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“China’s Economy in 2010 Forum” Snapshot (3)


“China's Economy in 2010 Forum” Snapshot (3)

January 12, 2010

The second session of “China's Economy in 2010 Forum” is on the topic of China's growth model, and held by Stephen A. Orlins.

Professor Yang Yao speaks first. For him, it's a great pleasure to work with the National Committee. The previous speakers have all talked about the unsustainability of China's growth model. He wanted to share with the audience an different and unhappy story, where China's growth model will continue in the next decade or next several decades. What's wrong with China's growth model? The drawback of China's growth model is basically two things: The decline of the share of consumption in GDP, and the large account surplus. Why is the decline of consumptio a bad thing? As China's GDP grows very fast, the welfare of Chinese people increases only slowly. There's growth, but no development. On the other hand, why is the surplus bad? Trade surplus means we have an excess of savings. Saving should have been used as investment, but clearly not the case in China. That's quite paradoxical, because China's investment rate must be among the highest in the world for the last decade. Since the US's Treasury bond which we bought has only an annual return of around 2%, this means we are wasting our money. As to saving itself, Chinese people do not save as much as that of India. Many people blames exchange rate manipulation for trade surplus, but we should also notice that not only China has huge surplus, so do Japan and Germany. Furthermore, RMB has appreciated 20% since 2005, China's trade surplus increases at rate of 30%.  Yao Yang's story is that China has comparative advantage in exporting sector. There are some long-term determinants: (1) industrial capacities. Among developing countries, China is a few of them which have accumulated sizable industrial capacities before economic reform; (2) Human capital. Literacy rate in China is 90% and most of the illiterate people are old. China does not have too much illiterate young people compared with India, where illiterate rate is about 40%. (3) Besides, demographic transition and transformation are also very important factors. Huge reserve of labor pool in rural China that has not been used up has suppressed the wage rate for a long time. These factor could be combined to explain the high investment/GDP ratio phenomenon. Secondly, According to Lu Feng's research, the growth of labor productivity in China's manufacture sector is very fast. Today, one worker's productivity is equivalent to 8 workers 30 years ago. Labor productivity increases at a rate of 14% per year. But the manufacture wage rate is increasing about 7%. There is a 7% gap between the two. This gap has all gone to capital gains. Also as reported in Lu Feng's paper, capital returns in mid-1990s increases tremendously. Besides, Government income also accumulates fast. In terms of savings, the residential saving out of GDP declined sharply from 22% in early 1990s to 15% by 2000. Since 2000, most increase in income has come from corporate sector. Chinese people are not particularly saving too much. The problem is that Chinese firms are saving too much. In conclusion, we live in a integrated and global age. If the US and China were one market, you really wouldn't need to worry about the surplus and deficit. The imbalance problem exists even between China's inland and coastal provinces. In the long run, we have to view the global economy as one economy. The division of labor and comparative advantage is going to rule the world economy. China's growth model is going to continue, no matter what kind reforms we are going to carry out. The target is to effectively utilize China's savings. Why do we need FDI when we cannot use up our own savings? There must be something wrong with our financial sector.

Huang Yiping is the last speaker. His presentation also emphasizes on how to rebalance Chinese economy and makes it sustainable. He started the talk with a comment on Chinese Central Bank's recent policy announcement. He believes there are two messages leaked out. The first is that expansionary monetary policy is going to continue, the second, which is more important, is the selective management of finance, including supply of bank credit, debt finance and issuance of shares in the stock market. Government tends to promote the industries with potential innovation, high-value added and low pollution, and restrain those with low-level technology, pollution and significant overcapacity. This is very important, for last year's major policy is targeted at supporting strong growth rate of 8%, while the quality of growth is becoming more important this year. There is a major turning point of macroeconomic policy. The question is, are we going to achieve it? The answer is, we don't know. If you look at what the government has done for the last few years, adjusting structure, improving quality of growth…these are like constant themes appearing every year. When the new government came into power and looked at this model, they believed it's not going to sustain. The government identified those problems as too much investment and too many exports, with not enough consumption. There are also problems like inefficiency of investment and too much pollution and income disparity. In the coming years, the government takes some measures to adjust structure and improve the quality and sustainability of growth, but what we can see is that all problems became worse during all these years. Policy didn't work. There are two possible reasons: these are wrong policies, or we are not aggressive enough. He believes most of our government policy are good measures, but not good and aggressive enough. The real solution to those problems is associated with the incentive structure. The measures our government adopted are superficial. His story is related to overall incentive infrastructure in the economy, which is fundamental. During the last sixty years, China carried out two experiments. During the first 30 years, we abolish all the free markets and implement the central planning system, which failed. During the latter 30 years, we reintroduce market factors back to Chinese economy, which proves to be successful. The key difference between these two is how to allocate resources and produce the products. However, the process of liberalization process is only half-way done and not finished yet. When looking at the goods market, it's almost completely liberalized. But as to the factor market, which is frequently mentioned today, it is heavily distorted. For example, the registration system, the under-developed social welfare system, and the severe discrimination against the farmers are prevalent in labor markets; In capital markets, the exchange rate and bond yield rate is distorted, making China's capital too cheap; land is also very cheap for manufactures, and controlled by our government; the environment is also important, if you don't need to compensate for pollution that are emitted, making it kind of under-priced input. Growth is so strong because everybody is willing to invest in China. Labor is cheap, land is cheap, energy is cheap, capital is cheap, and you don't have to compensate for the pollution. Do we have a better place to produce? At the same time, production, exports and investment is even stronger, and the imbalance problems occurs. When money was channeled to the corporate sector, the household share of GDP dropped by more than 10% in ten years. If household consumption is not compatible with GDP growth, how can we expect consumption to pick up the pace? His conclusion is that imbalance problems can be dealt with, but it will be a long term process. The government's management of industrial structure is useful and positive step, but the fundamental measures should be aimed at incentive structures and linearization of factor markets.