Transcript Four Dimensions of China`s Economic Success

Four Dimensions of China’s Economic
Success: Policies for a Second-best World
Albert Keidel
Senior Fellow, The Atlantic Council of the United States
Adjunct graduate professor, Georgetown University
[email protected]
for the conference:
New Economic Thinking, Teaching and Policy Perspectives
supported by
The Ford Foundation and MINDS
With BNDES, Federal Government of Brazil and CAF
Rio de Janeiro, Brazil, November 7~9, 2011
Chinese Growth through the Great Recession
Returns it to “normal” 8~10% expansion
Percent
15
East Asian
Financial
Crisis
U.S.
1991
Recession
10
2008-09
Great
Recession
U.S.
2001-02
Recession
5
?
-5
USA
China
Germany
Japan
2012
2011
2010
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1997
1996
1995
1994
1992
1991
1990
1989
0
The real culprit was U.S. money creation
through credit deregulation and nonregulation – an abuse of $ reserve creation
8
China Current Account Balance (% of U.S. GDP)
U.S. Consumer Debt (%-points above 12% of GDP)
6
U.S. Consumer Debt
U.S. Current Account balance (% of GDP)
4
2
China Current Account
0
-2
U.S. Current Account
-4
3
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-6
1980
%
The GFC Accelerated China’s Reforms
1. Damage was brief and salutary
• Little financial impact – but exports were slammed
• Forced shift to domestic demand and indigenous value-added
• Huge stimulus success illustrated quasi-fiscal capabilities
2. Many programs and projects moved forward
• Public investments: infrastructure , housing, health, education
• Private sector output surged – not a “return of the state”
3. Innovations stimulated on many fronts
• Accelerated restructuring pilots (especially in South China)
• Domestic financial diversification and innovation
• Hong Kong collaboration and RMB internationalization 4
Quarterly GDP Growth, Year-on-Year
16
GDP % Annualized
14
11.9%
12
10
8
9.1%
6.5%
6
4
2
2008
2009
2010
Quarterly Year-on-Year
Qtr-3
Qtr-2
Qtr-1
Qtr-4
Qtr-3
Qtr-2
Qtr-1
Qtr-4
Qtr-3
Qtr-2
Qtr-1
Qtr-4
Qtr-3
Qtr-2
Qtr-1
0
2011
5
Q-on-Q GDP Growth, Seasonally Adjusted
16
GDP % Annualized
15.2%
14
12
9.1%
10
8
7.6%
6.5%
6
4
2
1.2%
2008
2009
Quarter-to-Quarter SA
2010
Qtr-3
Qtr-2
Qtr-1
Qtr-4
Qtr-3
Qtr-2
Qtr-1
Qtr-4
Qtr-3
Qtr-2
Qtr-1
Qtr-4
Qtr-3
Qtr-2
Qtr-1
0
2011
Quarterly Year-on-Year
6
Exaggerated Issues to Remember
1. China doesn’t cause “global imbalances”
• China’s first surplus in 2005 was too late to cause the GFC
• The US 1998-2007 credit bubble caused large US trade deficits
• Hence, the U.S. trade deficits also caused China’s large savings
2. Consumption-investment (C-I) imbalances?
• China’s high investment (I) rate is the source of rapid growth
• A falling consumption (C) rate is normal; C growth is rapid
3. China’s exchange rate is not misaligned
• Long-term real trends indicate it is in a reasonable range
• Balassa-Samuelson logic doesn’t apply for such a short period
• China’s large trade surplus represents a kind of Dutch disease.
7
Basic Policies – Keynesian Stimulus
1. Limited financial sector contagion
• Tightly managed capital account eliminated direct exposure
• Quickly substituted yuan and HK$ trade letters of credit
• Identified U.S. dollar credit abuses as main crisis culprits
2. Large job-focused quasi-fiscal stimulus
• 15% of GDP over two years – within months of Lehman Bro.
• Financed overwhelmingly by directed bank credit
• Projects were infrastructure and housing – not balance sheets
3. Social welfare transfer payments to the poor
• Encouraged consumption, especially of consumer durables
• General funding expansion for education and safety nets 8
Four-dimension Explanation of Success
I.
Institutional economic leadership capacity
II. Heavy focus on public goods provision
III. Conscious attention to demand adjustments
IV. Rapid strengthening of profit incentives
9
Five-dimension Explanation of Success
0. Values, Norms and Principles
I.
Institutional economic leadership capacity
II. Heavy focus on public goods provision
III. Conscious attention to demand adjustments
IV. Rapid strengthening of profit incentives
10
I. Institutional Economic Leadership
1. Corporate government structure
• Executive function is by a management committee – The SC
• Communist Party is all-pervasive system of outside directors
• Web of checks, balances and consultation institutions
2. Farsighted policy implementation abilities
• Most powerful agency is Economic and Reform Commission
• Investment planning & project design are ahead of the game
• Statistical information is adequately reliable
3. Quick decisions to meet short-term shocks
• Information and analysis come together rapidly
• Leadership selection insulated from crippling corruption
11
II. Focus on Public Goods
1. Infrastructure, education and health
• Considered necessary to enable healthy market forces
• Investments extend to rapid expansion of strategic sectors
2. Financed from a repressed banking system
•
•
•
•
Non-risk-taking depositors enjoy little if any real return
Commercial banks lend to development banks and to projects
More efficient than a liberalized market-based banking system
Capital controls support repression and strengthen stability
3. Moderate crime, corruption & social unrest
• Wrenching changes and unmet expectations are major issues
• Avoidance of overly rigid “rule of law”
12
III. Macroeconomic Demand Management
1. Quantitative credit controls and interest rates
• Lending patterns and scale receive targeted adjustments
• Interest rates important for moderating deposit growth
• “Macroeconomic” in Chinese includes “sectoral adjustments”
2. Three-decade pattern of macro fluctuations
• Growth rates slow and speed up – independent of exports
• Complex origins – inflation concerns and a grain cycle
• Fluctuations also useful for reform implementation
3. U.S. credit bubble: a demand disturbance
• Beijing couldn’t control combo of FDI and export demand
• Slowing domestically-based demand caused trade surpluses
13
IV. Profit and Income Incentives
1. Thirty-plus years enabling market forces
• Land reform, state enterprise privatization and labor reform
• Freeing up rural-to-urban migration seeking jobs & housing
• Price reform’s major shift in direction of relative scarcities
2. Retained earnings and direct equity funding
• Shadow (opportunity-cost) rates of return are very high
• Active investors manage risk carefully
• Labor pay levels correlate highly with educational attainment
3. Political influence of wealthy is limited
• There is no campaign finance issue
• Lower-level corruption is at normal levels for GDP/capita14
0. Values, Norms & Principles
1. Nationalism and poverty reduction
• Leadership’s self-evaluation for national effectiveness
• Both lip service and resources aimed at poverty reduction
• Shared emphasis on economic rights and personal rights
2. Confucius and Daoism, not Stalin
• Axial Age (c. 500 BCE) had China ahead of the Greeks
• Emphasis on individual responsibility for welfare of others
• Harmonious development has deep Confucian roots
3. Rights to petition for grievances have limits
• Tiananmen demonstrations were not pro-democracy
• Administrative litigation law frequently leads to settlement15
How can we evaluate the developed West?
0. Values, Norms and Principles
I.
Institutional economic leadership capacity
II. Heavy focus on public goods provision
III. Conscious attention to demand adjustments
IV. Rapid strengthening of profit incentives
16
What about the teaching of Economics?
0. Values, Norms and Principles
I.
Institutional economic leadership capacity
II. Heavy focus on public goods provision
III. Conscious attention to demand adjustments
IV. Rapid strengthening of profit incentives
17
Thank you
[email protected]
18
China Pre-GFC (Global Financial Crisis)
1. Poised for new growth after 1990s’ reforms
• Enterprise, labor, banking, fiscal, foreign exchange reforms
• Sale of small & medium-sized SOEs; dramatic worker layoffs
2. Both benefits and distortions from WTO
• Huge surge in low-skill foreign “assembly” platforms
• U.S. credit bubble drove excessive U.S. imports from China
• Results: structural distortions & pressure for RMB appreciation
3. Rapid growth & eventual overheating
• Not export-led growth; rather, export-led overheating
• Accelerated urbanization and real estate construction
• Problems: pollution, land disputes, inequalities, inflation
19
Implications for Global Reform – Wish List
1. Internationally binding bank regulation
•
•
•
•
Global enforcement of commercial/investment bank separation
Uniform transparency & regulation of derivatives markets
Mandatory coordinated of global liquidity creation
Global standards for limiting special-interest political influence
2. International standards for capital flows
• Support for developing country short-term (s-t) capital controls
• Require s-t lending to be denominated in borrower’s currency
3. Pro-development trade standards
• Legitimacy for pro-development strategic protection regimes
• Agreement on protection sequences to optimize labor skills
20
China’s Trade Balance: Is this current account
component sensitive to exchange rate movements?
6
Trade Balance in Goods and Services as % of U.S. GDP
4
Rest of World
1.8%
2
China
1.6%
0
-2
3.4%
United States
-4
U.S.
Rest of World
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-6
China
21
Is the yuan now following a basket?!
US$ per 10 yuan
US$ per euro
1.55
Chinese yuan (right side)
1.50
1.45
1.40
1.35
1.30
euro (left side)
1.25
US$ per euro
January
December
November
October
September
2010
August
July
June
1.20
1.53
1.52
1.51
1.50
1.49
1.48
1.47
1.46
1.45
1.44
1.43
US$ per 10 yuan
22
Hong Kong’s RMB role: Highly Strategic
1. Assist Hong Kong’s economy
• Extension of CEPA (Closer Economic Partnership Agreement)
• Provide HK a range of privileged financial opportunities
2. Provide a safe & controlled Shanghai lab
• HK sophistication and openness promise good RMB lessons
• The mainland can control the scale of RMB offshore liquidity
3. Foster long-term RMB internationalization
4. Emphasize China’s “Triffin” critique of U.S.
5. Draw Taiwan closer to the mainland
• Show potential benefits of One-Country-Three Systems
23
Hong Kong’s Advantages
1. High Quality of Hong Kong institutions
• Human capital is high-quality and globally smart
• Legal and regulatory systems have excellent reputations
• Language – English and Chinese fluency
2. Geographical location
• Increasingly integrated coordination with mainland policies
• Well situated for providing ASEAN financial services
3. Mainland political commitment
• Beijing’s need to maintain HK’s yuan preeminence
• General support of HK as a successful SAR
24
Regional Trade and Business Implications
1. As Beijing pushes yuan settlement …
• Hong Kong’s advantages will draw international companies
• China’s importance for ASEAN trade will grow rapidly
2. If future yuan offshore liquidity is large …
• Other world financial centers will need to decide how to move
• Financial sector lobbying in other countries could give China a
strong bargaining chip in related (or unrelated) negotiations
3. Offshore lessons speed up Shanghai reforms
• Mainland financial business opportunities will expand
• Chinese financial firms will likely expand penetration of other
global financial markets
25
China’s current account surplus wasn’t
significant until late in the U.S. bubble
%
4
Current Account Balance as Percent of U.S. GDP
United States
China
Rest of the World
Rest of the World
2
China
0
-2
United States
-4
26
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
-6
Bubble-matching surpluses were elsewhere; US
housing price collapse matched China’s surpluses
12
10
Current Account Balances as Percent of U.S. GDP
and U.S. Housing Price % Changes*
%
% Change in
U.S. Housing
Prices*
8
6
Northern Europe, Nonmainland-China East
Asia and Oil exporters
4
2
China
0
-2
United
States
-4
* Inflation-corrected (CPI-corrected) housing prices (source: www.clevelandfed.org)
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
-6
27
What caused China’s surpluses?
Sharply slower investment to fight inflation.
China’s exchange rate didn’t do this:
130
Bil. US$ (log scale)
Exports
1030
China's
690 Goods & Services
Exports and Imports
Imports
460
310
210
140
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Exports
Imports
hi
28
Is the RMB low? … or high?! It’s all politics!
After the euro fell in July, 2008 China decided
not to let the RMB depreciate against the US$
US$ per Euro
RMB per US$
1.8
6.5
1.7
7.0
RMB
1.6
7.5
1.5
8.0
1.4
Euro
8.5
1.3
9.0
1.2
9.5
1.1
10.0
2005
Euro (US$/€)
2006
2007
2008
2009
2010
RMB (yuan/US$)
RMB hypothetical 'basket' value (yuan/US$)29
Not during the November-December
Lame Duck U.S. Congressional Session!
US$ per 10 yuan
US$ per 100 yen
1.29
Chinese yuan (right side)
1.27
1.25
1.23
1.21
1.19
1.17
US$ per 100 yen
January
December
November
September
2010
August
July
June
1.15
October
Japanese yen (left side)
1.53
1.52
1.51
1.5
1.49
1.48
1.47
1.46
1.45
1.44
1.43
US$ per 10 yuan
30
Currency Movements versus $ During the Crisis
Japan
%
Japan
25
Thailand
20
Switzerland
Singapore
15
Malaysia
10
Thailand
China
Canada
5
China
0
Canada
Brazil
India
-5
Brazil
India
Czech Rep.
Denmark
-10
Euro Zone
-15
Mexico
United Kingdom
Russia
-20
-25
2008
2010
Euro
Norway
Vietnam
Mexico
United
Kingdom
31
Finally, China’s reserves aren’t “massive.”
At end-2010, still only 26% of M2.
100
Percent
96%
Singapore
90
80
70
60
Foreign
Reserves as a
Share of Money
Supply
73%
Malaysia
50
40
India
30
S. Korea
20
20%
10
China
China
India
S. Korea
Malaysia
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
Singapore
Income Distribution
–
Long-term
Trends
Figure 1. Rural-Urban Migration and Inequality
1985
Household
Density*
.8
.6
.4
China
Total
A
B
C
1985
Urban
Gini
Coefficient
China Total
Rural
.2
Rural
Poverty Lines
Urban
0.3097
.0
.8
.6
2005
A
Household
Density*
B
Poverty Lines
A - Chines e Poverty Line
B - Old $-per-day Line
C - New $-per-day Line
C
China
Total
.4
Rural
.0
.8
.6
Gini
Coefficient
0.4557
Urban
.2
2005
2025
A
Hous ehold
Dens ity*
B
2025
C
China
Total
Urban
.4
.2
Rural
Gini
Coefficient
0.4526
.0
00
100
100
300
700
1,600
3,600
7,900
17,500
39,000
Household annual per-capita income in 2005 constant US$ (at 1985 average exchange rate)
Rural-urban Income Gaps and Farm Labor
Shares, China & Japan
1.2
China
Rural-Urban
Parity
Japan
1.1
1974
0.9
1953
0.8
0.7
Japan
1985
0.6
1960
China
0.5
1996
0.4
0.3
2007
0.2
60
50
40
30
20
Share of Labor Force in Agriculture (percent)
10
Rural-Urban Income Ratio*
1.0
China’s Seven Economic Regions
Regional per-capita income divergence
…
But with rapid growth in all regions
6,404
E. Coast
S. Coast
N. Coast
Central Core
N. Hinterland
S. Hinterland
Far West
7.7
7.4
6.7
6.6
6.6
6.0
4,901
4,196
3,556
3,218
3,062
2,662
2,410
Ave. Annual Real
Growth Rate
1985-2000 (%)
Per-capita
Rural
Income
Per-capita
Rural
Income
Log Scale
1,258
8.5
E. Coast
7.7
S. Coast
7.4
N. Coast
6.7
Central Core
6.6
N. Hinterland
6.6
S. Hinterland
6,404
4,901
4,196
3,218
3,062
6.0
Far West
Ave. Annual Real
Growth Rate
1985-2000 (%)
2,662
2,410
Per-capita
Rural
Income
Per-capita
Rural
Income
1,258
1,113
1,004
879
846
748
743
Rural Household 1985-2005
Real Per-capita Net Income
(Constant 2000 Yuan)
1985
2005
1,113
1,004
879
846
748
743
Log Scale
8.5
Rural Household 1985-2005
Real Per-capita Net Income
(Constant 2000 Yuan)
1985
1990
1995
2000
2005
Beijing’s SO2 levels are below Japan’s &
Korea’s earlier levels
Average annual
Parts per Million
Ambient SO2 Concentration
1988 Tokyo, 1968
.06
.05
1965
1997
Beijing
.04
.03
Seoul
All
Japan
1999
.02
1974
1993
2004
1983
.01
2000
1997
.00
0
Japan
5,000
Beijing
10,000
Seoul
15,000
Tokyo
20,000
25,000
GDP/capita 2000 US$