China’s Economic Policy: The search for a new growth model

Economic Reform Since 1978, economy growing at 10% per annum China as the second largest economy in the world China has rebounded effectively from the global financial crisis with the help of the stimulus package 2011 economic growth 9.2%, with inflation at 5.3% IMF—China’s GDP will surpass US in 2016 on PPP basis Economist –in dollar terms, converted at market exchange rates = 2018

Economic Reform Caution with the growth figures 2005, China’s GDP = 1/5 of the US = GDP per capita of 41,700 = USA in 1850 With the current growth rate in 2020, China’s per capita income will = Malaysia in 2007 and by 2030 will reach the level of Hungary and the Czech Republic in 2007 This year = South Africa, Botswana and Jamaica Growth derives from two main transitions – Shift from low productivity to higher productivity work – Shift from central planning to a more market-influence economy

Stimulus Package – Stimulus package of 4 trillion yuan ($570 billion)—November 2008 – Produced reasonably broad-based growth, a classic V-shaped recovery – 1 st quarter 2009 GDP rose 6.2% and by 10.7% in 4 th quarter—annual growth of 8.7% – Thus, January 2010, tightening of monetary policy and control over banks – Lending was up 30% in 2009 Originally: Public infrastructure (38%--actual 23%); Post- earthquake reconstruction (25%--actual 14%); social welfare (10%); rural development (9%); technology investment (9%); sustainable development (5%); education and culture (4%)

Stimulus Package Some of the amounts listed were already ear-marked – The money for the Wenchuan earthquake – Money budgeted for railway investment – 120 billion a year of corporate value-added tax cuts – Amounts to perhaps trillion yuan – Deutsche Bank calculate that 90% of the funding was already in prior investment plans The stimulus was a fiscal stimulus of between 1.5 and 1.7% of GDP – 18 Beijing Summer Olympics

Stimulus Program Stimulus worked but are there long-term negative effects? – Distorted the economy by reversing the long-term for state retreat from economic engagement and for greater private engagement – Will bad loans rise again? – Has it deflected the policy attempts to develop consumption as the main economic driver? – Jan Xinhua reported that consumption replaced investment as main driver of growth in 2007—growth was 11.4%; 4.4% from consumer spending; 4.3% from investment; 2.7% from net exports – But 2009: of 8.7% growth—8% from investment, 4.6% from consumption, and -3.9% from net exports – 2011, moving back to better balance: 9.2% growth—5% from investment, 4.5% from consumption and -0.01% from net exports – Other criticisms: risk of rising inflation, property and equity market bubbles; and excess industrial capacity

Stimulus Program – Did not advantage SOEs at expense of private firms – Did not alter long-term trend with private firms becoming the most important driver of economic growth – bank loans did not flow primarily to SOEs – Access of private firms and household businesses to bank credit improved considerably

Stimulus Program Neglect of Consumption  Investment was expanded to offset decline in trade  Consumption growth in 2009 was robust and was almost same as GDP growth  Investment boom created jobs in construction  Wages continued to rise  Pension and MLSS payments  Led to 9.8% increase in disposable income of urban residents and 8.5% for rural (2009)  Measures to encourage consumption: car sales, home appliance subsidy program  Increases in household borrowing  But 2010—household consumption down as share of GDP by 1.2% to all- time low of  Thus, claim exaggerated for 2009 but valid for 2010

Return of the State? Since 2003, market strengthening reform slowed But in , loans did not go overwhelmingly to SOEs and household business borrowing expanded fastest 1995—SOEs = 2/3 of exports, by 2008 = 18% and 14% by 2010 Private firm share doubled to 30%--most important source of growth in exports SOEs maintained monopoly in telecommunications, finance, petroleum etc.

New Growth Model? Formed the core of the new five-year plan: emphasizes quality of growth over quantity Four Primary Initiatives: – Lower economic growth targets – Increase consumption – Energy savings and environmental protection – Promote strategic industries

New Growth Model? Growth 2012 = 8%; FYP = 7.5% 11 th FYP called for 7.5% but was closer to 10% Beijing and Shanghai only announced growth rates close to target and some provinces announced 13% or higher Concern over below 8% growth for covering employment demands

1960Start of Rapid Growth* YearGDP per capita (PPP) China Vietnam (1970) Indonesia Thailand Taiwan South Korea Malaysia Philippines n.a. Hong Kong ** Singapore ** Japan Ethiopia n.a. Chad n.a. Haiti n.a. Per Capita GDP at the Beginning of the High Growth Period

Dating the End of High Growth Table 6 Country Year startPeriodGrowthPeriodGrowthPPP GDPExch Rate of slowingbeforeRateafterRateper cap atGDP at slowdownBeforeslowdownAfterslowdown (2005prices) Japan Taiwan Korea

New Growth Model? Increased Consumption Investment and Foreign trade have been major drivers of growth Trade: – Post-WTO imports grown 17% p.a., exports grown 15% = 5x higher than growth in world trade – Trade declined from 70% of GDP to 63% in 2007 and 44% in 2009 Investment – % of GDP roughly same as other East Asian successes – 2003– over 40% – investment = average of 54% of economic growth

New Growth Model? Increased Consumption First half of 1980s consumption growth was 4/5 of economic expansion but averaged barely 2/5 New FYP calls for household disposable income to increase by 7% BUT expansion held in check by high savings rate—over 40%, US under 1%, OECD average = 10%; Singapore similar Raise consumption from 35.1% to 41% of GDP – Low compared to other countries – US = 71% – Brazil = 63% – India = 54%

New Growth Model? Increased Consumption Measures to boost consumption – Raise minimum wages – Personal income tax reform – Improve land distribution – Expand social welfare initiatives – Increase dividends paid by SOEs to their owner, i.e. the state Elimination of remaining government controls on interest rates on both deposits and loans Appreciation on the currency

New Growth Model? Strategic Industries Investment in “Strategic Emerging Industries” 7 industries with 14 trillion yuan to be invested to raise contribution from 5% of GDP to 8% by 2015 and 15% by 2020 – Biotechnology – New energy – High-end equipment manufacturing – Energy conservation and environmental protection – Clean-energy vehicles – New materials – Next generation IT

New Growth Model? Political Opposition Coalition of vested interests that have blocked reforms – Export and import competing industries – Coastal provinces – Real estate and construction industries – China’s commercial banks