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“China’s Economy in 2010 Forum” Snapshot (1)


“China's Economy in 2010 Forum” Snapshot (1)

January 12, 2010

In the morning of January 7th, 2010, “China's Economy in 2010 Forum” was held in New York Stock Exchange by China Center for Economic Research from Peking University and National Committee on United States-China Relations. The world bank's chief economist and senior vice president Justin Lin Yifu, the chairman of China Merchants Group and China Merchants Bank Qin Xiao, the professor of China Center for Economic Research Yao Yang, Lu Feng and Huang Yiping, the senior follow at the Brookings-Tsinghua Center for Public Policy Xiao Geng and the chief economist of Export-Import Bank of China Wang Jian-Ye were participants in the forum.

Justin Lin:

Justin Lin's presentation is on the secret of the success of China's reform and the cost of the reform. China has maintained an annual growth rate of 9.8 percent continuously and stably during last 30 years, which was a big difference compared with other countries in transition. The reason lies in the gradual approach and the dual track approach that China adopted during this reform process. What makes the approach so important to China is the development strategy that government implements. Before 1978 reform, China adopted the strategy that promoted the growth of heavy industries. However, this capital intensive development model is against China's comparative advantage.  Since these industries could not survive in a competitive environment, the Chinese government began to introduce all kinds of distortions to protect such industries. When 1978 came, the mainstream recommendation was to remove all the distortions immediately. But if China adopted these policies, all the heavy industries would collapse immediately. As a result, the economy would encounter the same problem that other transitional countries ever had. Fortunately, under the leadership of Deng Xiaoping, some kind of gradual approaches were introduced in order to maintain stability. On the other hand, China liberalized the market, allowing private sectors to enter. The industries that private sectors entered are consisted with comparative advantage of China. China achieved its great dynamic economic growth. Meanwhile, with dynamic growth in the labor intensive industries, the comparative advantage followed in these sectors created the conditions to reform in all the other sectors. That is the secret that china had achieved both the stability and dynamic growth in the past 30 years.

When talking about the cost of the reform, Justin Lin also mentioned the cost, that is, imbalance. The external imbalance is trade surplus. In addition to that, there are also investment and consumption imbalance. Domestically, there are income disparities including rural-urban disparity and all those are imbalance during the rapid growth period in china. However, the most important imbalance is Income disparity. So far in china income disparity that is measured by GINI coefficient is 0.48, which is higher than many other countries.  Because of this imbalance in income, that is to say compared with rich people, and the large population of poor people has high consumption propensity and low saving propensity, the consumption propensity is low and saving propensity is high in China. Certainly it will decrease the consumption and increase the savings. That causes the saving-consumption imbalance. Because the domestic consumption propensity is low, China needs to use the global market to consume the products, which contributes to the trade surplus.

The next question is what causes the internal imbalance. Justin Lin mentioned some sectors that are lagged behind the economic reform. The first one is financial sectors. China's financial sector is dominated by big banks. Consequently, only the enterprises with large scale can access to the big banks' service, and small and medium sized enterprises will not get the financial service from these big banks. This financial structure has two implications for income distribution.  The first one is that the labor intensive industry can be damaged due to no financial services, which reduces the job opportunities. As we all know, in China, most low and medium level people earn their livings from wages.  If wage is suppressed, their income will be reduced. The second point is that such kind of overconcentration on the financial service reduces the cost for the rich, and limits other people's access to the capital service from the big bank, which also deteriorates the income disparity.

Secondly, natural resources sector lagged behind during the reform. Before the reform, China has a policy to subsidize the heavy industry with low input price. As an important input factor, the price of natural resource is also distorted. However, most of them are not been changed yet. After 1979, private enterprises were allowed to come to the natural resource sectors.  In general, only rich people can assess to this resources. The disparity between the domestic price and international price of natural source contributes to income disparity. And with income disparity, saving and consumption disparity will appear as well as the external disparity.

It is quite important to understand what the challenge is. In order to complete the transition to the market economy, China should remove the distortions both in financial sector and in natural resources sector. All these reforms will allow China to develop in a consistent way with its comparative advantage. Furthermore, reforms will also create more jobs and reduce income disparity as well as external imbalance.

Qin Xiao:

Qin Xiao talked about his observation and perception of China's economy from three aspects: recovery, rebalance and reform. Briefly, they are called 3R.

When talking about recovery, Qin Xiao said, from last quarter of 2008 to last quarter of 2009, China experienced quite strong V-shape recovery, which was mainly driven by government's fiscal policy and government's investment, including both central and local government. Meanwhile, such strong recovery is also backed up by the expansion of money supply. In Qin Xiao's opinion, generally, current china statistics has overestimated the investment and underestimated the consumption.  But from the quarter to quarter growth, household consumption, profitability, CPI, PPI and asset price, the recovery is obvious, because these are important indicators showing the sign of recovery. Even though China did a great job in recovery, it also generated some costs that the policy was a little overshooting. On one side, China has inflation pressure right now and the household sector consumption is still weak. On the other side, there are bubbles in stock market and housing sector, which makes the policy in post crisis period method more complicated. In the post crisis period, Qin Xiao thinks that there will be some policy shifting. Most of the loans entered the traffic sector, such as rail way, road way and other constructions in the last year. In the next two years, the slowdown and reduction of money supply and credit growth will be observed gradually. Qin Xiao said the target of credit growth in 2010 will be 18% and the credit growth is the key issue in the next few years.

3R are interrelated. When coming to this rebalance issue, the model of both China and the US's economy will be mentioned and both sides need reforms to change their models. As for china, on the supply side, overcapacity is difficult to deal with.  More than 10 industries are still in overcapacity, which will be another key issue in 2010. On the demand side, there are several issues needed to pay attention to. The first one is that the income disparity among regions and between the urban and the rural has become larger and larger. The second issue is about income distribution. At present, more resources are distributed to the SOEs and less to labor. Furthermore, local government's main target is GDP growth and tax revenue. The target is not so good for service sector, which provide more employment and will benefit the income of labors. The other issue is land. As urbanization process continues, lots of land from countryside entered the market, which can be regarded as a kind of subsidy to increase farmer's income.  For the labor income, most of labors rely on their wages and seldom have asset income. In a word, they cannot share the profit of SOE.

The last one is the reform. In the last 30 years, China has achieved great success in economy. Urbanization and privatization are still in the process. However, there is less reform in recent years. One possible reason is that there is no pressure to reform because there is no price. Right now, when experiencing the sub-prime crisis in US, the price appears. It is a good time for China to restart the reform agenda. This issue is comprehensive, since China development model is not the best in the world. For different countries with different stages of development, there will be difference models. Consequently, when we restart the reform agenda, the methods need to be more comprehensive. At last, Qin Xiao pointed out three points about the reform agenda.

The first point is to transform the function of government. The economy should be transformed from government-led economy to market-led economy. The main role that government should play in the market-led economy is to provide public goods. The second point is to deregulate the price of factors, such as land, labor, energy, natural resource and capital.  For all these factors except capital, gradually liberating the price is the way to work out; otherwise the factor price will distort the allocation of the resources. For capital, the more important thing is the exchange rate mechanism.  In 2005 there is a kind of reform, named B.B.C.: the band, basket and crawling. Actually, there is no real basket, even RMB crawling seven percentage of appreciation. During the process, the mechanism shifted from B.B.C. to pegging again. China should introduce more flexible policy in other ways, such as, given a real band, trying to introduce market factors to discover the real exchange rate and the real basket. The reform will be a long run process. The third one is about SOE. SOE is the wealth of the whole nation, not the wealth of the government.  But Chinese government always kept the revenue of SOE, which should be better transferred to the people. The method China should adopt is to transfer the asset to either the central bank or the capital market, as Qin Xiao suggested.