china's new path forward - professor liu mingkang

By Professor Liu Mingkang

China’s New Path Forward

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2001 2003 2005 2007 2009 2011 2013

GDP Growth Rate (%)

GDP yoy GDP qoq（saar）

Current Business Climate GDP growth in Q1, 2014: 7.3%E

Q4,2013: 8.0% Q3, 2013: 8.3% Q2, 2013: 7.3% Q1, 2013: 7%

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8%

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

PMI

PMI（sa） PMI（non sa） Expansion Threshold

50.3

Current Business Climate

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PMI in Mar 2014: 50.3 Jan 2014: 50.6 Dec 2013: 50.9

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-2

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2001 2003 2005 2007 2009 2011 2013

CPI Growth (% yoy)

CPI Core CPI


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CPI growth in Q1, 2014: 2.3% Q4, 2014: 2.7% Q1, 2013: 2.4%

2.4%

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2001 2003 2005 2007 2009 2011 2013

PPI Growth (% yoy)

PPI（yoy） PPI（qoq，saar）


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Q1,2014: -2.0%; Q4,2013: -1.4%; Q1, 2013: -1.7%

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2013 Q4 2014 Q1

Electricity Production (billion kWh)

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2001 2003 2005 2007 2009 2011 2013

Electricity Production (% yoy growth)

Electricity Production

Q1 2014 levels are a 15% drop from Q4 2013

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Current Business Climate Electricity production growth rate: Mar 2014: 7.8% Dec 2013: 10.5% Nov 2013: 9.5%


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663 on Dec. 5, 2008 628 on Feb. 6, 2012 698 on Jan.2, 2013

• BDI fell to 1002 on April 11, after a temporary rise in late 2013

• This is higher than the historical low of 650 in 2012, and 698 at the beginning of 2013

• Optimism remains, driven by expectations and substantive plans for significant reforms. Despite the optimism, concerns still remain.

• Top business challenges include rising labor costs, inconsistent regulatory interpretation, shortage of skilled labor (both general and managerial), as well as the imbalanced eco-system.

Business Climate: Summary

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• More flexibility in foreign exchange rate regime: daily RMB trading band expands from 1% to 2%.

• Liberalization of all interest rates in China

• Quicken the pace to build an innovation-ecosystem, to ensure that Chinese inventors and investors have access not only to the world’s fastest-growing market, but also to markets worldwide

• High deposit reserve ratio gives the central bank enough room for monetary easing, whenever necessary

• Abundant and sustainable private savings, high foreign exchange reserves, and further financial reforms help to stabilize financial markets

Preparedness for Possible Shocks

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Market Oriented Reform the Crux of Stimulating the Potential Growth Engine

• Continued efforts in reducing government controls and barriers, and for better market access i.e. 416 items of government approval requirements either abolished

or relaxed in 2013 Over 200 items will be further re-examined, rescinded in 2014

• Re-examination of the justifiability of those rules, laws, and fiscal, credit, foreign exchange policies aimed at incentivizing or de-incentivizing certain industries and localities, which distort the market mechanism

• All the reforms are expected to be phased within the next 2 to 3 years and a transparent negative list approach will be adopted accordingly, helping the market determine resource allocation 10

Consensus Reached Regarding Ownership and Property Rights Protection Issues

• The 3rd Plenum of the 18th Party Congress stressed the importance of protecting property rights of non-SOEs

• Mixed ownership will be introduced to realize the retreat of SOEs, among other structural initiatives

• To create an innovative ecosystem that grants sufficient and equal protection to both domestically owned firms and foreign firms Ensuring investor access to the world’s fastest-growing market and to

the best technologies and talents, regardless of country of origin. If the China (Shanghai) Pilot Free Trade Zone runs successfully,

practices will be copied to other parts of the country.

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To Build a Transparent Fiscal Regime • All sources of government incomes and expenditures will be

budgeted

• Set up local government financing mechanisms under which local governments shall regularly disclose their balance sheets by rules and/or laws Redefine division of responsibilities between central and local

governments These resulting in a clearer division of resources

Risks from by local government debt still under control Local government debt grew fast, but growth speed starting to

decline from 2013. About RMB 20 trillion in 2013, vz. 10.7 trillion in 2011. 20% of local governments (mostly county level) indebted over 100%

of GDP

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Effective Prevention of Systemic, Regional Financial Crises (1) • Financial regulation is improving

– Basel III and Solvency II are being firmly implemented in China. – Bitcoin related transactions are prohibited by the authorities, i.e. PBOC,

CBRC, CSRC, CIRC and MIIT(Ministry of Industry and Information Technology);

– Ordinance No. 107 issued by State Council on shadow banking • Clearer definition • Clearer regulatory and supervisory responsibilities • Stricter transparency and disclosure requirements

– Stricter regulation on safety and soundness of third party payment operators

• Financial reform is deepening – In the next 3-5 years, more efforts will be made to build a more sustainable,

more friendly, more resilient financial system – This includes institutions to evaluate credit and financial standings

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Effective Prevention of Systemic, Regional Financial Crises (2) • The practice of ‘rigid responsibility of repayment’ and ‘zero

default’ rule is being broken.

• Prudent treatment towards mobile internet financing

• Create a government-sanctioned body that can collect and supply credit standing and universal standing information of any individuals and institutions for domestic and multinational service providers, to improve rule of law and reduce risks

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New Urbanization Must be People Oriented

• Recently, it has been clearly stated that people are at the core of the new urbanization

– Adaptive city programing in line with local specifics

– Ensure consistency of city programming, regardless of changing of government officials

– Differentiated polices between big, medium and small cities

– More attention being paid to reform the Hukou system (household and residence registration system), equal employment opportunities, housing, young generation education, integration of different ethnic minorities, etc., the nation and society

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Political and Social Agenda (1)

• The nation, the society and the government are expected to do better in the rule of law

– 3rd Plenum of the 18th party congress set the tone that China needs to build up its nation, society and government under the rule of law

– Economic maturity brings new sets of legal challenges to China, which the government, businesses and citizens must be determined to address

– The whole reform process must be ensured on track of rule of law

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• Before building a creditable society, a creditable government must be in place

– The unprecedented in-depth anti-corruption movement reveals the dedication of the new Chinese leadership in building a creditable society and government, and to restore public trust

– Revealed corruption cases increasingly show that transparency is the best the cure of corruption. Rule of law, not rule by person, are the most reliable measures to protect the government from corruption

– The public oversight is an effective way of containing corruption • From the end of 3rd Plenum of the 18th party congress, 31 corruption cases

involving ministerial level officials were investigated and 20 were disclosed • 46% of corruption investigations initiated by public whistleblowing

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• Promoting solidarity of ethnic minorities with the majority and preserving the interests of religious groups

– China is a nation in which the Han majority and over 55 ethnic minorities live together

– Chinese government is committed to preserving social solidarity, stability and unity of the nation, and aims to share the fruits of development equally among all ethnic communities

– Neither authoritarian nor extremist policies will be appropriate for the Chinese government

– Religious groups’ rights should be seriously protected

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Frequent Smog Has Seriously Affected Social Stability, Brought Bad Reputation

• For the first time, the Chinese government promises to attach equal importance to fighting against pollution as fighting against poverty. Violations of anti-pollution laws will be punished seriously

• Making efforts to minimize energy consumption, pollutant emission, enhance energy consumption efficiency, and protecting drinking water sources by means of:

– Better standards and better implementation – Cooperation and coordination among government agencies and

across regions – Taxing carbon emissions and other pollutants, or setting up carbon

emission trading exchanges – Provide regional transparent targets to reduce pollution

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Hunger for a Greener, Lower Carbon Emission Society

• Government should play a key role in fighting against pollution and over-capacity in industries

• Government’s performance evaluation indicators should be changed so as to provide the right incentives

• Holistic approaches, including legal, administrative, taxation measures and market transaction mechanisms might be adopted to deal with pollution and over-capacity issues:

– Carbon tax – Resource tax – Carbon emission trading system, such as exchanges

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China is Forming a New View on Food Supply Security

• Sufficient and secure food supply – In the next 10 years, greater inputs in cleaner soil, cleaner

water, greener agriculture, and safe food

• Naturally, there will be more debates on the security of genetically-modified (GM) foods, transfer of rural and farmers’ land, and the de-farmeration of farmers.

• Debates on these issues might be helpful in improving people’s livelihoods and stimulating balanced standards

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China is Ready to Contribute to Addressing these Problems

• Though it’s late, the concept of ecological civilization and green life is getting known by Chinese, but still challenging

• It is vital for China and US to cooperate in changing the current model of energy production and consumption, developing clean energy technology, sharing experiences in improving governance and building a market infrastructure for cleaner energy

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China’s Emissions are High, but Falling A table of China’s thermal power emissions

Smoke and Dust

Year Emissions from Thermal Power Generation

Total National Emissions

(10,000 tons)

Emissions from Industry

(10,000 tons) Total Emissions (10,000 tons)

As % of Total National

Emissions

As % of Industrial Emissions

2010 1277.8 1051.9 160 12.5% 15.2

2011 1278.8 1100.9 155 12.1% 14.1

2012 1234.3 1029.3 151 12.2% 14.7

US 2012 443

EU 2012 487

Sulphur Dioxide (SO2)



(10,000 tons)

Emissions from Industry (10,000

tons) Total Emissions (10,000 tons)


Emissions As % of Industrial

Emissions

2010 2185.1 1864.4 926 42.4 49.7

2011 2217.9 2017.2 913 41.2 45.3

2012 2117.6 1911.7 883 41.7 46.2

US 2012 562 60 335 60 558

EU 2012 458 109.2 265* 58 243

Nitrogen Oxides (NOx)



(10,000 tons)

Emissions from Industry (10,000

tons) Total Emissions (10,000 tons)


Emissions As % of Industrial

Emissions

2010 - - 950 - -

2011 2404.3 1729.7 1003 41.7 58.0

2012 2337.8 1658.1 948 40.6 57.2

US 2012 1116 118.4 156 14 132

EU 2012 884 132.6 198.9 22.5 150

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*Includes data for Sox

Source: EPA Emissions Tracking Highlights, National Sulfur Dioxide Emissions, National Nitrogen Oxide Emissions EEA Sulphur Dioxide Emissions Assessment, Nitrogen Oxide Emissions Assessment

1. Investment in clean energy and technology

Some Positive Outlooks for China (1)

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2. Water, food and beverage markets

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3. Urban planning, design, construction and management

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4. Financial services and innovation 5. Breakthroughs in healthcare, nursing and population policy

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Some Positive Outlooks for China (5) 6. Media and entertainment

* Includes Algeria, Monaco, Morocco, Tunisia Source: Motion Picture Association of America Theatrical Market Statistics 2012, 2013

$2.4bn (0% YOY)

$3.6bn (+50% YOY)

$10.9bn (+1% YOY)

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Germany

South Korea

Russia

India

France*

Japan

China

US & Canada

2012-3 Box Office Revenue (USD bn) 2012 2013

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• China is the second largest, and fastest growing movie market

• 50% annual growth between 2012-3

Conclusion • China is now a middle income country with relatively

advanced technology and the second largest GDP in the world.

• Double digit GDP growth rate is no longer possible or desirable, but medium- and long-term potential remains strategically central to our most stakeholders, US in particular.

• To obtain new strategies and knowledge to improve China’s sustainable economic growth, we are ready to work closer with our friends at this end to addressing our problems and tapping our opportunities and ensuring China’s dreams are realized.

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Thank You!

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china's new path forward - professor liu mingkang

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