The Imbalance of the Chinese Economy and the Stability of the Global Economy Xiaopeng Luo Zhejiang University Presented at November, 2009

Outline The imbalance of the Chinese economy was a major contributor to the last global financial crisis; The mechanism of the imbalance; Why adjusting the exchange rate would not work; Why there is no quick fix for the imbalance? How China can help the world and how the world can help the China?

How China contributed the global financial crisis The model of Chimerica by Naill Ferguson By transferring significant size of savings to the US, China created an environment of low interest rate for the global economy. Under the environment, the cost for capital was low, while the return to the capital was increasing. The expansion of financial market went out the boundary of existing doctrine and monitoring capacity.

Why China can not consume more? Was the imbalance a plot? Did China manipulate the value of RMB? What could China gain from it? Why China can not consume more?

Understanding the Chinese Economic System Rent-sharing through hierarchy-an economic model to understand the Chinese economy. The relationship between the status rights and asset right is profoundly different from the West as China is an imperial state system rather than a nation state. The political centralization is maintained through control of status rights, the assets rights were secondary to the status rights. The two kinds of rights were tradable, while the status rights dominated the asset rights.

Rent-Sharing through Hierarchy before the reforms The Communist revolution created a collective rights system while keeping the tradition in the relationship between the status rights and asset rights. The collectives with higher ranking in the unified social hierarchy entitled both greater status rights and assets rights while the collectives in low status entitled both low status rights and asset rights.

Rent-Sharing through Hierarchy before the reforms However, the lower ranking units were entitled to greater economic rights (Barzel, 2002) to achieve greater self-sufficiency, so more rent can be extracted by the state. If the low ranking units got too productive and create sizable assets, they should be promoted to higher ranking, and their economic rights be restricted to maintain the stability of the hierarchy.

Rent-Sharing through hierarchy after the reforms The reforms decentralized, de-collectivized and monetized the rent-sharing through hierarchy to enhance economic rights. Keeping low status rights, the lower ranking units were allowed to keep more assets as long as the state and the higher ranking units can keep larger share in the total rent. The lower ranking units can trade for higher status rights with their assets.

The Challenge of Peasant economic rights to the System At the bottom of the society, the Chinese peasants have too little asset rights. The de-collectivization give them economic freedom, but there was not much non- farming job opportunity for them. The rapid development of rural industrialization had created many new jobs for the peasants, while threatening the status rights of the urban population.

How FDI helped China to resolve the dilemma The FDI, especially those oversea capital invested in the costal area for expert manufacture industry created new job opportunities for peasant without threatening the privilege of the state sector. In stead, it created new source of rent to the state. The system of rent- sharing through hierarchy increasingly depending on export expansion.

Why China can not consume more? Chinese consumption rate has kept dropping since 1985, from more than 50% to 33% in early 2009, the lowest in the world. The transfer of purchasing power to the developed countries could be equivalent to the total wages of the migrant workers. Why China can not let their own people consume more?

Why China can not consume more? Interest conflict: the groups in power understand by intuition that it is not in their interest to empower the groups at the bottom. (theory by Barzel) Knowledge gap: the policymakers don’t know how to make change without destabilize the system. (labor contract law)

Why there is no quick fix? What China need is to transform the state of rent extracting for GDP growth into a state that is capable to provide justice and fair welfare to all citizens. The nation state model does not fit China because it is not possible to have equal status rights for 1.4 billion people. ( the dilemma for free domestic immigration)

How China can help the world and how the world can help China? As the Chinese economy will continue to stay imbalanced, what would be the best way to invest its savings? A Chinese Marshall Plan to Africa? Some major Infrastructure projects to deal with global warming? The world should find a financial arrangement that to payback China.

How the world can helps China? China will go through a difficult transformation and the stake of its failure is too high not only for China but also for the world. The only way to reduce the costs and risks for China in this great transformation is to have a successful communication revolution. ( Giddens )