yukon huang

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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







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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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