Transcript No Slide Title

China’s Great Economic Transformation
Lee G. Branstetter
October 25, 2013
© Lee G. Branstetter
China’s economic performance has
been impressive
Chinese real GDP growth, 1979-2010
16%
14%
12%
10%
8%
6%
4%
2%
0%
Shanghai, 1990
Shanghai, 1990
Shanghai, mid-2000s
But China’s growth is not unprecedented
Chinese real GDP growth, 1978-2004 vs. Japan’s real GDP growth 1947-1973
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
18
16
14
12
10
8
6
4
2
0
Korea exhibited the same economic
dynamism in earlier decades
And other Asian economies have done
about as well for extended periods
Per Capita GDP Growth, 1978-94 (Percent Per Year)
Top ten growth performances
1) China (Official)
2) Korea
3) China (Alternative)
4) Taiwan
5) Thailand
6) St. Kitts & Nevis
7) Botswana
8) Singapore
9) Hong Kong
10) St. Vincent
-6
-4
(8.0%)
(6.9%)
(6.8%)
(6.3%)
(5.9%)
(5.8%)
(5.7%)
(5.2%)
(5.1%)
(5.1%)
-2
Source: The World Bank
India (3%)
United States (1.5%)
Brazil (0.2%)
0
2
4
6
8
Past performance does not guarantee
future success!




South Korea went through a wrenching
downturn in 1997-1998, lost 6% of GNP,
and had to be bailed out by the IMF
Taiwan emerged from its worst postwar
recession in 2002, suffered slow growth
for the next ten years
Hong Kong has suffered two recessions in
the last ten years
The Japanese economy stagnated for
more than a decade
Key learnings




China is not the first East Asian nation to grow
rapidly for a sustained period
There are important parallels between aspects of
Chinese economic growth and those of other
Asian countries
These parallels include both strengths and
weaknesses
The weaknesses have the potential to limit
China’s growth prospects
Agenda
The revolution in Chinese agriculture (1980s)
China’s embrace of globalization (1980s-early 2000s)
China’s unfinished financial revolution (1990s-2000s)
Losing balance in the 2000s?
China emerges from the Cultural
Revolution…
邓小平
Deng Xiaoping
Agricultural productivity stagnated
under communism
Commodity
1955-57
1964-66
1977-79
1983-85
Grain
303
274
318
376
Edible oil
7.5
4.9
5.4
12.3
Wheat
6.2
7.6
9.3
15.1
Cotton
2.4
2.8
2.2
4.8
Numbers indicate agricultural output in kilograms per capita
Source: Naughton, 1995, p. 53
The Death of Commune Agriculture
Percent of households in
Household Responsibility System
100
98%
99%
1983
1984
80%
80
60
45%
40
20
14%
1%
0
1979
Source: World Bank
1980
1981
1982
Poverty fell dramatically
Incidence of poverty (percent)
70
60
50
International poverty line
40
30
20
Absolute poverty line
10
0
1981
1983
Source: World Bank
1985
1987
1989
1991
1993
1995
Increase in savings
National Savings and its Components, 1979-2003
A rapid shift of labor out of
agriculture...
17 years China 1978-1995
30 years Philippines 1950-1980
50 years United States 1820-1870
60 years Japan 1870-1929
0
10
20
30
40
50
Years taken to reduce the share of agriculture in the labor
force from 70% to 50%
Source: World Bank
60 Years
. . . and into non-state industry
%
100
Shares of Industrial Output by Ownership
Private firms
80
Town and village enterprises and collectives
60
40
State enterprises
20
0
1978 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Source: World Bank
Legitimizing the private sector

Phase 1: 1978-1983
– Proprietorships of 8 or less employees were allowed
– Township and village enterprises (TVEs) allowed to operate
completely outside the economic plan

Phase 2: 1984-1992
– Many TVEs operate as “red hat” firms
– State Council issues regulations concerning larger private
enterprises in 1988
• Sole proprietorships
• Partnerships
• Limited liability companies

Phase 3: 1993-present
– Accelerated liberalization
– 15th Party Congress (1997) declares private enterprise an
important component of the economy
– Private ownership incorporated into Chinese Constitution (1999)
China’s opening to international trade

Devaluation of the Chinese yuan; moves
toward current account convertibility

Demonopolizing foreign trade

Reducing tariff, nontariff barriers to trade
China’s opening to foreign investment

Four special economic zones established in 1979
– 3 cities in Guangdong, 1 city in Fujian
– Tax holiday for foreign investors
– Low tax rates (15%) on business income

14 “open coastal cities” in 1984
– Extended slightly less generous concessions elsewhere
on the coast

The “Twenty-two Regulations” of 1986
– Allowed for FDI nationwide
China’s opening led to a sharp increase
in trade . . .
Trade-GDP ratios,
in 1987 prices (percent)
40
Other large
developing countries
30
China
20
10
0
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995
Source: World Bank
. . . and an explosion of FDI
U.S. dollar values of contracts utilized capital
50000
40000
30000
20000
10000
0
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
U.S. $ millions
60000
Source: MOFTEC
The regime crushes political dissent in
1989, and there is a pause in reform…
But Deng Xiaoping places his full weight
behind economic reform in 1992
FDI came mostly from a small number
of (Asian) countries…
Inward FDI in China by source country
60000
40000
Ot her
30000
Jap an
Eur o p e
U SA
T aiwan
20000
10000
Ho ng Ko ng
20
02
20
00
98
96
94
92
90
88
0
86
U.S. $ millions
50000
And was concentrated in a small
number of regions…
Cumulative FDI inflows, 1996-2003
12000000
10000000
6000000
4000000
2000000
dong
Guan
g
dong
Shan
Fujia
n
i
angh
a
ter S
h
Liaon
ing
0
Beijin
g
USD 10,000
8000000
Exports have been similarly concentrated
Chinese Exports by Province, 2003
Beijing
Fujian
Tianjin
Liaoning
Shandong
Shanghai
Jiangsu
Guangdong
Zhejiang
Source: MOFTEC
The geographic concentration of
Chinese trade and investment

The role of the first SEZs
– Linked Guangdong to Hong Kong
– Linked Fujian to Taiwan


Allowed labor-intensive manufacturing to shift from HK/Taiwan
to China
The success of Hong Kong, Taiwan firms established an “export
infrastructure” in these regions
– Guangdong and Fujian accounted for 62% of export growth from
1984-1993
– By 1994, they generated 44% of exports, despite having only 8% of
China’s population and 12.7% of GDP

Hong Kong/Taiwanese investment has also played a key role in
the development of “Greater Shanghai” as an export center
since 1995
– Greater Shanghai is home to more than 200,000 Taiwanese
expatriates
Chinese exports to the U.S. have
displaced exports from the Asian NIEs
Source of US Footwear Imports, 1985-2001
70
60
Percent (%)
50
40
30
20
10
0
85 986 987 988
9
1
1
1
1
89 990 991 992 993 994 995 996 997
9
1
1
1
1
1
1
1
1
1
China
South Korea & Taiw an
1*
98 999 000
0
9
1
1
2
20
*Jan-Sept dat a
Chinese exports to the U.S. have
displaced exports from the Asian NIEs
Source of US Toys, Games and
Sporting Goods Imports, 1985-2001
70
50
40
30
20
10
China
Hong Kong, South Korea, Taiw an
*Jan-Sept dat a
20
00
20
01
*
19
98
19
99
19
96
19
97
19
93
19
94
19
95
19
91
19
92
19
89
19
90
19
87
19
88
0
19
85
19
86
Percent (%)
60
China’s “high-tech” exports are driven
by foreign firms. . .




China has displaced Japan and the EU as
the single largest supplier of “high-tech”
goods to the U.S.
But the domestic value-added is only
about 15% of export value
Foreign firms account for 92% of
computer exports, 74% of electronics and
telecom equipment
The top-ranked exporter in China is a
Taiwanese electronics firm
China’s export prowess: made in
Taiwan (and Hong Kong and . . . )
China’s export success not only resembles that of
Hong Kong and Taiwan in form . . . It is actually
being generated, in large part, by the same group
of firms.
Zhu Rongji: chief economic policy
architect in the 1990s


Successfully brought an inflationary
investment boom under control…
Zhua Da Fang Xiao (Retain the large, release
the small)
– Sell off small SOEs
– Downsize SOE manufacturing: 25-30
million workers laid off
– Restructure the large ones to improve
profitability and accountability
– Allow SOEs to sell shares to the public to
raise funds, improve discipline

Launched major reforms of China’s financial
system to make it more market-driven

Brought China into the WTO
– Additional opening to imports…
– And to foreign direct investment
Zhu Rongji
朱镕基
The SOE sector shrank sharply
What China promised in return for
accession to the WTO




A significant opening of the agricultural
sector
An opening of the service sector (retail,
distribution, financial services)
Further reductions in barriers to
manufactured imports
Uphold WTO rules and principles
regarding nondiscrimination,
transparency, protection of intellectual
property rights
What China got

Better market access for its goods
– Eligible for MFN tariff rates

No longer hostage to U.S. foreign policy
– U.S. could no longer cut off access to its own
market with impunity

Opportunity to shape the rules of the
global trading system
China has fulfilled many of its
promises…




Average statutory tariffs on manufactured goods
have come down from about 45% to about 10%
Imports of basic grains and other land-intensive
crops have surged as agricultural trade barriers
have been lifted
China’s total imports doubled between 2001 and
2004
Significant liberalizations in retail and distribution
sectors have been achieved
– Large scale foreign retailers no longer need local partners
– Foreign firms now have much greater control over
marketing, distribution, and after-sales service of their
products in China
But significant issues remain…

Intellectual property rights protection
remains inconsistent and generally weak
– The “right” laws are on the books…
– And specialized IP courts exist
– But this is the top gripe of U.S. firms in China


“Exchange rate protectionism”
The prominence and power of SOEs in key
sectors
The banking system is still dominated by
state-owned enterprises
Finance Foreign Banks (1.2%)
Urban Credit
Companies
Rural Credit
Cooperatives (0.5%)
(1.6%)
Cooperatives
(9.8%)
City Commercial
Banks
(5.1%)
Joint Stock
Commercial Banks
(13.6%)
Policy Banks
(9.5%)
State-Ow ned Banks
(58.7%)
ICBC
BOC
ABC
CCB
The state retains considerable control
over the banks


The state sets interest rate “guidelines”…
And imposes quantitative restrictions on
lending
– Overall lending quotas
– Loan allocations to key sectors


And continues to require approval of large
investment projects
And continues to appoint the top officials
of the Big Four banks
Which continue to funnel a large fraction
of new lending into the state sector
Financial System Loans
SOEs
Other
Consumer
Government
Agricuture
SOEs still dominate other key sectors
Growing distortions in China’s pattern
of economic growth




Evidence from the
“expenditure approach”
Evidence from the
“production approach”
Evidence from the “income
approach”
Evidence from the “savingsinvestment approach”
Dr. Nicholas Lardy
Peterson Institute
for International
Economics
Even the nation’s own leaders have
suggested serious problems
“China’s economic growth is unsteady,
unbalanced, uncoordinated, and
unsustainable.”
-- Chinese Premier Wen Jiaobao, in
response to a question posed at the
National People’s Congress, March
2007
Wen Jiabao
温家宝
Investment in China has soared to
unprecedented heights…
Investment as a share of China's GDP, 1978-2010
percent
50
45
40
35
30
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
25
Sources: National Bureau of Statistics of China (2010f, 55); ISI Emerging Markets, CEIC Database.
While household consumption has
fallen to low levels…
Household consumption as a share of GDP, 1978-2010
percent
60
50
40
30
20
10
0
Sources: National Bureau of Statistics of China (2010f, 55-56); ISI Emerging Markets, CEIC Database.
An overbuilt manufacturing sector, an
underdeveloped service sector
Agriculture, industry, and services as a share of GDP, 1978-2010
percent
60
50
Industry
40
Services
30
Agriculture
20
10
0
Sources: National Bureau of Statistics of China (2010f, 39); ISI Emerging Markets, CEIC Database.
Household income lags GDP growth in
the 2000s
Household disposable income as a share of GDP, 1992-2008
percent
70
68
66
64
62
60
58
56
54
52
50
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: National Bureau of Statistics of China (2010f, 74-83); ISI Emerging Markets, CEIC Database.
“Overexporting” in the 2000s
China’s net exports as a percent of GDP
(A924NXN % A924NGDP)
10
10
8
8
6
6
4
4
2
2
00
01
02
03
Source: Haver Analytics
04
05
06
07
08
09
10
10/03/11 20:09
Exchange rate manipulation – the
smoking gun
Change in foreign exchange reserves, 2001-10
percent
billions of US dollars
600
14
12
500
10
400
8
300
6
200
4
100
2
0
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Note: The bars show change in foreign exchange reserves in billions of dollars (left axis) and the line tracks the
change in reserves as percent of GDP (right axis).
Sources: State Administration of Foreign Exchange of China, www.safe.gov.cn; ISI Emerging Markets, CEIC
Database.
Financial repression in the 2000s
Real return on household one-year deposits, 1997-2010
percent
8
6
4
2
0
-2
-4
-6
Sources: ISI Emerging Markets, CEIC Database.
Other policy distortions

SOEs pay no dividends

Artificially low costs of land and energy

An insufficient safety net keeps household
savings rates high
Negative externalities of overindustrialization at home…
China’s supercharged competitiveness
affects other countries
World Carbon Dioxide Emissions by Country, 19902030
Projection
Historical Data
13,000
China
CO2 emissions (Million Metric Tons)
12,000
United States
11,000
OECD Europe
10,000
Russia
9,000
Japan
8,000
India
Canada
7,000
South Korea
6,000
5,000
4,000
3,000
2,000
1,000
0
1990
1995
2000
2006
2010
2015
2020
2025
2030
China’s growth has held up well during
the recent global financial crisis. . .
14
GDP growth rates, 2007-2011
12
10
USA
Philippines
Indonesia
China
India
Japan
8
6
4
2
0
-2
2007
2008
2009 2010
2011
-4
Source: IMF (2009), UBS (2010)
But foreign criticism of Chinese
economic policy has intensified…




Western governments have accused China of
“playing by a different set of rules”…
…And artificially boosting exports through
unprecedented currency manipulation
Multinationals complain that the Chinese
government is far less welcoming
And some foreign experts point to the rise of a
“new” model of Chinese state-directed capitalism
A reform program to get China back
on track





Allow interest rates to rise and be set by the
market
Allow the exchange rate to appreciate, and be set
by the market
Let markets determine prices for land and energy
Force SOEs to pay dividends, open up Chinese
equity markets to private firms
Institute a better social safety net for the Chinese
people
China’s powerful domestic interests
may block reform





The coastal industrial centers support ER
intervention…
As do foreign firms manufacturing in China
Both benefit from artificial subsidies to
manufacturing
China’s top leaders now rule by consensus, not
decree
And weaknesses within the Party’s inner circle
are increasingly coming into the open
The People’s Republic of Corruption?
Bo Xilai
薄熙来
Wen Jiabao
温家宝
Xi Jinping
习近平
Three views on the role of SOEs in the
Chinese economy



SOEs have slowly but steadily declined in
importance – and this will continue, fostering
China’s growth
SOEs will not shrink much further, eroding
efficiency and slowing growth
SOEs will not shrink much further, providing a
powerful tool for the Chinese state
– To retain control of the economy in good times
– To stabilize the economy in bad times
– To steal markets from foreigners, inside and
outside of China
Retain the large, release the small



SOEs have continued to decline as a source of
investment, output, and exports, even in the most
recent years
But the Chinese government maintains that the
largest SOEs will not be privatized
Instead, SOEs are to remain control of the
“commanding heights” in key sectors of the
economy
The reality of China’s SOEs



SOEs are systematically less profitable and
productive than indigenous private firms or
foreign firms
SOEs have steadily declined in importance as a
source of Chinese exports
The evidence does not support the view that
Chinese SOEs constitute a threat to Western
prosperity
SOEs dominate Chinese equity
markets…
And stock market returns fail to reflect the
dynamism of China’s (private) economy
Shanghai Composite Stock Index
A reversion to SOE-led growth?
Perception vs. reality




China is investing massively in energy
and “infrastructure” sectors
These industries have always been
dominated by SOEs
China’s size, rapid growth, and weakness
elsewhere focus global attention on this
SOE dominance
But it is nothing new…
Familiar weaknesses in China’s
growth model


Inefficient allocation of capital
Chronic tendency toward excess
investment and exports
– Capital is too cheap for industrial corporations
– So are other key factors of production
– The exchange rate is still distorted
– Risk reducing policies distort the investment
policies of large firms
– Too much capital goes to inefficient SOEs


Distortions did not diminish in the 2000s
If not corrected, this could catch up with
China in the long run
Will China get old before it gets rich?




Thanks to the “one child” policy, China’s population
will age extremely rapidly
By 2025, China will have a higher median age than the
U.S.
By 2040, there may be just two Chinese workers for
every retiree (versus 2.3 in the U.S. at the time)
China will have the age profile of a rich country, but
the resources of a developing country
China’s strengths provide some basis
for optimism



China’s development process is still at an
early stage
China has achieved an unusual degree of
international openness, which insulates it
against the Asian “dual economy” disease
China’s immense scale creates unique
opportunities for local entrepreneurs and
for the rest of the world
But China may need to manage a political
transition, as well as an economic one




China has managed to defer political reform
while embracing economic reform…
But the next stage of economic reform will
require the party and the state to surrender
some of its most important remaining levers
of power to promote the national interest
When forced to choose between what’s
good for China and what’s good for
themselves, what choice will the
“princelings” make?
The answer to this question will impact the
economic well-being of the entire planet