Sustaining China’s Growth Miracle A Delicate Balancing Act Eswar S. Prasad Cornell University, Brookings Institution and NBER

Outline of Talk Characterizing China’s ascendance Getting behind the growth story Policy challenges: short term, long term The rebalancing challenge China-US relationship

Shares of World GDP (in percent) Nominal PPP

Contributions to World GDP Growth (in percent) Nominal PPP

Income per Capita (USD thousand) Nominal PPP

Domestic Demand (USD trillion) Investment Consumption

Trade and Debt Share of World Exports (in percent) Public Debt (USD trillion)

Parsing the Growth Numbers

Composition of Growth

Source: IMF.

Investment and Private Consumption (Percent of GDP)

Growth of Personal Disposable Income, Fixed Asset Investment, and Nominal GDP

Contributions to GDP Growth, China, (in percent) GDP Growth10.2 ConsumptionTotal4.1 Private2.8 Government1.3 Investment5.0 Net Exports1.1

Contributions to GDP Growth, : International Comparison (in percent) CountryChina Asian Emerging Markets Median GermanyJapanU.S. GDP Growth ConsumptionTotal Private Government Investment Net Exports

Exports and Imports (12-Month Growth Rates)

Exports and Imports (Billions USD)

Trade and Current Account Balances (Billions USD)

Trade and Current Account Balances (Percent of GDP)

Macroeconomic Policies Fiscal policy Monetary policy Exchange rate regime

Source: IMF.

Money and Credit Growth

Nominal Exchange Rates

Real Effective Exchange Rate Indices

Foreign Exchange Reserves: Flows and Stocks (Billions USD)

Inflation Rates (Year on Year)

Chinese Bond Yields

U.S. Treasuries

Short-Term Policy Challenges Controlling inflation Restraining credit growth Asset bubbles: Real estate? Managing capital inflows

Equity Market Indices

Source: IMF.

Balance of Payments (Billions USD)

Improving the Balance of Growth From exports to domestic demand Investment to consumption-led growth Employment growth Reducing regional disparities

GDP Composition (in percent) 1995 ConsumptionPrivate44.9 Government13.3 Investment40.3 Net Export ConsumptionPrivate46.4 Government15.9 Investment35.3 Net Export ConsumptionPrivate35.8 Government13.0 Investment44.0 Net Export5.2

GDP Composition: International Comparisons (in percent) 2009 CountryChina Asian EM GermanyJapanU.S. ConsumptionPrivate Government Investment Net Export

Investment and Private Consumption (Percent of GDP)

Labor Share of National Income Flow of Funds Data

Labor Share of National Income GDP-Income Approach

Personal Disposable Income (Percent of GDP)

Composition of National Saving (Percent of GDP)

Age Effects on Income, Consumption, and Saving Rates

Why is Urban Household Savings Rate Rising? Chamon, Prasad (Jan. 2010), AEJ: Macroeconomics Chamon, Liu, Prasad (Dec. 2010), NBER WP Precautionary motives: Buffer stock savings (young, middle-aged); Health risk (elderly) Structural factors: Financial market underdevelopment; Pension reforms

Twelfth 5-Year Plan Comprehensive assessment of growth challenges Key short-term priority: managing inflation Lower but higher-quality growth: less resource- intensive, employment-generating, equitable Strong signals to common households, local govts. Financial system reforms; Capital a/c convertibility But all reforms in China’s way, at China’s pace

Tensions: Short-term vs. Long-term Objectives Long-term goal: Raising wages Short-term problem: Inflation Long-term goal: Making RMB international currency Short-term problem: Capital inflows

Reform Priorities Financial sector development Better monetary policy framework Fx flexibility a piece of the puzzle Social safety nets Governance reforms (corruption)

Growth Prospects

China: Population Projections

Risks Sudden stop/reversal of capital inflows Plunge in value of US dollar Collapse of external demand Loss of confidence in banking system

Ratio of deposits to GDP

Net Position A. Assets FDI Portfolio Equity Debt Other investment Reserve assets Foreign exchange reserves B. Liabilities FDI Portfolio Equity Debt Other investment International Investment Position (Billions USD)

Risks Sudden stop/reversal of capital inflows Plunge in value of US dollar Collapse of external demand Loss of confidence in banking system Asset price busts Social instability

Risks Sudden stop/reversal of capital inflows Plunge in value of US dollar Collapse of external demand Loss of confidence in banking system Asset price busts Social instability China-US relationship turns ugly

China-U.S. Relationship The exchange rate issue, bilateral trade Restrictive government procurement policies (indigenous innovation policy) Flashpoint: Chinese holdings of U.S. debt Risks of the legislative process

Prospects Short-term growth prospects look good Many challenges for long-term growth Sustainable high growth needs policy reforms