economic policy-making process needs to be simplified.

• Some consolidation is needed to coordinate better


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“Rebalancing” is a Wrong Diagnosis

• But it was based on a myth based on the wrong

understanding of Chinese statistics.

•“Too little consumption, too much investment”was the universal diagnosis for the Chineseeconomy for a long time.

•

“ Rebalancing the three wheels (consumption,investment and exports)” had been the maintheme of China’s economic policies for thelast decade.


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Rebalancing is a myth.

• Consumption is underestimated by at least of 10% GDP

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• US housing consumption is almost 20% of household

consumption, and 14% of GDP. In contrast, Chinahousing consumption is only 8% of householdconsumption, and 3% of GDP. The difference is largelydue to different methods in calculating imputed rents.

• Service sector: advanced economy over 70% of GDP,India 57%, China 45%. Main reasons: (i) health careexpenditure (China, 5% of GDP; the US, 18% of GDP);(ii) cash economy; (iii) under-reporting (2006 census,

16% of GDP up revision largely due to service sector)


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Rebalancing is a myth.

• With all these statistical abnormalities, China’s “true”

investment-GDP ratio should be below 40%.

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• Creative accounting in China puts a lot of consumption(cars, travel, meals and entertainments) in operationalcosts: (i) government agencies and SOES: (ii) privatefirms (Cai, Fang and Xu (2011): entertainment and travelCosts of Chinese firms twice as high as in South Korea).

• On the other hand, investment is significantly over-estimated in China: (i) double counting in investment:1+1>2, the sum of provincial GDP is 2 trillion more than

the national total; (ii) underestimation of price deflator(Young (2003)).


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A Change of Course from “Rebalancing”

• A change of course: the main theme of

economic policies is changed to “supply-side

structural reforms”., instead of rebalancing.

• As China’s national statistical bureau improvesand adjusts its statistical methods, the so-called“imbalance” will be automatically balanced.

• But “rebalancing investment and consumption”led to the wrong policy prescriptions, sometimesat the terrible timing (2013-14).


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“Supply-side Structural Reforms”

• It (hopefully) refers to a reform program that aims to improve

market efficiency (SOE reforms, regulation reforms, factor

market reforms, and local government reforms).

• The emphasis on supply-side is to deviate from the demand-side (consumption, investment and export) analysis of thebalance of three-wheels.

• The emphasis on structural reforms is to deviate from“structural adjustments” which often referred to industrialpolicies stemming from the need to “rebalance”.

• “Supply-side structure reforms” are not “supply-side Reganeconomics”, or simply tax reduction.


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Will the Chinese Economy Turn Around

For the Chinese economy to get back on track, all

of these factors will be necessary

• Effective and efficient decision-making of

economic policies in an new era.

• Right diagnosis of problems, right set of policypriorities in the short-run and long-run,implementation

• Restoration of confidence, domesticand international


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Patterns of Economic Growth in China

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Years in trouble: 8 or 9; strong growth: 3 or 4.


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Cycles of Fixed Assets Investment Growth

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The Resilience of the Chinese Economy

• Incredible amount of entrepreneurshipeverywhere

• Growth potentials remain strong, percapita GDP is only $7,000.

•Demographic dividend in quantity isdisappearing, but in quality is coming strong(hundred of millions of college graduates)


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Concluding Remarks

• “The man who is a pessimist before 48 knowstoo much; if he is an optimist after it, he knowstoo little.” (Mark Twain)

• 2016 will be an eventful and critical year

• It will be extraordinarily challenging.

• But for all the above reasons, I am still hopeful,and remain (Cautiously ) optimistic.


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Comments Welcome!Thank You!

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XBMA-ChineseEconomy-2016