developing futures to mitigates risks as china's economy ... · adjustment and gear-shifting...

Developing futures to mitigates risks as China's economy shifts gear

Institute of Financial Futures of China Financial Futures Exchange: Zhao Qingming

May 29th,2014,·Shanghai

Content

1. Gradual consensus on the notion of “Gear-shifting of economic growth”

2. Chinese economic growth has possibly already shifted gear

3. Develop financial futures market to fend off risk during gear-shifting period.

1. “Gradual consensus on the notion of “Gear-shifting of economic growth”

1. The notion of “overlapping of three periods” China’s economy currently changes gear, experiences throes of

structural adjustment and digests preliminary stimulus package, as appeared in “Important statement on economic work by comrade Xi jinping since 18th NCCPC” in Xinhua News Agency on Feb 22th, 2014

This Mar 5th, Premier Li Keqiang mentioned in his government work report that “we are in the middle of throes of structural adjustment and gear-shifting period of economic growth”, but not digestion of preliminary stimulus package

Current understanding on “gear-shifting period of economy” is that China’s economy is going from high-gear to mid-high gear period, after which, China’s economy is at advanced level and shifts into low-speed development.


2.There is still controversy as to gear-shifting of China’s economy. The majority agrees.

Liu Shijin(2011):China’s potential growth rate is very likely to drop by 2015 at around 2013-2017 by about 30%, that is, from 10% to 7%.

Lin Yinfu(2012, 2014):judging the potential of late-developing advantage, from 2008, China is potentially looking to growth rate of 8% for another 20 years.

Others: experts estimate this year’s growth rate is 8.6%. After 18th NCCPC, some experts think that with deepening reform, growth rate is back to 10%.

Overall, most insiders including investment bank economists, believe that China’s economy changes gear.


3.Some late-developing countries or regions are clearly experiencing economic gear-shifting

——Japan：annual growth rate is 9.7% for 1950-1972, 4.26% for

1973-1990, and 0.86% for 1991-2012（source of data：Japan Cabinet Office）

GDP% of Japan

Mean value


3.Some late-developing countries or regions are clearly experiencing economic gear-shifting (Continued)

——Korea： annual growth rate is 8.02% for 1961-1996, 4.07% for 1997-2012,（source of data: WIND/World Bank）.

GDP% of South Korea

Average%


3.Some late-developing countries or regions are clearly experiencing economic gear-shifting (Continued)

——Taiwan, China： annual growth rate is 8.62% for 1952-1994, 4.15% for 1995-2013,（source of data: WIND/World Bank).

Average%

GDP% of Taiwan

2. Chinese economic growth has possibly already

shifted gear

1.Late-developing countries is prone to rapid development at industrialization stage.

Industry growth accelerates and takes up more in GDP share, dominating economic growth. Towards the end of phase, service industry become primary force replacing industry, which enters mid-high speed development (Liu Shijin, 2011).

The rapid development phase: Firstly, at industrialization stage, new technology and equipment improves production rate; secondly, demographic dividend: large population enters into workforce with cost of labor remains the same, that is so-called “Shenzhen wages”.

When industrialization basically ends, economy changes gear for two reasons, labor productivity of service industry is not as fast as that of industry; demographic dividend disappears.

2.One of the rationale behind gear-shifting notion：Dramatic drop in

growth rate: between 1979 and 2012, growth rate was almost 10% annually, and 10.5% between 2002-2012. While in 2012-2013, it was 7.7% for two years. This year is not likely to be over 7.5%, which is dramatic compared with earlier. Meanwhile, employment is in good shape and this does not lead to mass unemployment.

2. Chinese economic growth has possibly

already shifted gear

GDP% of China

3. One of the rationale behind gear-shifting notion：（continued)



GDP: quarter-on-quarter

GDP: quarter-on-quarter

2.Chinese economy has possibly already step down

3. Another rationale behind gear-shifting notion ：shift in industrial structure

In 2013, for the first time, tertiary industry surpass secondary industry in GDP share. The added value proportion for secondary industry is 43.9% and that of tertiary industry is 46.1%, and is still on the rise judging from the trend.

Primary industry

Secondary industry

Tertiary industry

4.The goal of policy is changing: Macro policy of most countries aims at employment and price,

while GDP growth rate is rarely one, or predictive one, if at all. Since reform and opening up, China takes growth rate as main

policy purpose, sometimes at the expanse of commodity price. Growth speed is for the purpose of employment, but is not in line with taking employment directly as policy purpose. Pursuing GDP speed is a bit like planned economy.

New policy stipulates “upper and lower limit” of policy purpose: the lower limit for growth rate and employment and upper limit for commodity price.

In the past, there was a notion that 1% of growth rate means 800,000 new jobs.

Now, the figure is 1.3-1.5million and last year, it was 1.7 million.

2.Chinese economy has possibly already step down

5.It is our judgment that Chinese economic growth has possibly already shifted gear

Research finds：for the same unit of GDP, employment by service industry is 1.2-1.3 times of that of secondary industry. Service industry is still on the rise and secondary industry is declining.

Employment pressure is decreasing: the age of labor experiences negative growth since 2012, that 3.45million less in 2012 and 2.44million less in 2013.

At the end of 2012, employment population are 257.73million, 232.41million, 276.9million respectively（Wind）.

For countries with high share of service industry, the economic growth rate is usually not high since technology growth is slow and productivity is less likely to improve.

2. Chinese economic growth has possibly already shifted gear

6.Most institutions and economists agrees that economy is changing gear, that there is the necessity and urgency of changing of growth pattern, and that high leverage of enterprises (esp. SOEs) and local government is potentially risky and unsustainable. It is hoped that stimulus policy will be put forward by government to maintain high speed development

and investment.

We believe as long as it stays within employment lower limit, there will not be stimulus policy. In the future, policy will center on shift of growth pattern and structure with a focus of service industry, esp. productive service. Civil investment will be activated by leaner administration and power delegation.




1.Many late-developing countries experience financial crisis as economy changes gear.

Japan discounted the fact its economy was slowing down and put on stimulus policy, ending up with real estate and stock bubble, with lost decade and lost twenty years ensued.

Korea and Taiwan, China suffered Asia financial crisis after ecnomic slowdown.

2.China has accumulated large amount of risks High leverages of enterprises and pressure of bank loan: facing with

economic slowdown and lower profitability, enterprises’ ability to pay back loans is undermined and banks are facing mal-pressure.

Overpricing of house and risk of real estate bubble breakdown: house- price -income ratio is too high, which over drafts household spending and curbs consumption. Liability is not likely happen with the bank intact. Development loan is most subject to risks, while the bank suffers.

Insufficient ability of local government to pay back loans: Insufficient and unsustainable land finance; eagerness to engage in more project.

large amount of hot money flow in and asset allocation need of the rich from home: a substantial part of foreign exchange reserve of 4 trillion is hot money flown in, and the rich need to avoid risks and offshore risks.


3.We should face up to the gear-shifting, avoid putting in stimulus blindly and repeating Japanese’s fate.

If we go against the rules of economic slowdown and put in blind stimulus policy, we might repeat Japanese’ path.

The accumulated risk from previous policy is more than that of then Japan, Korea and Taiwan, China.

China is hopeful to realize mid-high speed growth(5-7%):firstly, urbanization rate is lower than when economies of Japan and Korea changed gear; secondly, employment ratio in primary industry is over 30%, but is shifting towards second and tertiary industry.



To develop financial futures is necessary for sound financial market system and Chinese financial market system with breadth and price flexibility. Sound financial system includes spot market, futures market, OTC, exchange market and so on, constituting whole financial market system. Financial futures market and spot market complement each other.

Financial futures market is perfect for price discovery, facilitating interest rate and marketization of exchange rate. Compared with spot market, financial futures market’s trading model is concentrated trading and continuous auction, which is better for price discovery. Financial futures market is not advanced and in some way become the weak link limiting commercialization of interest rate and exchange rate.

Financial futures market provides the market players with diversified risk management tool with lower cost.


5. Sound financial futures market is conducive to fending off impact of cross-border capital flow for macro economy stability.

In countries with advanced financial market, financial products enjoys better demand flexibility, limited price fluctuation might lead to massive trading and that of opposite direction, which in turn curbs over fluctuation of price, thus stabilizing interest rate, exchange rate and stock market.

We studied economic stability of G7 and emerging countries between 1961 and 2012, concluding that GDP growth rate of emerging countries is twice as much as that of G7, that is, developed countries enjoy more stable economy. One reason behind it is that their financial market is sound, curbing substantial inflow and outflow of capital, thus the stable macro economy.


Thank you!

developing futures to mitigates risks as china's economy ... · adjustment and gear-shifting...

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