1. Susan Mays, Ph.D., contact mays999@gmail.commays999@gmail.com Globex Faculty Fellow, Peking University; Faculty, The University of Texas at Austin China’s Economy: Growth and Global Connections Macro-economy and Challenges 北京大学工学院 PKU College of Engineering Globex

2. 2 Macro-economic key points for today 1.“China is ‘slowing’ “: ongoing GDP growth, yet rate of growth is slowing Expected, yet definitely questions about the GDP components 2.“Over investment” Investment is too large as a portion of GDP Corp (SOE) and gov loans (debt) are growing faster than GDP Normal w rapid development, but it’s time to make more efficient investments (that is, make better loans) or do less investment Chinese leaders well aware…policies for more consumer-led econ 3.“Not consumer driven” Consumer spending growing slower than GDP…lower than any major nation in history Yet, income and spending up 10% annually since 2005 But consumers save due to lack of social safety nets (like health) Consumers save because also few options for “financial returns” (like in stock market equity); must save in banks, earn very low interest

3. 3 With slower growth, growth is still nominally much larger than in previous years when C’s econ was smaller (1) Date sources: tradingeconomics.com; China’s General Administration of Customs; World Bank. YearGDP China in US$trillion GrowthGrowth Value 2000US$1.19t10%119b 2005US$2.25t10%225b 2010US$6.01t10%601b 2015US$11.38t5%569b

4. 4 The components of GDP, which is the national “output” or “income” GDP = Consump + Gross Investment + Gov Spending + (Exports – Imports) GDI = Private Consump + Investment + Gov Spending + (Net Exports) GNI = Consump + Gross Capital Formation + Gov Spending + (Net Exports) Note: Greens terms are both “Consumption”: We split private consumption (also called “consumer consumption”) and government spending (also called “government consumption”) Red represents total national “Savings” (now at ~50% for China)

5. 5 4.“Limited financial system”: Financial system not totally open to global capital: not free flows of capital in-out of China…saw problems in other developing countries State-owned bank centered: give low returns to depositors; favor loaning to state-affiliated companies or projects; don’t really loan to private nor foreign companies Leads to “shadow banking” 5.“Increasing debt level”: up 2x 2007 to 2014; debt = consumer + gov + corp ~260% of GDP; highest ever; interest payments add up! Almost all from domestic sources; won’t default on foreign debt like LA in 1980s and Asia in 1997 high corp debt, 52% of total debt (loans & investment we discussed) Different than US debt story: usually covers just government debt owed in part to foreign countries 6.“Incomes not increasing (…enough)”: pay is somewhat supressed; this inhibits the consumer spending portion of GDP; corps/gov spend on capital investments not labor; little union support; ag>Ind>serv…takes time; big labor supply

6. 6 Macro-economic key points for today 7.Fiscal policy: = gov tax and spending 8.“Local gov debt and land transfer issues”: related to fiscal policy 9.“Shadow banking”: due to financial sector limitations and fiscal policy 10.Increases in gov spending can lead to increased consumption part of GDP

7. 7 Taxation and government revenues (taxes, SOEs, fees, etc.) IMF Working Paper, “Is China Over-investing and Does it Matter?,” 2012

8. 8 The central government’s 2014 commitment to fiscal and tax reform in order to reduce risks from local debt Daniel H. Rosen and Beibei Bao, Rhodium Group, “China's Fiscal and Tax Reforms: A Critical Move on the Chessboard,” July 11, 2014. “Public finance is the foundation and a critical pillar for state governance. A scientifically designed fiscal and tax regime is the institution that guarantees resource allocation optimization, market unification, social equality, and long- lasting security and peace for a nation.” XI Jinping’s Team, 2014

9. 9 Macroeconomic levers 1) fiscal policy and 2) monetary policy ( < amount of $ circulating in the economy) Fiscal Policy, primary levers: 1.Taxation……………~25% of GDP 2.Gov spending (In U.S. there’s an annual “budget deficit”, which is “Gov Spending – Taxation”, we spend more than we tax, which then accumulates to be “national debt”)

10. 10 The “Two Ratios” were brought under control in 1994; another big reform enacted by end of 2016 Daniel H. Rosen and Beibei Bao, Rhodium Group, “China's Fiscal and Tax Reforms: A Critical Move on the Chessboard,” July 11, 2014.

11. 11 China’s central government has more tax revenue than expenditure commitments Daniel H. Rosen and Beibei Bao, Rhodium Group, “China's Fiscal and Tax Reforms: A Critical Move on the Chessboard,” July 11, 2014.

12. 12 Local governments have been increasingly funded by land transfers (“off-budget” revenues and ^ “shadow banking”) IMF Working Paper, “Is China Over-investing and Does it Matter?,” 2012 Daniel H. Rosen and Beibei Bao, Rhodium Group, “China's Fiscal and Tax Reforms: A Critical Move on the Chessboard,” July 11, 2014.

13. 13 New tax reforms: hard deadline in 2016 7.Fiscal policy: = gov tax and spending 8.“Local gov debt and land transfer issues”: related to fiscal policy 9.“Shadow banking”: due to financial sector limitations and fiscal policy 10.Increases in gov spending can lead to increased consumption part of GDP

14. 14 2016 fiscal and tax reforms… When Beijing cut fiscal and monetary stimulus in 2010, LGFVs were forced into the arms of shadow banks Abuse of farmers in land transactions is well known; fiscal/tax reform to stop it Talk of how to improve rights and social justice around land, but growth trumped the rights of rural citizen almost every time Central attention is more on local debt burdens than farmer rights China’s reforms are moving ahead despite bureaucratic inertia, institutional resistance, and widespread skepticism New reforms limit local special activity No laws or regulations can stipulate tax policies that are more preferential than national Try to reduce local government’s addiction to land financing and inefficient investment Create a market-driven economy for businesses

15. 15 Macro-economic fundamentals Focus: structure, performance and output (GDP) of a whole economy Goals: Influence interest rates and money supply in order to stabilize business cycles and affect employment and inflation…to foster the GDP Main Levers: 1) fiscal policy & 2) monetary policy Primary Indicators: GDP = the output (or “income”) of the whole economy Inflation: Price Indices (consumer and producer) = price of a basket of goods (Un)Employment rate Trade Balance = exports – imports (surplus or deficit) Balance of (Intern.) Payments (BOP) = (foreign $ in) – (domestic $ out) = Current Acct + Capital Acct

16. 16 Banks turn households savings into loans (investments) for SOEs, infrastructure, local governments, (…and real estate?) IMF Working Paper, “Is China Over-investing and Does it Matter?,” 2012 STATE OWNED BANK LARGE STATE OWNED ENTERPRISES FAMILY GOV. PROJECTS (INFRASTRUCTURE) LARGE STATE OWNED ENTERPRISES

17. 17 2014 still at ~50%: China’s gross national savings (investment) as % of GDP…..vs. U.S. 18%, Germany 26%, Korea 32% IMF Working Paper, “Is China Over-investing and Does it Matter?,” 2012

18. 18 Rapidly rising private per capita consumption; yet private consumption declining as a share of gdp (1)National Bureau of Statistics China; People’s Daily; tradingeconomics.com; data trend combines rural and urban averages. (2)IMF; World Bank; CIA; over 600 million internet users; RMB up 30% since 2005; over 270mm rural migrant workers in cities; migrant worker income tends be between rural and urban averages. Annual Disposable Income Per Capita 1 Urban Income ~ 3x Rural Latest Data 2013: Urban: Y29,945 = ~US$4,325 Rural: Y8,896 = ~US$1,428

19. 19 Currently savings are up 7% in last 10 years to 30% of income (5-6% in U.S.) and consumption is 35% of GDP (75% in U.S.) Aurthur Kroeber, “China’s Consumption Paradox,” Eurasian Geography and Economics, 2011, data from Chamon and Prasad (2008) and NBS (2010.)

20. 20 Decline in consumption as a percent of GDP under rapid industrialization China1995-201112% Japan1955-197014% Korea1975-198821% Korea1956-198844% Malaysia1982-199712% Thailand1982-199712% India1960-200626% U.S.1900-195025% Aurthur Kroeber, “China’s Consumption Paradox,” Eurasian Geography and Economics, 2011, data from IMF in 2011.

21. 21 Why was China’s consumption percentage so low to begin with? Aurthur Kroeber, “China’s Consumption Paradox,” Eurasian Geography and Economics, 2011, data from IMF in 2011.

22. 22 The share of working-age people will now decline, likely leading to less savings Carl Bonham and Calla Weimer, “Chinese Savings Dynamics,” Oxford Economic Papers 65, 2013, page 183.