China Forum #94: China's Economic Growth

Just another WordPress site

China Forum #94: China's Economic Growth

hello and welcome to China for him the leading program for discussing the latest in trends and development in modern Chinese culture politics economics and social issues my name is Madeline federally and I will be your moderator for our program today today on China forum we will be discussing recent developments in China’s economy looking specifically at the third plenums proposed economic reforms and China’s slowing growth we are happy to welcome today’s expert dr. UConn Huang dr. Huang is a senior associate in the Carnegie Endowment for international peace Asia program where his research focuses on China’s economic development and its impact on Asia in the global economy previously he has served as the World Bank’s country director for China Russia and the former Soviet Union republics of Central Asia prior to that he served as a lead economists for Asia and chief for country assistant strategies he has also held positions at the US Treasury and various universities in the United States Tanzania and Malaysia dr. Huang has published widely on development issues recently Co heading Co editing the book East Asia visions he recently completed a volume entitled reshaping economic geography in East Asia dr. hong thank you for being here today pleasure almost three months have passed since China’s third plenum announced significant economic reforms in your opinion what is the central theme in the driving force behind these economic changes and if these reforms are implemented do you believe they will actually change China’s economy some people have said that this particular third plenum will be like the third plenum that don’t shout being headed that’ll change China it’d be transformational this basic theme of this third clown is about governance the way that China we managed how the economy will be structured and there’s basically one principle that came out and the principle is that the market should be decisive and this is a big change it’s a the government should not be setting prices for allocating resources but the market will but a market can only function if you have strong institutions if you have competition so some of the basic requirements for the market to performance role currently does not exist in China so it’s going to take time then there what I call three primary themes affects the government’s administration of China the first is the unification of the rural sector in the urban sector traditionally in China they’ve been dealt with separately now they’ve been seen as an integrated whole the second issue is trying to actually equalize a level of playing field between the state enterprises in the private sector and the third is the relationship between Beijing and the provincial governments so these are the three unifying themes and then the document gets into how you do this and it focuses on monetary policies and it focuses on fiscal policies but that in a nutshell is what the third plenum is all about and do you think that these forms if implemented can actually change China’s economy I think it will it could be and the whole question of course is will they implement this can they and the first thing that realises is this is an agenda for at least the remainder of this decade and my view probably longer if they take it seriously and the fact that they were so specific this time the third plenum document had 60 points 16 sessions it was much more precise much more detailed than I would say the third plenum documents of the previous senior leadership the fact that they’ve created two important coordinating committees when dealing with the economy and one dealing with security and that both of these communities will be headed by President Xi Jinping is significant because he’s actually saying I’m gonna take responsibility for this you no longer will be diffused within the system so I think they’ve signaled their intention that doesn’t mean of course that they will act upon it that still remains to be seen so going back to one of your three themes that you identified how involved do you think the central government will be in implementing these fall these reforms and like you said this could potentially give rise to greater you know communication coordinates with China’s provinces why is that important what makes China really different what makes tried different is the relationship between what I would call the center Beijing and the provinces and municipalities is completely different from any system we see elsewhere Beijing appoints all the governor’s the senior party officials in each of these provinces they serve there for two or three four or five years and they have performance indicators and criteria and

if they do well they rotate other parts of the country and they do very well over the whole careers then they hope to be promoted in the system to the Standing Committee of the Communist Party and they would to be Beijing to become the president’s the Vice premiers etc etc in the United States we would find it extraordinarily odd if the governor of Utah didn’t come from Utah the government are you talking from Washington well in China the governor of the province comes from Beijing he will not be somebody at XI likely not somebody who was actually born in that province but they had to perform and this is a key aspect now these appointments these regional relationships these officials that come from the center they basically are given two sets of objectives one dealing with the economy and when dealing with political stability and China’s done extraordinary well in terms of the economic objectives flowing fast changing reforming investing but in the eyes of many people the political situation the status in the country hasn’t changed very much and some people see this as a problem so the third plum actually talks about changing the nature of the indicators the objectives the way Beijing relates to the provinces and the objectives and goals that they will establish the officials that they move there and people waiting to see what this actually means but everyone realizes there’s got to be some kind of change there’s a lot of instability in China occurring there are a lot of what I call incidents of mass protests this absorbs a lot of people’s attentions this cost a lot of money to deal with this aggravates tensions and the government needs to deal with this so I know one of the greatest challenges is just kind of curtailing off what you said is the disconnect between what you can maybe consider the eastern seaboard in China where most of the wealth is and then the West and so as you know we watch this third plenum these economic reforms unfold do you see the potential for greater emphasis to be put on economic development in the West trying to bridge that gap economically between the eastern seaboard and the West and this is a key objective of the government if you go back 20 30 years when don’t shopping opened up the economy essentially what he did was he said let us concentrate our investment our resources our financing our support along the coast let us trade with the outside world let’s open up the country so in doing so you see Guangdong Fujian seung-hi Beijing they get a lot of money they got of infrastructure a lot of the so called Margaret workers come from the interior they all go along the coast the coast really takes off the coast grows like 15% a year for a couple decades but slowly the interior is also growing catching up but nevertheless by relative income standards the interior is much poorer than the coastal areas even though the lies have also improved so over the last five six seven eight ten years the government slowly saying we’ve got to redress this regional imbalances we’ve got to miss more the interior particularly in the Far West and then also in the central provinces now this has actually caused the interior provinces to grow faster than the coast in the last three to four years but it has a heavy cost because the investments in the interior don’t generate the same kinds of productivity increases the profitability of investments along the coast so while there is what I would call a regional balancing greater equality occurring between the interior and the coast it has cost consequences and this is a showing of actually in some of the debt problems that showing up in China you’re not getting such a high rates of return the credit is not generating production as rapidly so debt is building up is now a tense issue because you can’t afford to have the debt burden increase but nevertheless you have this equity objective in trying to improve the situation inside the property in the interior provinces in China now how will these reforms affect the migrant workers that come from maybe the Western more rural areas into the eastern more urban areas now the migrant workers is a phenomenon I don’t think we’ve seen in terms of the scale or significance anywhere else in the world there are 250 million Marvin workers who moved rural urban areas and many of them moved across provincial boundaries 10 or 15 years ago their salaries would have been maybe half half that of what I would call the formal establish residence in these cities but the Saudis have increased very rapidly because they’re in short supply now so their salaries have actually come up to the same levels as other people with formal residency in these cities but Margaret workers and do often do not come with their families because they do not have access to

health and education services they’re not eligible to buy houses they can’t enter certain kinds of labor exchanges as others can so they’re discriminated in a way and they don’t consume as much as others because they have no opportunities they don’t have secured you do so so this is a big issue in China and part of the third plenum decision is to try to see how and what speed migrant workers can be given the same rights social services the right to live the right didn’t work wherever they want to as others who are what we call the established residents in the coastal areas of China this is going to be a contentious issue it’s an equity issue it’s a political issue but it also affects the growth of the economy because of it they had these rights they would actually spend more and they spend more China would actually be able to grow much faster than it currently is so talking about growth we know that China has grown significantly in the last decade and in 2010 China’s growth rate reached ten point three percent however this last year in 2013 China only grew by seven points % why do you think China’s growth has dropped by two and a half percent in the last three years and is this slowing growth way something that the Chinese leadership needs to be concerned with you have to put Chinese growth experience into perspective they’ve been growing at around 10% a year for almost three decades from 1980 to 2010 you cannot continue to grow at 10% a year when your income levels is increased dramatically it started off as a low-income country is now upper middle income country what do we know about the experiences of other countries they’ve gone through the same kind of process essentially it’s the Japan it’s Korea its Singapore its Taiwan they also grew at rates like 8 9 10 percent a year for decades and then at a certain income level that income level turns out to be around $10,000 per capita growth rates decline China’s per capita GDP in purchasing powers indicators deflated is now around 8,000 and they’re going to decline and it it turns out that that first fall is in the range of about the 78% and if you’re successful you actually find it that you’re fortunate to grow to 78% for maybe five six seven eight years and then it goes down to five to six eventually be very successful you who are what you see in Europe in the United States the economy’s growing in two to four percent a year so this is a natural decline and whereas many people see this as a collapse or something a problem the real issue is it is something actually that should be managed if you can grow at seven eight percent for 78 years this should be a success you’re not gonna go out ten percent anymore but seven percent for example for the rest of this decade would be a very good outcome provided that it is high-quality that is sustainable that’s environmentally better than has been in the past providers also that’s more egalitarian in terms of the differences between the poor areas and the rural areas the urban areas rural areas the coastal provinces in the here so it’s a quality growth I don’t matter in the coming years not so much as speed so do you think in order to manage the gradual decline in growth is this something that the leadership needs to be very involved with or is this something that you think will just unfold naturally well this is a sort of like a onic situation it’s a very delicate situation in terms of managing this transition from ten percent down to seven it’s more difficult than it would have been because they have a debt problem they’ve built up a lot of debt because they have this huge stimulus program in response to the global financial crisis so in some ways they have less resources to manage this there’s more tension in the system because inequality is so high there’s also a lot of political aspirations so that also makes it more difficult so in in some ways there is a greater burden on the central leadership but this is also an economy which is more market-driven private-sector activity actually counts for most of the activity most of the employment in that sense unlike twenty years ago the state the central system cannot determine what to invest what to produce what you should do even the mobility of people today is much freer than it used to be you know in in the problem is the responsibilities are greater the choices are more limited in some ways but the ability of the government to influence it is also more limited is becoming like we see in the West when people say can the US during the Europe can they increase employment can they get growth going and what we see of course is despite the best efforts it’s not that

easy so China has a situation where as unlike the past it has to rely upon the market to do things but the problems are much complicated more sensitive so yes they have to play a role in terms of policies but their direct levers to affect the outcomes are not as strong as they used to be now earlier you mentioned that in the two new committees that were created in the third plenum of the economic and the security how President Xi Jinping is the head of both of those does that mean that she really does hole as the leader of those the primary responsibility for managing China’s growth the appointment that he wanted to take the formerly the leadership of both of these groups is an interesting decision and I think we still don’t know whether in fact this is a good sign or a bad sign actually after all he’s already president of the country he formally already has the top responsibilities so why should he want to take the leadership but these groups he might think it should be delegated to somebody else who can spend full time on this effort I think what he’s trying to signal is a couple of things and he’s signaling for example it’s the party that’s going to be responsible for outcomes in the future in the last 10 years a lot of people expected many things to be the responsibility of what I call the formal government to premier the ministers the administrative structures he’s actually establishing the point that he thinks change is going to come through the party system that’s different from the past now we don’t quite know what that means because the implementation of actions is done through the ministries through the formal government structures but he’s basically found that the formal government structures find it difficult to implement things because of what we call and everyone else has been referring to his vested interest they can’t coordinate across ministries across sectors so now they want to elevate it to one step up and this is back to the party so that’s one thing that a second thing I think he wants to show is that he’s personally going to take charge of this it’s not gonna be like in the past Authority in various areas were split there’s a Vice Premier who deals solely with the financial sector anything was dealing with financial sector is that persons refine ability even security was covered by one Vice Premier all security issues political security instability issues he’s responsibility so everything is compartmentalized what he wanted just wants to say basically is we’ve got to be more coordinated and the only way that he thinks that can be done is by essentially saying I’m going to handle this now do you think that this is a risk for Xi Jingping because so much of his and the party’s legitimacy rests in the economic success of China if the people are you know fed employed their quality of life is improved improving they will be less inclined to rebel and resist the government I think this is a risk by taking the responsibilities in both these key areas which are both very complicated difficult he’s also showing that I’m going to be be held responsible if things don’t work out now if you go back to the the previous two decades the who Jean who who 1john zooming and Jerome gee it was a split divisions he’s going back and basically saying there were weaknesses in that structure he’s going back and I see that he sees what he wants to accomplish the model for that is dong zhuo ping he’s going back and say do Michelle Payne was a transformative leader he basically took responsibility for both the political as well as the economic and he thinks for some whatever his own insights into the system he sees that as being necessary now in order to move to the next level now doom was dealing with what I would call a simpler set of problems however the China of 30 years ago was very very poor it needs only to invest in certain kinds of things it didn’t get engaged in foreign policies or global issues he’s just kept to itself so I think the questions that observers are are waiting for and looking very carefully at yes boom shopping could handle everything but it was in some ways a simpler world internally and externally it’s not that way today so is he actually taking on too much should he in fact delegate certain things more to others and why hasn’t he and I think we don’t know that’s something we have to watch so say China’s growth rate declines to roughly 6 percent do you think that the quality of life will continue to improve

for the Chinese citizens it’s a kind of an interesting debate they used to grow 10% not growing at 7 or 8 could potentially and certainly will at some point go down to five to six and people are wondering how bad is this or can I handle this now in the West we if this be a strange question in the u.s. we’re trying to ask or see can the US grow at two and a half three so why is six so bad good now what people don’t quite realize is the following 6% doesn’t necessarily translate directly into improved living standards that we in the United States of Europe would associate with 6% and the reason is that in China they save and invest so much here in the United States the investment rate is 15 percent of the GDP in China is 45 percent three times the Chinese system saves 52% of economy’s income here it’s very very small now what that means of course is consumption levels in an absolute sense are much lower than one would expect given the size of the economy now this does make sense for China it does because you invest a lot you can continue growing and you can continue to have improving living standards which are very high for a very long period of time if you consume a lot today but don’t invest then tomorrow you basically have nothing to earn with and nothing to consume so the Chinese model very rapid growth very high investment also means keep consumption a little bit lower invest a lot so that can continue consuming rapidly in the future so the six percent growth doesn’t translate into six percent improvement living standards it’s somewhat lower the second issue is they still have massive inequality you have to basically transfer income and resources from poor areas from richer areas employers from the coastal areas to the interior from the urban areas to the rule if you don’t grow it’s very hard to transfer a big increasing pie easier to do but that pie is not going very rapid then you have a lot of political tensions so this inequality the issue this question about heavy savings and investment and trying to keep this built for the future and then you have a what I call emerging unemployment problem which is different but actually it’s it’s ironic it is actually similar to what we see in the u.s. it’s unemployment of the college graduates they can’t find jobs the secondary students can and this is the kind of interesting question because they now say themselves in the past they had to go rapidly because the people from the rural areas the people from primary schools secondary schools who wants the job in the factory we have to go fast to give them a job they’re actually all fully employed this is a shortage the labor supply is shrinking the problem today is the unemployment rate among college graduates is three times that of secondary students that means you have to drill the service sector and service sector in China is very very small now you cannot grow a service sector without rapid growth without urbanization and for trying to be able to do that you still need fairly rapid growth so this leads me into my question about the middle income trap we know it’s easier to go from a very poor country to a middle-income nation than it is to go from a middle-income nation to a rich country thus one of the great questions facing China is whether or not it will be able to overcome this middle income trap and truly develop into a rich nation do you believe that China will be able to overcome this the middle income trap was developed a concept which was developed over the last decade people observed that developing countries it was relatively easy to go from low to middle income but relatively few developing countries were able to move from middle to high and what they were looking at is Latin America there are all these countries in Latin America at middle or upper middle income levels doing fairly well and then somehow over the last several decades they all stalled their growth which declined they never went further and you look at this globally you realize that only about ten countries over the last 20 or 30 years managed to go from middle to high income now half of those were in East Asia the other half were in the EU the southern countries who basically became richer because they came part of the EU and there’s a few countries in Africa who got rich because of oil so the only really serious what I call normal developing countries are all in East Asia and these were only Japan Taiwan South Korea Singapore Hong Kong and these are in fact the only countries

that went from middle to high and that shows you that it’s very hard but it also asks the question what do they have in common and is China going to follow the same model and broadly it is it’s probably a model which says they have a lot invested a lot trade integrate yourself with the global economy and if you do this very very well and you’re able to increase productivity you can escape the middle income trap and critical in that is productivity increases because your labor force is no longer expanding there’s a limit on which you could invest so at some point at the upper middle income level how do you get productivity to increase and you can do it either through innovation technology improvements that’s what’s happening I happen to Korea and Taiwan you can do it through in China urbanization moving more people from rural areas to urban areas because productive in the urban areas is three times that in rural areas so the mere movement of people to better paying and more productive jobs can increase growth by one to one-and-a-half percentage points for a very long period of time so China’s urbanization strategy over the next decade decade and a half is done well and it’s efficient and manages to get the best productivity out of these people then China can escape the middle income trap so that’s why why we hear so much emphasis on these urbanization campaigns and right and some people say this is odd I never thought of urbanization is a growth driver because you can go to South Asia and then look at these huge cities they don’t see productivity increases they don’t see growth there’s just these slums or pollution so some people think urbanization has a lot of negative consequences and that’s why I say it has to be efficient organization has to be well-managed urbanization China is somewhat unique compared to other Asian cities its largest cities are very large but you don’t see the same levels of slums a beggars that you see elsewhere that’s because they control their migration now this is very tricky because when you control the migration you also prevent people from coming so it has this negative consequence in the sense that urban incomes are three times rural in China that’s the highest in the world so they actually need more people in the cities but they also worried that they’ll get these slums that’ll get more pollution they’re already heavy polluted but the real issue is as identified in the third plenum the urbanization we want it but we have to do a better job at it and one of the key issues in China is it should be done ways where the population is more concentrated more densely packed may be elected New York New York is very very densely packed and people think that has a traffic problem but the traffic problem may be no worse than Washington’s for example because they’re able to get air urban infrastructure in there well thank you unfortunately we are out of time today but I just wanted to thank you again for joining us and helping us work through this issue of China’s economic growth and thank you to all of you at home who are joining us we’ll see you next week on China forum you you