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Key Economic Policy Choices Facing China’s New Leaders
(China Debate – March 26, 2013)
Yukon Huang Senior Associate Carnegie Endowment Former World Bank Director for China

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China is becoming a more normal economy
• Moving to a more sustainable but slower growth and becoming more balanced regionally. • Less reliant on central interventions and driven more by market driven forces influencing key prices and capital flows. • But as a more normal economy China must deal with new risks. • It is now more vulnerable to global cycles and less able to rely on state investments to drive growth. • This could make the new leadership less secure than before.
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Many Views on China’s Reform Agenda
• “China needs to rebalance its economy”

• “It is about getting prices right – interest rates are too low and the exchange rate is undervalued”
• “China’s trade surpluses and its undervalued exchange rate drive trade deficits in the West”

Are these myths or realities?

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First, a snapshot of China’s growth pattern : Rapid and relatively stable growth – led by the coast but now by the interior
GDP Growth Rates - national and regional
18% 16% 14% 12%

10%
8% 6% 4% 2% 0%

China

East

Central

West
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China- Regional Growth 2011 – Center Now Rising

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(1) “China needs to rebalance its economy ”– increase

consumption and reduce investment”
(% of GDP)

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But declining consumption share is characteristic of successful industrializing countries

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China leads in growth of consumption

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(2) Are Interests rates too low in China?: 3-month deposit rates and annual inflation rates
3-month rate China Japan Singapore 3.88 0.16 0.26 Inflation 2.0 -0.3 3.6

South Korea
Taiwan UK

2.76
0.94 0.49

1.4
3.0 2.7

US
Source: The Economist, March 8, 2013

0.28

1.6

(3) US - China trade balances are not linked

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China's trade balances with the US, EU, Canada, select Asian economies, and other commodity exporters
200

US
150

EU
100

Canada
Billions of U.S. dollars 50

Selected ASEAN*
0 1995 -50 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Japan

South Korea
-100

Taiwan
-150

-200
*Selected ASEAN includes Malaysia, Philippines, and Thailand. Other commodity exporters includes countries who had trade surpluses with China in 2010 and exported more than $1 billion in primary commodities to China in 2010, excluding Hong Kong, Singapore, and the other economies depicted.

Other Commodity Exporters*

Three key choices that would support growth and address increasing social unrest
• Role of the state

• Role of the banking and fiscal systems • Pace and pattern of urbanization
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(1) Need a new growth model that disentangles the state from other economic agents
Past

GDP
Party/ Government SOEs State Banks

GDP
Future
Party/ Government Private Sector SOEs Banks (state and private)
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Promoting competition between state and private enterprises to drive future growth
Robust

China

Rest of the World

Globalization

Strong

Province A

Province B,C…

Regional Competition

Weak

State Enterprises

Private Enterprises

State vs. Private Role of the State Firms

(2) China’s banks play too large of a role
Money Supply (M2) as Percent of GDP, 2011

United States

South Korea

India

Brazil

China
0 40 80 120 160 200

China’s budget plays too small of a role
(% of GDP) High Income OECD Total Expenditures Social Expenditures Other Middle Income Upper Lower

China

41.6

33.1

36.1

25.7

26.9 14.7

16.2 16.9

15.4 20.7

9.4 16.3

*Social expenditures include health, education, and welfare spending

3. Premier Li Keqiang’s support for urbanization would help sustain rapid growth and deal with income disparities:

- Reform migration and urban management policies - Mega-cities should be larger and density needs to be increased in many cities

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80

Urbanization needs to accelerate

70

60

Percentage of Total Population

50

40

Unconstrained Migration
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Current Path

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10 1980 1985 1990 1995 2000 2005 Year 2010 2015 2020 2025 2030

Urban density needs to be increased

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Risks are as much political as economic
• For these three choices, strong vested interests militate against change: links between the Party and economic agents and between Beijing and the regions. • Collective decision-making makes it difficult to address politically charged concerns. Will this change? • China’s regionally decentralized governance system has encouraged economic liberalization but retarded political liberalization.

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