Post on 26-Dec-2015
Challenges to China’s Growth: Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times
Nottingham University
Ningbo, China
November 9th 2010
2
Challenges to China’s Growth
“In the case of China, there is a lack of balance, co-ordination and sustainability in economic development.”
Wen Jiabao, Premier of the State Council of the People’s Republic of China, September 2010
4
1. China’s potential
• The simplest measure of the growth potential of an economy is its distance from the global productivity frontier.
• This can be called its “catch-up potential”.
• Despite more than 30 years of very fast growth, China is still far behind the frontier, with output per head, at common international prices (or “purchasing power parity), at a fifth of US levels.
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1. China’s potential
PATTERNS OF CATCH-UP GROWTH
GDP PER HEAD RELATIVE TO US(2009 EK $s)
1.0%
10.0%
100.0%
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Japan South Korea China India Brazil
6
1. China’s potential
• China is still so far behind the frontier, because it was extremely poor when rapid growth began after the shift to “reform and opening up”.
• GDP per head, at PPP, was only 3 per cent of US levels in the later 1970s.
• Today it is about the same ratio to US levels as that of Japan in 1950, before more than two decades of very fast growth.
• So China may have up to another two decades of very fast growth in front of it.
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2. Model
• China is following what professor Michael Pettis of Peking University’s Guanghua School of Management calls a “souped-up” version of the “Asian model” pioneered by Japan and South Korea.
• The characteristics of this production-oriented model are: high investment, transfers from households to industry (via low interest rates, suppressed wages and a depressed exchange rate), rapid growth of exports and high external surpluses.
• China is “Japan plus”: with a higher investment rate, larger trade surpluses, lower consumption and much more currency intervention.
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2. Model: fast growth
CHINA'S GROWTH PERFORMANCE
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
GROWTH PREVIOUS 5-YEAR MOVING AVERAGE OF GROWTH
9
2. Model: investment
GROWTH OF INVESTMENT, CONSUMPTION AND GDP
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
GDP Household consumption Government consumption GFCF
INVESTMENT AS THE DRIVER OF DEMAND
10
2. Model: investment
COMPOSITION OF CHINA'S FINAL DEMAND
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Private consumption Government consumption GFCF Net exports
HOW INVESTMENT SOARED
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2. Model: financial repression
INTEREST RATES AND NOMINAL GDP
0
5
10
15
20
25
30
Q1 199
7
Q3 199
7
Q1 199
8
Q3 199
8
Q1 199
9
Q3 199
9
Q1 200
0
Q3 200
0
Q1 200
1
Q3 200
1
Q1 200
2
Q3 200
2
Q1 200
3
Q3 200
3
Q1 200
4
Q3 200
4
Q1 200
5
Q3 200
5
Q1 200
6
Q3 200
6
Q1 200
7
Q3 200
7
Q1 200
8
Q3 200
8
Q1 200
9
Q3 200
9
Q1 201
0
Q3 201
0
Nominal GDP (annual % change) LENDING RATE 5Y AND ABOVE DEPOSIT RATE, 6M
FINANCIAL REPRESSION
12
2. Model: exchange rate
RMB PER US DOLLAR
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
01
/01
/19
90
01
/01
/19
91
01
/01
/19
92
01
/01
/19
93
01
/01
/19
94
01
/01
/19
95
01
/01
/19
96
01
/01
/19
97
01
/01
/19
98
01
/01
/19
99
01
/01
/20
00
01
/01
/20
01
01
/01
/20
02
01
/01
/20
03
01
/01
/20
04
01
/01
/20
05
01
/01
/20
06
01
/01
/20
07
01
/01
/20
08
01
/01
/20
09
01
/01
/20
10
THE MANAGED EXCHANGE RATE
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2. Model: exchange intervention
CHINA’S FOREIGN CURRENCY INTERVENTION
CHANGE IN FOREIGN CURRENCY RESERVES, AUGUST 2000 - AUGUST 2010 ($m)
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
China
Japa
n
Russia
Saudi
Arabia
Brazil
India
S. Kor
ea
Mex
ico
Turke
y
Indo
nesia
South
Afric
a
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2. Model: trade
CHINA’S OPEN ECONOMY
CHINA'S TRADE(as share of GDP)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Trade balance Exports Imports
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2. Model: trade
CHINA’S OPEN ECONOMY TRADE OVER GDP, 2008
(per cent)
92%73%
59%41% 41% 46%
32% 24%
18%
15%
7%
19% 14% 8%
7%7%
0%
20%
40%
60%
80%
100%
120%
South Korea Germany China UK India Russia Japan US
Merchandise Services
Source: World Bank, World Development Indicators
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3. Challenges
• So what might prevent China from sustaining the high growth model for two or more decades?
• Answers lie in:
– Productivity;
– Investment;
– Finance;
– Resources;
– External demand; and
– Geo-politics.
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3. Challenges: productivity
• First challenge – raising productivity:
– Further increases in the investment rate seem implausible.
– That will make economic growth relatively more dependent on rising productivity.
– There is some evidence that the rate of growth of whole economy productivity is slowing.
– The lowering of the rate at which labour is transferred from rural activities to the modern sector will lower productivity growth.
– So raising productivity growth will become ever more important.
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3. Challenges: productivity
INVESTMENT AS DRIVER OF SUPPLYSOURCES OF CHINA'S GROWTH
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
2000 2001 2002 2003 2004 2005 2006 2007 2008
Total Factor Productivity Growth (ln difference, percent)
Contribution of non-ICT Capital Services Growth in GDP Growth (percent)
Contribution of ICT Capital Services Growth in GDP Growth (percent)
Contribution of Labor Quality Index to GDP Growth
Growth
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3. Challenges: investment
• Second challenge – managing investment:
– China’s economic growth has been pushed by an extraordinary savings and investment effort.
– Astonishingly, the country has emerged as both the largest investor, relative to gross domestic product, in the world and the largest exporter of capital, in absolute terms.
– While a source of very rapid growth, this growth pattern also creates significant vulnerabilities.
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3. Challenges: investment
– Assume the incremental capital output ratio is close to 4.
– Then a decline in the growth rate from 10 per cent to 5 per cent would reduce China’s warranted investment rate by 20 per cent of GDP.
– If abrupt, that would generate a collapse in demand.
– This does not seem to be imminent. But such a sharp adjustment is likely in the next 25 years.
– When this happens, China must either shrink savings dramatically or increase its current account surplus enormously, if it is to balance its economy.
– Otherwise, it would risk prolonged Japan-style recession.
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3. Challenges: finance
• Third challenge – containing finance:
– China’s growth has been driven by rising ratios of credit and money to GDP and heavy taxation of savers.
– As the marginal returns on capital fall and bubbles become frequent, large banking sector losses become plausible.
– Higher interest rates, to support household incomes and improve efficiency in the use of capital, would further squeeze the margins of the banking sector.
– A move to open up the capital account, perhaps to support the internationalisation of the renminbi, would make the financial sector vulnerable to a severe crisis.
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3. Challenges: finance
MONEY SUPPLY OVER GDP(per cent, 4Q moving average}
0.020.040.060.080.0
100.0120.0140.0160.0180.0200.0
Q1-19
92
Q4-19
92
Q3-19
93
Q2-19
94
Q1-19
95
Q4-19
95
Q3-19
96
Q2-19
97
Q1-19
98
Q4-19
98
Q3-19
99
Q2-20
00
Q1-20
01
Q4-20
01
Q3-20
02
Q2-20
03
Q1-20
04
Q4-20
04
Q3-20
05
Q2-20
06
Q1-20
07
Q4-20
07
Q3-20
08
Q2-20
09
Q1-20
10
CN: Money Supply M2 (% of gdp) CN: Money Supply M2: Quasi Money (% of gdp)
MONETISATION OF CHINA
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3. Challenges: resources
• Fifth challenge – managing resources:
– China’s size means that, at any given level of development, it needs vastly more resources than other countries, except India.
– This means that it shifts the terms of trade against itself, as it grows.
– It also means that it has to secure vast quantities of resources.
– If, for example, China were to have as many vehicles per head as Japan, its fleet would increase fifty-fold and world consumption of oil would almost have to double.
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3. Challenges: resources
IMPORTS OF THE “WORKSHOP OF THE WORLD”
SHARES IN WORLD MERCHANDISE IMPORTS 2008(per cent)
27.8%
22.6%
6.4%5.0%
6.2%7.2%
13.3%
10.0%
13.1%
7.6%
17.0%
13.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
AgriculturalRaw materials
Ores andmetals
Manufactures Food Fuels Total
China US
Source: World Bank, World Development Indicators
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3. Challenges: resources
CHINA'S SHARE IN WORLD COMMODITY IMPORTS(2009 estimates)
55.0%
48.0%
30.0%
25.0%
20.0% 20.0%
8.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Iron ore Soybean Cotton Copper Nickel Palm Oil Oil
IMPORTS OF THE “WORKSHOP OF THE WORLD”
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3. Challenges: resources
COMMODITY BOOM
COMMODITY PRICES
0
100
200
300
400
500
600
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Fuel and Non-Fuel
Non-Fuel ncludes Food and Beverages and Industrial Inputs
Industrial Inputs Price Index includes Agricultural Raw Materials and Metals
Commodity Fuel includes Crude oil (petroleum), Natural Gas, and Coal
Source: IMF WEO, October 2010
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3. Challenges: resources
ENERGY INTENSITY OF THE CHINESE ECONOMY
ENERGY EFFICIENCY OF THE ECONOMY(2005 GDP, at PPP $s, per kg of oil equivalent)
9.9
7.97.4
5.54.9
3.4
0
2
4
6
8
10
12
UK Japan Brazil US India China
Source: World Bank, World Development Indicators
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3. Challenges: world demand
• Sixth challenge – managing external demand:
– China is already the world’s largest exporter and has the world’s largest current account surplus.
– It also has had unsustainably rapid growth of exports.
– Natural forces will tend to drive the economy into current account deficit, since export growth will be constrained by the growth of world trade, while import growth will be linked to the growth of the domestic economy.
– This shift needs to be welcomed, since it will defuse tension and enhance the level of welfare at home.
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3. Challenges: world demand
SHARES IN WORLD MERCHANDISE EXPORTS, 2008
(per cent)
11.4%
4.4%3.8%
1.8%
0.0%
9.3%8.9%8.1%
11.5%
5.6%
8.1% 8.2%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Manufactures Ores and metals Food Fuels Agricultural Rawmaterials
Total
China US
Source: World Bank
EXPORTS OF THE “WORKSHOP OF THE WORLD”
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3. Challenges: world demand
GROWTH OF VOLUME OF MERCHANDISE EXPORTS AND IMPORTS, 2000-08
0%
5%
10%
15%
20%
25%
30%
China Russia South Korea India Brazil US Japan UK
Export Import
Source: World Bank, World Development
CHINA’S SOARING TRADE
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3. Challenges: world demand
CHINA RISES TO THE TOP OF THE SURPLUS LIST
CURRENT ACCOUNT BALANCES ($bn)
-$100.0
$0.0
$100.0
$200.0
$300.0
$400.0
$500.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
China Germany Japan
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3. Challenges: geopolitics
• Seventh challenge – a premature superpower
– China is a developing country and is also likely to remain a relatively poor country for decades, in terms of incomes per head.
– But, by virtue of its size, it has a gigantic impact. Indeed, it is on its way to becoming a superpower.
– As a result, it is one of the few countries – arguably one of two or three (if the European Union is viewed as one) – that must take account of the impact of its actions on the world economy.
– China cannot just “import order”. It must “export order”, too.
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3. Challenges: geopolitics
GDP OF THE TEN BIGGEST ECONOMIES(ranked in 2015, at PPP)
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
United States China India Japan Germany Russia Brazil United Kingdom France
Source: IMF WEO
CHINA’S LEAP TO THE TOP
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4. Policies
• China has the potential to develop rapidly for another two decades, or more. But if it is to succeed it will have to:
– Shift towards growth driven by domestic consumption.
– Manage a decline in the investment rate.
– Accelerate innovation.
– Rebalance the economy away from growth of exports.
– Further reduce the current account surplus.
– Sustain an open world economy.
– Increase resource efficiency.
– Secure resources at manageable prices.
– Help maintain a peaceful world.