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Key Economic Policy ChoicesFacing Chinas New Leaders
(China Debate March 26, 2013)
Yukon Huang
Senior Associate Carnegie EndowmentFormer World Bank Director for China
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China is becoming a more normal economy
Moving to a more sustainable but slower growthand becoming more balanced regionally.
Less reliant on central interventions and drivenmore by market driven forces influencing keyprices and capital flows.
But as a more normal economy China must dealwith new risks.
It is now more vulnerable to global cycles and lessable to rely on state investments to drive growth.
This could make the new leadership less securethan before.
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Many Views on Chinas Reform Agenda
China needs to rebalance its economy
It is about getting prices right interest rates are
too low and the exchange rate is undervalued
Chinas trade surpluses and its undervalued
exchange rate drive trade deficits in the West
Are these myths or realities?
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First, a snapshot of Chinas growth pattern :
Rapid and relatively stable growth led by the coast butnow by the interior
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
GDP Growth Rates - national and regional
China East Central West
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China- Regional Growth 2011 Center Now Rising
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(1) China needs to rebalance its economy increase
consumption and reduce investment
(% of GDP)
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But declining consumption share is characteristic of
successful industrializing countries
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China leads in growth of consumption
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3-month rate Inflation
China 3.88 2.0
Japan 0.16 -0.3
Singapore 0.26 3.6
South Korea 2.76 1.4
Taiwan 0.94 3.0
UK 0.49 2.7
US 0.28 1.6
(2) Are Interests rates too low in China?:
3-month deposit rates and annual inflation rates
Source: The Economist, March 8, 2013
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(3) US - China trade balances are not linked
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-200
-150
-100
-50
0
50
100
150
200
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
BillionsofU.S.
dollars
China's trade balances with the US, EU, Canada, select Asian economies, and
other commodity exporters
US
EU
Canada
Selected ASEAN*
Japan
South Korea
Taiwan
Other
Commodity
Exporters**Selected ASEAN includes Malaysia, Philippines, and Thailand. Other commodity exporters includes countries who had trade surpluses with China in 2010
and exported more than $1 billion in primary commodities to China in 2010, excluding Hong Kong, Singapore, and the other economies depicted.
*Selected ASEAN includes Malaysia, Philippines, and Thailand. Other commodity exporters includes countries who had trade surpluses with China in 2010
and exported more than $1 billion in primary commodities to China in 2010, excluding Hong Kong, Singapore, and the other economies depicted.
*Selected ASEAN includes Malaysia, Philippines, and Thailand. Other commodity exporters includes countries who had trade surpluses with China in 2010
and exported more than $1 billion in primary commodities to China in 2010, excluding Hong Kong, Singapore, and the other economies depicted.
*Selected ASEAN includes Malaysia, Philippines, and Thailand. Other commodity exporters includes countries who had trade surpluses with China in 2010
and exported more than $1 billion in primary commodities to China in 2010, excluding Hong Kong, Singapore, and the other economies depicted.
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Three key choices that would support growth
and address increasing social unrest
Role of the state
Role of the banking and fiscal systems
Pace and pattern of urbanization
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(1) Need a new growth model that disentangles the
state from other economic agents
GDP
Party/
GovernmentSOEs
State Banks
Party/
Government
Private Sector
SOEs
Banks (state and private)
GDP
Past
Future
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China
Province A
State EnterprisesPrivate
Enterprises
Province B,C
Rest of the World
Promoting competition between state and
private enterprises to drive future growth
Role of the State
Strong
Robust
Weak
Globalization
Regional
Competition
State vs. Private
Firms
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0 40 80 120 160 200
China
Brazil
India
South Korea
United States
(2) Chinas banks play too large of a roleMoney Supply (M2) as Percent of GDP, 2011
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*Social expenditures include health, education, and welfare spending
High
Income
OECDMiddle
Income
Upper
LowerChina
Total
Expenditures 41.6 33.1 36.1 25.7Social
Expenditures 26.9 16.2 15.4 9.4Other 14.7 16.9 20.7 16.3
Chinas budget plays too small of a role(% of GDP)
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3. Premier Li Keqiangs support for
urbanization would help sustain rapid
growth and deal with income disparities:
- Reform migration and urban
management policies
- Mega-cities should be larger and density
needs to be increased in many cities
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10
20
30
40
50
60
70
80
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
PercentageofTota
lPopulation
Year
Urbanization needs to accelerate
Unconstrained Migration
Current Path
U b d it d t b i d
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Urban density needs to be increased
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Risks are as much political as economic
For these three choices, strong vested interests militateagainst change: links between the Party and economicagents and between Beijing and the regions.
Collective decision-making makes it difficult to addresspolitically charged concerns. Will this change?
Chinas regionally decentralized governance system has
encouraged economic liberalization but retardedpolitical liberalization.
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