challenges to china’s growth: martin wolf, associate editor & chief economics commentator,...

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

3

Challenges to China’s growth

• Potential

• Model

• Challenges

• Policies

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.

5


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


• 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.

7

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.

8

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

11

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

13

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

14

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

15

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

16

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.

17

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.

18

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

19

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.

20

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.

21

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.

22

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

23

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.

24


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


25


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”

26


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

27


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


28

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.

29


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”

30


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

31


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

32

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.

33

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

34

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.

35

4. Policies

• As the economy becomes bigger and more complex and its impact on the world grows, all this will become much harder.

• The premier has correctly defined the challenges.

• We all wait to see how the next generation rises to meet them.

challenges to china’s growth: martin wolf, associate editor & chief economics commentator,...

Documents