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

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

3. Shares of World GDP (in percent) Nominal 0 5 10 15 20 25 30 19962010 PPP 0 5 10 15 20 25 30 19962010

4. Contributions to World GDP Growth (in percent) Nominal 0 10 20 30 40 50 60 70 19962010 PPP 0 10 20 30 40 19962010

5. Income per Capita (USD thousand) Nominal 0 10 20 30 40 50 19962010 PPP 0 10 20 30 40 50 19962010

6. Domestic Demand (USD trillion) Investment 0.0 0.5 1.0 1.5 2.0 2.5 3.0 19962010 Consumption 0 2 4 6 8 10 12 19962010

7. Trade and Debt Share of World Exports (in percent) 0 2 4 6 8 10 12 14 16 19962010 Public Debt (USD trillion) 0 2 4 6 8 10 19962010

8. Parsing the Growth Numbers

9. Composition of Growth

10. Source: IMF.

12. Investment and Private Consumption (Percent of GDP)

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

14. Contributions to GDP Growth, China, 2000-09 (in percent) GDP Growth10.2 ConsumptionTotal4.1 Private2.8 Government1.3 Investment5.0 Net Exports1.1

15. Contributions to GDP Growth, 2000-09: International Comparison (in percent) CountryChina Asian Emerging Markets Median GermanyJapanU.S. GDP Growth10.24.60.81.51.9 ConsumptionTotal4.13.20.51.02.0 Private2.82.60.30.61.7 Government1.30.60.20.40.3 Investment5.00.8-0.20.2-0.1 Net Exports1.10.70.5 0.0

16. Exports and Imports (12-Month Growth Rates)

17. Exports and Imports (Billions USD)

18. Trade and Current Account Balances (Billions USD)

19. Trade and Current Account Balances (Percent of GDP)

20. Macroeconomic Policies Fiscal policy Monetary policy Exchange rate regime

21. Source: IMF.

22. Money and Credit Growth

23. Nominal Exchange Rates

24. Real Effective Exchange Rate Indices

25. Foreign Exchange Reserves: Flows and Stocks (Billions USD)

26. Inflation Rates (Year on Year)

27. Chinese Bond Yields

28. U.S. Treasuries

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

30. Equity Market Indices

31. Source: IMF.

32. Balance of Payments (Billions USD)

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

34. GDP Composition (in percent) 1995 ConsumptionPrivate44.9 Government13.3 Investment40.3 Net Export1.6 2000 ConsumptionPrivate46.4 Government15.9 Investment35.3 Net Export2.4 2009 ConsumptionPrivate35.8 Government13.0 Investment44.0 Net Export5.2

35. GDP Composition: International Comparisons (in percent) 2009 CountryChina Asian EM GermanyJapanU.S. ConsumptionPrivate35.857.858.058.171.1 Government13.011.220.018.716.4 Investment44.020.317.919.715.2 Net Export5.29.23.93.0-2.7

36. Investment and Private Consumption (Percent of GDP)

37. Labor Share of National Income Flow of Funds Data

38. Labor Share of National Income GDP-Income Approach

39. Personal Disposable Income (Percent of GDP)

40. Composition of National Saving (Percent of GDP)

42. Age Effects on Income, Consumption, and Saving Rates

43. Why is Urban Household Savings Rate Rising? Chamon, Prasad (Jan. 2010), AEJ: Macroeconomics Chamon, Liu, Prasad (Dec. 2010), NBER WP 16565 Precautionary motives: Buffer stock savings (young, middle-aged); Health risk (elderly) Structural factors: Financial market underdevelopment; Pension reforms

44. 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

45. 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

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

47. Growth Prospects

50. China: Population Projections

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

52. Ratio of deposits to GDP

53. 200720082009 Net Position118814941822 A. Assets241629573460 1. FDI116186230 2. Portfolio285253243 Equity202155 Debt265231188 3. Other investment468552535 4. Reserve assets154719662453 Foreign exchange reserves152819462399 B. Liabilities122814631638 1. FDI704916997 2. Portfolio147168190 Equity129151175 Debt181715 3. Other investment378380451 International Investment Position (Billions USD)

54. 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

55. 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

56. 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

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