Comments on China and the Future of G 20 Yiping Huang Peking University Alok Sheel Secretary, Economic Advisory Council of the Prime Minister of India* * Views are personal and do not reflect those of the Indian Government

China’s New Growth Model The recently concluded 18 th Party Congress indicates that China’s new central leadership (President Xi Jinpeng and Premier Li Kequiang) is strongly committed to a new model of growth to be achieved by This new model is based on the vision of its 12 th V Year Plan ( ): rebalancing growth away from dependence on investment and manufacturing exports to domestic consumption and services. Reasons for the shift could be: Weak external demand – lingering crisis in major export markets Services more labour intensive as manufacturing becomes more K intensive Avoid the middle income trap – needs to grow rich before its grows old Social tensions – high levels of inequality Alok Sheel2

Progress on the New Growth Model The author argues that progress has already been made in rebalancing the Chinese economy: Current Account Surplus has declined from over 10% of GDP to under 3% Income distribution has started to improve – lower Gini index Household consumption/GDP rising since Contrarian view: the root of China’s imbalance lies in low household consumption and high savings and investment, and this pattern has not materially changed since the onset of the GFC – indeed worsened in some respects XI V Year Plan ( ) had also identified its imbalanced growth model as a problem needing corrective action – no progress Alok Sheel3

Global Imbalances have indeed declined, but …. How much of this is cyclical because of lower global growth and how much is structural? Alok Sheel4

The case for cyclical decline of global imbalances The decline in exports has been countervailed by higher domestic investment in China In the US, declining household consumption has been countervailed by rising government consumption. In other words, rebalancing demand from consumption to Investment in the US, and from investment to consumption in China, has still to happen. This alone will make global growth ‘strong, sustainable and balanced’ : the core G 20 agenda Alok Sheel5

Chinese rebalancing data: WSJ May 22, 2013 Alok Sheel6

Prognosis There appears to be a broad consensus on the New Growth Model within the new central leadership. China has a track record of efficiently implementing policy decisions. However, such a major structural shift will take time and would need to overcome hurdles in the way, such as: Powerful SOEs controlled by local leaders who have been major beneficiaries of financial repression. Danger that with declining investment growth could decline particularly sharply as China’s capital input-output ratio is low. Leadership would need to hold its nerve to manage the transition as trend growth could decline – pressure to shift back to higher trajectory could mount. Social backlash – the influential and relatively affluent urban middle class might feel threatened by abolition of the hukou system. Alok Sheel7

Global Implications of Chinese Rebalancing Author : first china induced global recession? However, Immediate impact would be to supplement demand in a demand deficit global economy – therefore would serve to lift global growth. long-term -- as the relative size of the Chinese economy grows, possible to envisage a Chinese downturn depressing global growth. At present the reverse position prevails. If China rebalances and the US does not, other countries would need to generate similar surpluses (Eurozone?), or global growth would remain weak, US treasury yields would rise and the dollar weaken. Failure of Chinese and US rebalancing – back to asset and credit fuelled unsustainable booms. Alok Sheel8

China and the G 20 Along with Germany, perhaps the biggest beneficiary of the rise of the G 20. A G-3 within the G 20? China widely perceived to be responsive on the rebalancing issue – actual rebalancing would enhance its standing even more – seen to be sharing the global burden. PBOC also wants China to move to capital account convertibility by China mostly responding to rather than setting the G 20 agenda. Now wants to contribute to agenda setting, therefore more willing to engage on rebalancing, currency and trade (wants to be part of TPP, even though this goes beyond current WTO rules) If it wants to be more active in agenda setting within the G 20 – for this it would need to carry other developing G 20 countries along. Alok Sheel9