Growth and Transformation of Chinese

Economy

Group Members:
1. Abhai Singh Solanki (X001-18)
2. Anurag Srivastava (X007-18)
3. Avnish Kumar (X010-18)
4. Suprabha Kumari (X020-18)
History of China’s Development
 First Five-Year Plan (1953-1957)
 A new economic order modeled on the Soviet Union example,
emphasizing the development of capital-intensive heavy
industry
 Great Leap Forward (1958-1960)
 The break away from the Soviet model and introduction of a
new program aimed at rapidly raising industrial and agricultural
production
 Cultural Revolution (1966-1976)
 The pursuit of Mao’s own development strategy of a self-reliant
economy and political struggle
 Economic Reforms (1978- )
 To move the economy from a planned economy to one that is
more market-oriented
Model of China Development

 #1: Socialist planned economy:

 Government planning is basic means of allocating resources
 Production quotas: quantity rather than quality
 Suppress consumption to increase saving: invest in heavy
industry
 Self-reliant and uninvolved in foreign economic relation
 Results:
 Overuse of industrial equipment
 Shortage in supply: production and consumption goods
 Unstable economy growth
Model of China development

#2: Socialist market economy:

Market is basic means of allocating resources
State controls at the macroeconomic level
Economic structural Reform
Results:
Competition: establishment of the diversified ownership
Efficient: profit maximization
Open: involved in foreign economic relation
Fast and stable economy growth
GDP based on 1990 International GK dollar, share of world total
Chinese Annual Real GDP Growth: 1979-2018(Percent
Change)
GDP based on PPP, share of world total (%)
 China’ economy experiences impressive changes in favor of marketization. In fact,
as far back as1996, 81% of the production materials, and 93% of retail sales, had
already been traded according to the market pricing mechanism.
State Sector’s Contribution to gross
industrial output
Contribution of state-owned sector to the total urban
employment (%)
Contribution of state-owned sector to the total tax
revenue (%)
 Comparison of Two Development Models

China (1952-1977) China (1978-1998)

45000 45
1200000 900
GDP (USD million)
40000 40 GDP (USD million) 800
DPG per capita (USD)
1000000 DPG per capita (USD)
35000 35 700

30000 30 800000 600

GDP per capita

GDP per capita

25000 25 500

GDP
GDP

600000
20000 20 400

15000 15 400000 300

10000 10 200
200000
100
5000 5

0 0
0 0

1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
Industrial structure: China (value-added as % of GDP) Vs India (Value-
added as % of GDP)
China India

China: 1960-1969 1970-1979 1980-1989 1990-1999 2000-2011 1960-2011

37.2 32.3 29.4 20.5 12.0 25.7

Agriculture Industry 35.2 44.5 44.3 45.4 46.5 43.3

Service
27.7 23.2 26.3 34.1 41.5 31.0

1960-1969 1970-1979 1980-1989 1990-1999 2000-2011 1960-2011

India: Agriculture 42.2 38.6 31.7 27.4 19.4 31.4

Industry 19.9 22.3 25.5 26.1 27.3 24.3

Service

37.8 39.1 42.8 46.5 53.3 44.3

Data source: World Development Indicators, April 2013, World Bank

 New Challenges to China

 Three transitions
 Population and environmental pressures
 Employment insecurity
 Growing inequality and poverty
 Macroeconomic instability stemming from incomplete reforms
Three Transitions

 From a planned economy to a market-based one

 From a rural, agricultural society to an urban, industrial one
 From a non-WTO nation to a WTO one
 Population and Environmental
Pressures
Population and Urbanization in China

Large in number (1.4 billion) 140000

Population (year-end) (10 000 persons)
35

% of Urban
120000 30

Low growth rate (1%)

Persentage of Urban Population

100000 25

Population
80000 20

Low urbanization (30%) 60000 15

40000 10

Large number of floating 20000 5

population (~100 million)

0 0

52

62

70

78

85

87

89

91

93

95

97
19

19

19

19

19

19

19

19

19

19

19
 Employment Insecurity

4 Urban
Unemploy
3 ment Rate
2

0
1978 1982 1985 1988 1991 1994 1997
 Growing Inequality
Per Capita Annual Income of Urban and Rural Household and The Related
Index
Per Capital Annual Net Income of Per Capital Annual Disposable Income of
Rural Household Urban Households
Year (USD) Index (1978=100) (USD) Index (1978=100)
1978 16.15 100.0 41.52 100.0
1980 23.13 139.0 57.75 127.0
1985 48.08 268.9 89.37 160.4
1986 51.25 277.6 108.78 182.5
1987 55.94 292.0 121.19 186.9
1988 65.89 310.7 142.85 182.5
1989 72.73 305.7 166.35 182.8
1990 82.99 311.2 182.61 198.1
1991 85.68 317.4 205.63 212.4
1992 94.80 336.2 245.05 232.9
1993 111.44 346.9 311.66 255.1
1994 147.64 364.4 422.76 276.8
1995 190.77 383.7 517.90 290.3
1996 232.90 418.2 585.11 301.6
1997 252.73 437.4 623.98 311.9
1998 261.43 456.8 656.00 329.9
(5) Policy and further reforms:

 The spread of market forces must be encouraged

 The government must begin serving markets (by building the legal, social
physical, and institutional infrastructure)
 Integration with the world economy must be deepened – facing WTO
(6) Summary
 Economic prosperity varies substantially around the world - some countries are times richer than others
 Economic growth rates also very substantially - the relative position of countries can change over time
 The standard of living depends on the economy’s productivity
 Productivity depends on 4 determinants - physical capital, human capital, natural resource, and technological
knowledge
 Government policies can influence the economy’s growth rate in many ways:
 encouraging saving and investment
 encouraging investment from abroad
 fostering education
 maintaining property rights and political stability
 allowing free trade
 controlling population growth
 promoting the research and development of new technologies
 The accumulation of capital is subject to diminishing returns:
 The more capital an economy has, the less additional output the economy gets from an extra unit of capital,
 higher saving leads to higher growth for a period of time, but growth eventually slows down as the economy
approaches a higher level of capital, productivity, and income,
 the return to capital is especially high in poor countries (catch-up effect).
FDI and Export

 FDI inflow can influence a country’s terms of trade.

 China has experienced a sustained growth in FDI inflow since its
economic reforms. According to the general principle of the effects
of international transfers of income on a country’s terms of trade,
there should be an improvement in the terms of trade of the recipient
country.
 However, the decline of China’s general terms of trade has not
changed.
 To find the explanation, this paper points out, we should look at the
sectoral structure of China’s FDI inflow rather than the aggregate
FDI.
FDI: Fountainhead of China’s
Economic Growth
 China has grown rapidly over the last 25 years from a
very low income level.

 Average annual GDP growth 1980-2002: 9.5 percent

 Per capita GDP rose from about $300 in 1980 to $1000 in

2002
 Output = ƒ (capital, labor)
 FDI brought in the capital and technology
 Capital financing →foreign debt
 →Foreign direct investment
 China selected FDI
Share of Chinese Merchandise Exports and Imports by
Foreign-Invested Enterprises in China: 1990-2018
China’s Merchandise Trade: 2000-2018 ($
billions)
Annual Change in China’s Merchandise Exports and
Imports: 2000- 2018 (percent)
Since the 1990s, China’s tariff rates gradually
decreased. In particular, after the entry into WTO in 2001,
the rates significantly declined.
International comparison: FDI net inflows (% of GDP)
FDI inflows to China, 1990-2005
China receives FDI (capital and skills)
→economic growth
→commodity consumption
→imports increase
→surplus of trade balance
→invest in foreign securities
→lower interest rates in the USA
Export and FDI

With substantial foreign investments inflow, the capital-

and technology-intensive sectors, facing the import
competition, have not enjoyed a satisfying expansion, but
suffered from a further contraction.
This biased growth among the exports sectors, causing the
excess supply and the excess demand for the capital- and
technology-intensive products, has aggravated the
deterioration of China’s terms of trade.
 China, An EmergingSuperpower
China is experiencing a U curve (1820‐2030)
Gross Domestic Product Shares World Total, Four Major Powers, 1–
2030

Source: Angus Maddison, “Statistics on World Population, GDP, and per Capita GDP, 1–2003 AD” (www.ggdc.net/maddison/); Angus
Maddison, Chinese Economic Performance in the Long Run, 960–2030 AD (Paris: OECD, 2007).
 Economic Development: Past,
Present, and Future

• China’s Potential for Further Economic

Growth
– International and domestic catch‐up effect
– High domestic savings and high investment
rates
– Expected increase in human capital
– Growth of the nonagricultural sector
– Steady increases in total factor productivity
 Economic development
• China creates 50 years economic growth
gold age (1978‐2030 , 2011 estimation)

Growth index in China (1978=1.00)

1978‐2010 2010‐2030 1978‐2030

1978 2010 2020 2030 Annual growth Annual growth Annual growth
(%) (%) (%)

GDP 1.00 20.57 44.4 87.4 9.9 7.5 9.0

GDP per
1.0014.71 30.3 62.5 8.8 7.0 8.3
capita
 Demographic Challenges
• The PRC’s rapid demographic transition
– Modern demographic transition, 1949–78
– An aging society: fewer children and more
seniors, 1978‐present
• Therefore, we need to adjust population
control policies
China's demographic transformation (Population
in millions)
 Demographic Challenges
• Urbanization: the main driving force of
future development
Urban Population Growth, China, the World, and the United States, 1950–
2030
Period China World United States
1950‐1980 3.85 2.91 1.75
1980‐2000 4.47 2.50 1.41
2000‐2030 2.19 1.86 1.16
1960‐1970 0.99 2.94 1.73
1950‐2030 3.38 1.44 1.44
Source: UN Department of Economic and Social Affairs, World Urbanization Prospects: The 2008 Revision.
 Demographic Challenges
Urbanization, China and the United States, 1950–2030 (2010 estimation)

Urban population (million) Urbanization rate (percent) Share of world urban

population (percent)
Year
China United Ratio China United
Gap China United States
States States
1950 61.7 101.2 0.61 11.2 64.2 53.0 8.37 13.74
1960 130.7 130.3 1.00 19.7 70.0 50.3 13.12 13.08
1970 144.2 154.6 0.93 17.4 73.6 56.2 10.83 11.61
1980 191.4 170.3 1.12 19.4 73.7 54.3 11.00 9.78
1990 302.0 192.8 1.57 26.4 75.3 48.9 13.28 8.48
2000 459.1 225.3 2.04 36.2 79.1 42.9 16.09 7.90
2010 607.2 259.0 2.34 47.0 82.3 35.3 17.38 7.41
2020 756.3 290.7 2.60 54.0 84.9 30.9 17.97 6.91
2030 879.9 318.5 2.76 60.0 87.0 27.0 17.72 6.41
Source: National Bureau of Statistics of China, Statistical Data of the 55 Years of New China (2004); UN Department of Economic and
Social Affairs, World Urbanization Prospects: The 2008 Revision; author’s calculations.
Urbanization:
The process of urbanization is another driver of China’s economic growth. Judged by
the urban population’s share of the total population, over the period of 1960-1978, it
slightly increased from 16.2% to 18.6%. In 2000, however, it almost doubled and jumped
to 35.9%.
International comparison: Urbanization in
terms of population (urban)

Country\Year 1960-1969 1970-1979 1980-1989 1990-1999 2000-2011 1960-2011

China 17.4 17.8 22.5 30.6 43.2 26.9

India 18.7 21.2 24.2 26.5 29.4 24.2

United States 71.7 73.7 74.4 77.0 80.8 75.7

Japan 67.3 74.7 76.7 77.9 85.7 76.8

Germany 71.8 72.5 72.8 73.2 73.4 72.8

Developed countries 66.3 70.5 72.8 75.0 78.4 72.8

 Urbanization
• The world is more and more urbanized (2011 estimation)
Urbanization, China and the UnitedStates, 1950–2030
Share of world
Urban population (million) Urbanization rate (%)
Year urban population (%)
China US China/US China US Gap China US
1950 61.7 101.2 0.61 11.2 64.2 53.0 8.37 13.74
1960 130.7 130.3 1.00 19.7 70.0 50.3 13.12 13.08
1970 144.2 154.6 0.93 17.4 73.6 56.2 10.83 11.61
1980 191.4 170.3 1.12 19.4 73.7 54.3 11.00 9.78
1990 302.0 192.8 1.57 26.4 75.3 48.9 13.28 8.48
2000 459.1 225.3 2.04 36.2 79.1 42.9 16.09 7.90
2010 665.6 259.0 2.57 49.7 82.3 32.6 19.05 7.41
2020 845.0 290.7 2.91 60.0 84.9 24.9 21.00 6.91
2030 1020.0 318.5 3.20 70.0 87.0 17.0 22.90 6.41

Note: 2020 and 2030 data is estimated by author, annual growth rate from 2010‐2030 is 2.15%, 1978‐2010 is 4.3%.
Source: National Bureau of Statistics of China, Bulletin on Census 2010; UN Department of Economic and Social Affairs, World
Urbanization Prospects: The 2008 Revision; author’s calculations.
 Education and HumanResources
• How should China become the world’s leading human
resources power?
– It is imperative that the state accelerate the popularization of
preschool education, aiming to raise enrollment in
kindergartens to over 75 percent by 2020
– It is essential to improve the quality of teachers
– Equality in education should be made the most important
policy goal
– The educational system must be reformed, and a premium
must be placed on institutional innovation
– Both international and domestic education resources should be
fully employed
– An investment system should be established in which the
government is the main investor and social organizations
provide supplementary support
 Science, Technology, and Innovation
• Measurement of science & technology power
– The first capacity is the country’s innovative capacity in
science
– The second capacity is innovative capacity as regards
technology
– The third capacity is the country’s capacity to use new
technologies
– The fourth capacity is the capacity of a country to use
global information
– The fifth capacity is the capacity of a country to invest in
R&D, measured by the country’s R&D expenditures
(purchasing power parity, or PPP)
 Science, technology and innovation
• Five major indicators are used to measure
science, technology and innovation power,
and China will be of course a superpower by
2030 (2011 estimation)
Measurements of science and technology power
Dimension Indicator Period Weight Data source
Scientists & engineers
Human resource 95‐07 1/5 UNESCO
engaged in R&D
Input
Investment
R&D expenditure 80‐09 1/5 OECD
capacity
Science innovation
International paper 80‐09 1/5 Web of Science
capacity
Output Technology innovation Patent applicant filed
80‐08 1/5 WIPO
capacity by resident
Market capacity High tech productexport 80‐08 1/5 World Bank
 Science, Technology, and Innovation

• Driving forces of China’s rise in science

and technology
– Economic and S&T globalization
– The business sector
– Government guidance and promotion
– Sustained high‐speed economic growth
– China 2020: an innovative country
 Climate Change and Sustainable Growth
Direct Economic Losses Caused by Natural
Disasters and their Proportion of GDP,
1990–2008
• China: worst victim of Proportion in Proportion in
Economic loss
Year GDP of the added GDP
climate change (billion yuan)
year (%) of the year (%)

1990 66.6 3.6 40.6

– Natural disasters since 1991
121.5 5.6 39.6
ancient times (flood
)
1992 85.4 3.2 17.0
– Meteorological disasters 1993 99.3 2.9 12.4
1994 187.6 4.0 15.5
– Natural disasters and 1998
300.7 3.8 62.9
agricultural losses (flood
)
2003
– Natural disasters and (SARS)
148.2 1.1 10.9

economic loss 2005 204.2 1.11 10.9

2006 252.8 1.21 10.9
2007 236.2 0.96 8.1
2008 1175.2 3.91 47.3
Source: National Bureau of Statistics of China, Ministry of Civil Affairs, Report of the Damage Caused by Disaster in China: 1949–
1995 (1995), pp. 403–07; National Bureau of Statistics of China, Statistical Bulletin on Economic and Social Development;
author’s calculations.
 Climate Change and Sustainable Growth
• China’s roadmap for tackling climate change
– Breaking the stalemate and working together to reduce
emissions
– Climate change policy objectives for 2020
• Energy conservation: reduce per capita GDP energy consumption by 20
percent every five years, with the 2006–20 cumulative reduction
equaling 50– 80 percent
• Emissions reduction: reduce discharges of major pollutants by 10
percent every five years, with the 2006–20 cumulative reduction of
SO equaling 30–40 percent and of CO equaling 50 percent
2 2

• Innovative green technologies: become a collaborator, a leader, and a

user
• Green energy market: become the world’s largest wind power and
solar power market, become a producer and exporter of new energy
technologies and equipment, and increase the use of clean energy to
20 percent of all energy consumed
• Green ecology: build the world’s biggest artificial forest carbon sink
and the world’s largest green screens (shelter belts in the northeast,
the north, the northwest, and the southeast coast)
– Other Policies Associated with Climate Change
 China’s Debt Level Raises Concerns
 Another concern about Expansion of Assets and Liabilities is Asset Price Bubble.
 Real Estate Bubble
 Tight land supply shall be blamed more than monetary policy.
 High housing-price-to-income ratio (20), but low personal-housing-loan-to-GDP
ratio(20%). Only 60% of house buyers apply for housing loan, average housing loan to
housing price ratio is 60%. The personal-housing-loan-to-GDP ratio is also low compared
to other countries.
 Moderate asset bubble can improve liquidity of enterprises, thus promoting investment
and growth (Farhi and Tirole, 2011).
 Bubbles and foreign exchange reserve can act as stores of value (Ventura and Voth, 2015)
 If return of SOEs < return of bubble < return of non-SOEs, investment will flow from
SOEs to bubble, factor demand of SOEs decreases, so non-SOEs can use more and
cheaper factor. In this process, percentage of SOEs decreases while non-SOEs increases.
 Key problem: is return of bubble lower than non-SOEs or new industries?
 China’s Debt Level Raises Concerns
 Real Estate Investment in Land Reshapes Wealth Distribution, but not Increases Capital Formation
 Land acquisition costs increase fixed assets investment and accumulates debt simultaneously, which
cannot promotes total capital formation
 The gap between investment and capital formation is widening since 2004

90% 180

80% 160

70% 140

60% 120

50% 100

40% 80

30% 60
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Capital Formation (Percentage of GDP) Fixed Assets Investment(Percentage of GDP)

House Price Index (2005=100,RHS)
Data Source: National Bureau of Statistics
House Price, Total Capital Formation and Fixed Assets Investment（1997-2016）
 Two Stages of China’s Assets and Liabilities Expansion
 Crowd In and Crowd Out
 Based on the interactive relationship between expansion of assets and liabilities and development
of the real economy, the expansion of China’s macro-economic expansion of assets and liabilities
from 1998 to 2017 is divided logically into two periods of “crowd in” and “crowd out”.
 Stage 1: Balance Sheet Expansion Crowd in Real Economy （1998-2007）
 Three crucial structural reforms creating space for balance sheet expansion
 Tax Sharing Reform: Infrastructural Construction
 Housing Distribution Reform: Real Estate Development
 SOE Reform and Entry into WTO: Manufacturing Development
 Globalization Dividend lead to high return of real economy:
 Fragmentation of production along the global value chain dominated by multinational firms.
 Main advantage of China: low cost and high quality.
 Problems of resource allocation efficiency and innovation are not very important.
 Two Stages of China’s Assets and Liabilities Expansion
 Stage 1: Balance Sheet Expansion Crowd in Real Economy （1998-2007）
 Collateral Value of Land and Housing: In circumstances of financial repression, land and house is
used as collateral, the rising value of land and house means more liquidity and greater borrowing
capacity for private sector.
 Enterprises’ Leverage Decline: the ratio of total debt to total asset was decreasing from 1998 to 2007.
Investment efficiency is improved and enterprises’ performance is positive.

Data Source: National Bureau of Statistics

Figure Leverage of Industrial and Real Estate Enterprise
(1999-2015)
 Two Stages of China’s Assets and Liabilities Expansion
 Stage 2: Balance Sheet Expansion Crowd out Real Economy （2008-2017）
 The Turning Point: 4 Trillion RMB Fiscal Stimulus Package after Global Financial Crisis
 Mechanism of Crowd Out
 Insensitivity of Interest Rate: Due to soft budget constraint and asset bubble, investment and financing
decisions of local government, SOEs and real estate enterprises are insensitive to interest rate.
 Structural Change of Financial System: The shadow banking system is rising and financing interest-
rate-insensitive sector, together with traditional credit.
 Private Sector Squeezed: the real interest rate is higher than profit rate of industrial enterprises, which
causes many capital rushing from real economy to financial
12 market and real estate market.
 Return of Real Economy Decreases: 10

8
 Decline of demographic dividend 6

 Lagged development of industrial structure 4

2
 Factor allocation inefficiency
0

 Unfavorable global economy growth -2

2006
1999
2000
2001
2002
2003
2004
2005

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Real Interest Rate Profit Margin of Industrial Enterprises
Data Source: National Bureau of Statistics, People’s Bank of China
Figure Real Interest Rate and Profit Rate （%）
(1998-2016)
 Two Stages of China’s Assets and Liabilities Expansion
 Result: Growth Momentum Shifted from Manufacturing to Real Estate and Infrastructure
 Manufacturing investment growth fell from 62.2% in 2003 to 4.2% in 2016.
 Infrastructure investment growth remains at around 20%, while real estate investment rebounds due to
stimulus policy in 2016.
 The Change in Growth Momentum Weakens Credit Stimulus’ Boost to GDP Growth
 Manufacturing investment in the current period forms production capacity in the next period, which sustains
GDP growth and decreases credit intensity.
 Real estate and infrastructure investments in the current period produce nothing in the next period, and credit
intensity has to rise continuously for stabilizing GDP growth.
70 5

60 4.5

50 4
3.5
40
3
30
2.5
20
2
10
1.5
0
1
-10
0.5
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0

2004
1996
1997
1998
1999
2000
2001
2002
2003

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Infrastructure Manufacturing Real Estate

Data Source: National Bureau of Statistics Data Source: National Bureau of Statistics, People’s Bank of China
Fixed Assets Investment Growth: by Sectors（1996-2016） Credit Intensity: New credit per unit of additional GDP
 Policy Tools to Maintain Financial Stability
 In the Short Run, Many Policies are Introduced to Resolve Debt Problem
 Municipal Bonds for Debt Swap: China imposes 3.2 trillion RMB municipal bonds for debt swap in 2015, and the
total size is rising to 5-6 trillion RMB both in 2016 and 2017.
 Debt for Equity Swap: The debt for equity swap would allow commercial banks to swap the debt they hold in
underperforming companies for stock holdings.
 Non-performing Assets Securitization: The non-performing assets securitization is launched since May, 2016 to
encourage private capital to participate in the NPL market.
 In short run, the Probability of Debt Crisis is Very Low
 Most of debt is domestically funded, and external debt exposure is relatively small
 Large banks are State-owned and Government has capacity to inject liquidity

12000 160
140
10000
120
8000 100

6000 80
60
4000
40
2000 20

0 0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
2015-11
2015-01
2015-02
2015-03
2015-04
2015-05
2015-06
2015-07
2015-08
2015-09
2015-10

2015-12
2016-01
2016-02
2016-03
2016-04
2016-05
2016-06
2016-07
2016-08
2016-09
2016-10
2016-11
2016-12
2017-01
2017-02
2017-03
External Debt Domestic Loans
Data Source: Wind Data Source: National Bureau of Statistics
Figure Issuance of Municipal Bonds for Debt Swap since 2015 Figure External Debt and Domestic Loans
(100 Million Yuan) (Percentage of GDP)
 Main messages

 Growth has slowed somewhat but remains strong.

 China will remain the major driver of global growth.
 Financial risks from high corporate debt are rising and need to be
addressed urgently.
 Innovation and entrepreneurship should contribute more to
productivity growth.
 Streamlining the social assistance system and the distribution of
resources in education and health would enhance inclusiveness.
 At the current trends, the standard of living in China will surpass that of the US in
25 years! Or, will they?

Per Capita Income

That is, can China maintain it’s current growth rate?

 China remains
56 the major driver of global growth
Real GDP growth

Source: OECD Economic Outlook Database.

 Rebalancing from industry to services
57
is underway

Share of industry and services in GDP

Source: National Bureau of Statistics.

 The saving rate is still very high
58

Saving rate of households and non-financial enterprises, % of GNI

Source: National Bureau of Statistics.

International comparison: Gross savings (% of GDP)
International comparison: Gross capital formation (% of GDP)
International comparison: Ratio of savings to GDP, %.
Country\Year 1960-69 1970-79 1980-89 1990-99 2000-2011
China 30.5 34.7 40.9 47.4
United States 19.9 19.6 17.8 17 14.0
Japan 35.3 35.6 31.8 30.7 25.4
Korea 8.7 22.3 26.5 35.1 31.5
Singapore -4 28.6 41.7 48.2 43.9*
Malaysia 21.9 27.1 30.2 40.7 35.5
Thailand 18.7 22.3 31 35.3 29.6*
India 12.5 17.9 20.5 23.6 31.6*
Egypt 22.6 19.9
South Africa 23.5 25.5 25 16.7 15.4
Brazil 16.8 19.35 19.8 16.8 16.6
Argentine 26.5 14.9 24.4#

United
Kingdom 20 17.6 15.7 14.4
Germany 23.8 20.6 21.4 22.6
France 24.1 18.9 19.8 19.6
East-Asia 27.8 31.6 36.4 29.5

European
Union 12.9 24.8 24.1 22.6 20.2
High income 25.6 25.5 23.1 22.8 19.6
Middle income 25.3 25.7 25.3 28.5
Low income 11.3 17.3 19.6 20.7 22.6*
World 24.5 25.3 23.4 23.1 21.0
Gap between savings and investment (% of GDP)
 The poverty rate has declined dramatically
62

Rural poverty rate

Source: National Bureau of Statistics.

 R&D spending is high
63

R&D spending as a share of GDP

Note: Latest year available.

Source: OECD MSTI database.
 Key recommendations
64
to address financial risks

• Enhance prudential regulation by requiring lenders to take into

account borrowers’ repayment ability when extending loans.
• Restrict leveraged investment in asset markets.

• Conduct a prudent fiscal policy. Channel funds to where returns are

high such as education, health and social security and avoid
misallocation of capital by allowing banks to better price risks.
• Improve the quality, coverage and timeliness of fiscal reporting.
65

Providing opportunities to all

 The tax and transfer system
66
does little for redistribution

Reduction in market income inequality due to taxes and transfers

Source: Standardised World Income Inequality Database (SWIID) Version 5.1.

• Broaden the personal income tax base and increase tax progressivity.
 Key recommendations for sharing the benefits
67 of growth by providing opportunities to all

• Base social security contributions on actual income earned.

• Increase central and provincial government social assistance transfers to
poorer areas.
• Broaden the personal income tax base and increase tax progressivity.
• Implement a broad-based nationwide recurrent property tax and consider
an inheritance tax that would include some basic inheritance allowance.
• Gradually increase and unify the pension age to 65 and then index it to
life expectancy.
• Improve administrative procedures to make it easier to draw a
pension in a different location from where it is earned.
• Increase public funding for childcare and introduce incentives to
encourage the participation of migrant children and those in rural areas in
early childhood education.
• Raise doctor salaries by allowing doctors to provide fee-based medical
services in public hospitals outside of their standard work.
 Key recommendations
68
to make growth greener

• Effectively implement the December 2016 Environmental Protection

Tax Law, stepping up enforcement efforts and raising environmental
taxes.

• Allow independent renewable generators to sell surplus energy and

link renewable capacity expansion with the extension of the local
power grid.
Political Scenario: Past,Present and
Future
 Democracy in China was introduced in the late 19th century.
 Modern Chinese leaders state that they run a "socialist democracy" where
the Communist Party of China is a central authority that acts in the interest
of the people. The Communist Party approves what political parties can
run. The Democracy Index scores China a 3.1 out of 10, classifying its
government as authoritarian.
Contemporary Policy Debates

 Consensus on “Where we have been” but debate over

“Direction are we going”
 Hu Jintao’s “Harmonious Society” Debate
-- Development brings “harmony” with political/legal
restraints
-- Rapid marketization exacerbates social inequality/instability
 Xi Jinping’s “China Dream”
-- Fundamental economic reform necessary
--Strong anti-corruption efforts, but reject “westernization”
Contemporary Social Challenges:

Income Distribution
Income inequality--wealth gap--gaping urban-rural divide
Growing Inequality

 Growing Urban-Rural Gap

Average urban income 3X rural income
Wealthiest 10% income 13X rural income
Wealthiest 3% income 220X rural income
Wealthiest 1% income 440X rural income

 Wealthiest 10% Poorest 10%

Share: 40% 2%

 Rural violence on the rise—180,000 “mass incidents” in 2010 involving

millions of people (a 10 fold increase over the past decade)
Demographic Challenges
Contemporary Legal Challenges:
Corruption and Crime

Four Kinds of Official Corruption

 Gray = Graft
 Yellow = Prostitution/Pornography
 White = Drugs
 Black = Organized Crime (1,900 middle rank officials jailed
2005 Crime Statistics
 689,000 criminal cases, 844,717 convicted = 98% conviction rate
 10% rise in crime rate over 2004
 Approx. 3,000 documented executions (some estimate 6-12,000)
Global imbalances (% of world GDP)
 Scenario analysis: Growth accounting for future
growth in China

Potential growth Capital Labor Effects of energy saving

Period a 1-a TFP
rate of GDP (% ) growth (% ) growth (% ) and emission reduction

2011-2015 0.7 0.3 7.8-8.7 10-11 0.8 0.2 -1

2016-2020 0.6 0.4 5.7-6.6 9-10 -1 0.3 -1

2021-2030 0.5 0.5 5.4-6.3 8-9 -0.5 0.4 -0.5

 Future Challenges
 Slower Economic Growth—loosen controls over financial system,
promote private business, rein in SOEs, more flexible Capital
Account.
 Slow Political Reform
 Growing Social Instability—improve social benefits/social safety
net
 Key recommendations to increase the
78 quality and resilience of growth
• Spread government support for innovation across more sectors.
• Strengthen intellectual property right protection by more
systematically prosecuting violators and raising fines.

• Accelerate the bankruptcy process to reduce uncertainty and

compensate the laid-off in accordance with relevant laws.
• Require the regular publication of company accounts and enhance
disclosure standards for all firms. Raise penalties for individuals
committing fraud.

• Gradually remove implicit guarantees to SOEs and other public entities.

• Professionalise the management of SOEs to make a clear division
between business and politics.
• Strengthen the independence and decision-making role of the board by
hiring truly independent directors.
 What impact should a slowdown of China’s growth have on the
world economy?
Figure 1: China’s Hard vs Soft Landing

China’s trading partners

Soft landing (to potential output Leading indicators

growth, i.e. 9 % p.a.):

LI Commodity
exporters (incl.

• a very limited impact on global Australia)

growth, could even be positive LI OECD All

overall. LI EU
LI , Japan,,
South Korea,
Taiwan

•Commodity exporters (Australia,

Argentina, Brazil, Russia, South China’s GDP growth (%)
Africa) would be the main losers, 4 8 12

raw material importers benefit

thanks to lower prices.
 China’s Surplus Labour
•Much of China’s and India’s rural labour force is underemployed, engaged only in seasonal
agricultural work with little earnings.

China has about 2.5 agricultural workers for every hectare of arable land. And many of
China’s construction sites and labour-intensive factories are staffed with rural migrants for
who the alternative is to survive on one acre per person.

•According to the US Department for Agriculture. China’s Ministry of Agriculture estimates

that rural China has 150 million surplus workers.

Add to this urban unemployment caused by the restructuring of loss-making state

enterprises, estimated at ca. 14% in 2002.
.
With employment at ca. 750 million in China and an estimated annual employment growth
of 1 percent (resulting from prospective GDP growth minus increases in labour
productivity), we can dare a back-of-the-envelope prediction.
China’s Surplus Labour

 Over the coming 20 years, China’s rural surplus labour will not be
exhausted.

 The shape and speed of China’s and India’s integration into the
world economy will depend importantly on the transfer of labour
from mostly rural low-productivity areas to mostly urban high-
productivity sectors.

 This process can be well described by a core model of economic

development, the Lewis-Ranis-Fei or surplus labour model. The
crucial feature of the model is that the modern sector – and by
extension the world economy (!) – faces an unlimited supply of
labour at wages not far from the subsistence level.

New risks

 Rapid changes in global comparative advantages

 New competitors
 New products, new technologies
 Changes in global scarcities
 Reflected in volatility in commodity prices
 Especially in energy markets
 Linking of energy and agriculture
New risks

 Financial market volatility

 Affecting even countries that manage their own markets well
 Sub-prime mortgage crisis
 Large changes in risk premium

 New rules of the game

 International rules (WTO, IMF, Basle)
 Domestic responses to the changing global landscape
 Backlash against globalization
Further consequences

 New geo-politics: new power of developing countries and resolve to use

 Also evidenced, e.g. in China’s new role in Africa
 More assistance to infrastructure loans than African Development Bank and World Bank
combined
 Competition for resources will help developing countries—but drive up prices for commodities
 And will impose new limitations on broader social agendas (Darfur, global warming)

 G-8 will not work

 Protectionism especially strong in areas of investment—Sovereign Funds
 Shouldn’t be a problem in most areas if there is appropriate regulatory
framework in place
 But there is a risk of a backlash if West is seen as hypocritical
Lessons
 For more inclusive growth, the generation of good
quality productive employment is the most critical
variable.

 Need growth strategy that allows and encourages

labour productivity increases overall while significantly
expanding expenditure – and therefore income and
employment opportunities – in social sectors.

 Major role for state intervention, through direct public

investment and through fiscal, monetary and market-
based measures that alter the structure of incentives for
private agents.
Thank you !