“China’s Great Dilemma” By: Kevin Vargas

China’s GDP as a Case Study How reliable is the underlying economic data? Most Estimates say that China’s GDP is overstated Unreliability to decentralized data gathering, inconsistent quality and methods across the country, tax evasion by the private sector (including households and private corporations), and manipulation of data by the central and local governments and SOEs China is one of the first countries to report its GDP, usually about two weeks after the end of each quarter. This compares with developed economies that collect smaller volumes of data more efficiently and take between four and six weeks.

Is Rapid Growth Sustainable? Abnormally rapid growth is rarely persistent, many economies experience stagnation or low grow after reaching maturity. Much of Chinese data is based on production, the net output of agriculture, industry and services, while most developed economies rely more on expenditure-based data. As countries become richer, their per capita income growth rates slow, according to the conditional convergence growth theory.

How has China changed Trade? Cheap labor and hence cheap goods, cheap capital via export of excess savings, and lastly, a massive demand shock for commodities, particularly basic commodities. China accounts for 13% of global exports and 10% of global imports. Its demand accounts for 50–60% of the global production of iron ore, nickel, thermal coal and aluminum, and a significant share of copper, tin, zinc, steel, cotton and soybeans

The Main Exporter, but for how long? • The key question is whether China can sufficiently rebalance its economy toward consumption without risking a significant, and hence destabilizing, slowdown. Most countries in Asia that relied on an export-led growth model driven by cheap currency and cheap labor experienced rapid growth rates in the early years of development, but inevitably slowed down after a period of rapid growth. China will not be an exception.

State-Owned Enterprises and the Private Sector How to Escape the Dilemma? State-Owned Enterprises and the Private Sector Proposals include modifying ownership structures; increasing dividend payouts; relying on market- driven pricing except in public utilities and services; and easing entry of the private sector into certain public sectors dominated by SOEs.

How to Escape the Dilemma? 2. Financial System Increase the role of the market by liberalizing interest rates, the renminbi exchange rate and the capital account; permit private capital to establish small and medium-sized financial institutions; and establish a deposit insurance system and a market-based exit mechanism for financial institutions.

How to Escape the Dilemma? 3. Fiscal Policy Improve the taxation system by generating more revenues from personal income, real estate and resource taxes; and improve the budget process with more transparency and better allocation of revenues and responsibilities between the central and local governments.

How to Escape the Dilemma? 4. Rural Land Reform and Hukou Reform Changing the Hukou residency permit system to allow migrants to obtain urban residence permits in order to access the social benefits of residency, including health care, education and housing. Farmers who lease the land for 30-year periods should have more property rights through better litigation and documentation to avoid coercive expropriation; farmers should be allowed to lease and mortgage their land to third parties.

How to Escape the Dilemma? 5. Market Access and Foreign Investment China should allow more inbound and outbound foreign investment and relax market entry requirements. Examples include opening up services such as finance, education, culture, medical care, building design, accounting, etc.

How to Escape the Dilemma? 6. Environmental Regulation China’s pollution comes at great cost. The World Bank estimates that the annual cost of pollution is 9.7% of GDP, stemming from destroyed human capital and natural resources and damaged structures.