China’s New Deal: How to Response to International Financial Crisis

1. China’s New Deal: How to Response to International Financial Crisis HuAngang Center for China Studies and School of Public Policy & Management Tsinghua University CEA annual conference, Oxford · July, 2010

2. Can China Save the World? • China won't see GDP rise more than 4% in 2009, and the country's economy may not grow at all. Time Magazine, 03/02/2009 • Not surprisingly, China has now become the focus of a world that is looking for a way out of the swamp. Time Magazine, 10/08/2009 • “The Chinese Worker - Person of the Year 2009” - We found some of the people who are leading the world to economic recovery: Chinese men and women, their struggles in the past, their thoughts on the present and their eyes on the future. Time Magazine, 16/12/2009

3. Growth rate of GDP and industrial value added over the same period last year (2008-2009) Data Source: China Monthly Economic Indicators, 2010, issue 2.

4. Macroeconomic Indicators in G20 Countries Note: China’s unemployment data is cited from Work Report of Government (2010). Data Source: The Economist, Feb. 20th-26th 2010, pp. 89-90.

5. Questions to be Addressed • What are the reactions of countries around world when facing financial crisis triggered in US? • How does China deal with the crisis? • Why does China react so rapidly and successfully? • What are the implications drawing from China’s actions? • How does China spur its transition of development model in post-crisis era?

6. Agenda • Chinese Way to Deal with International Financial Crisis • Post-evaluation of International Financial Crisis • China’s Experiences of Cope with International Financial Crisis • From Accelerating Development to Accelerating Transition • Conclusion

7. Chinese Way to Response to International Financial Crisis • China’s new deal: fighting with international financial crisis • Compare with 1998 Asia Financial Crisis • Threat • Huge external shock: lower external demands • Strength • GDP is 2.5 times of 1998 in 2008 • Foreign reserve is 13 times of 1998 in 2008 • Rate of return on sales of SOEs is 3 times of 1998 in 2008 • NPL (non-performing loan) is only 2-3%, and profit rate of state owned banks is 17% in 2008 • Fiscal revenue is 6 times of 1998 in 2008

8. Chinese Way to Response to International Financial Crisis • China’s new deal: fighting with international financial crisis • 4 trillion fiscal stimulus package • 5/11/2008, 10 policies to spur economic growth • 12/2008, Central Economic Work Conference - spur economic growth, balance economic structure, expand domestic demand • 03/2009, NPC annual assembly - expand domestic demand, keep growth, adjust structure, upgrade development level, focus on reform, more active, look on people’s livelihood and promote harmonious development (扩内需、保增长；调结构、上水平；抓改革、增活力；重民生、促和谐) • 03/2009, 11 industrial revitalization plans

9. Chinese Way to Response to International Financial Crisis • 4 trillion fiscal stimulus package • Four focuses • Government investment: 4 trillion in two years, of which, 1.18 trillion is fiscal expenditure • Industrial revitalization plans to upgrade technology and improve international competition capacity • Improve innovation capacity • Promote social development: expand social security net, increase employment • Seven aspects • Improve macro-control, expand domestic demand, promote agriculture development, change growth pattern, deepen openness reform, promote social development and improve government capacity

10. Chinese Way to Response to International Financial Crisis • 4 trillion fiscal stimulus package Data Source: NDRC website.

11. Chinese Way to Response to International Financial Crisis Fiscal stimulus has spurred non-state investment Funds for Investment in Fixed Assets and its Structure in the Whole Country Data Source: China Statistical Yearbook (2009), and IMF.

12. Post-evaluation of International Financial Crisis • Keep robust economic growth during the crisis • Maintain high employment rate • Increase household income • Keep CPI stable • Improve the situation of international balance of payment

13. Post-evaluation of International Financial Crisis • China has kept its robust economic growth during and after the crisis • Several suspects about China’s performance • V-shape • U-shape • L-shape • W-shape • The real case that the economy is only SLOW DOWN in China

14. Post-evaluation of International Financial Crisis • China has contributed over 50% of the world economic growth in 2009 Data Source: China Statistical Yearbook (2009), and IMF.

15. Post-evaluation of International Financial Crisis • China has created many job positions • World unemployment rate has reached 6.6% in 2009, of which, youth unemployment rate is 13.4% (ILO, 2010) • Absorb new labors, and the first time employment rate (初次就业率) of college graduates is 74% in 2009, and has achieved 84% at the end of 2009 • Urban employment number has rebounded, only slightly declining at Q4 of 2008. 1.46 million unemployed workers has been reemployed during January to November, 2009 • Solve unemployment of migrant workers, only 4.6% of 20 million migrant workers are unemployed at the end of 2009

16. Post-evaluation of International Financial Crisis • Urban employment number has rebounded Data Source: China Statistical Yearbook (2009), and Work Report of Government (2010).

17. Post-evaluation of International Financial Crisis • Household income has kept increased • Annual per capita disposable income of urban households and annual per capita net income of rural households has increased 9.8% and 8.5% respectively, and higher than GDP growth rate 8.1% • International financial crisis has increased 17 million poverty population in east Asia and Pacific region, and about 4 million population will drop into 1.25 consumption dollar per day to increase total poverty population into 21 million in 2010 (ADB, 2009)

18. Post-evaluation of International Financial Crisis • Keep CPI stable • China’s CPI is -0.7% in 2009, of which, 0.9% in urban areasand -0.3% in rural areas • Base on the definition of The Economists, China was in the deflation stage • China is likely to have moderate inflation in 2010, the primary task is to prevent the deflation and over-production which has happened during 1998-2002

19. Post-evaluation of International Financial Crisis • Improve the situation of international balance of payment • The proportion of the trade balance to the total GDP has decreased from 7.6% in 2007, to 6.6% in 2008, then to 4% in 2009 • Three major influences of financial crisis to country’s economy are (1) uncertainty of liquidity, (2) decline of international capital and (3) decline of international trade, among them, only the third factor has influenced Chinese economy

20. Post-evaluation of International Financial Crisis • China’s global economic position has been strengthened during the crisis • China has been the second largest economy (exceed Japan) in exchange term in the world Data Source: 2006-2008data is from WDI 2009, 2009 data is from The Economist, Feb. 20th-26th 2010. Data Source: Maddison, 2010.

21. Post-evaluation of International Financial Crisis • China’s global economic position has been strengthened during the crisis • China has been the largest economy (exceed US) in PPP term in the world Data Source: Maddison, 2010.

22. Post-evaluation of International Financial Crisis • China’s global economic position has been strengthened during the crisis • China has been the second largest manufacturer in the world (%) Data source: United Nation Industrial Development Organization, Statistical Country Briefs; UNIDO, International Yearbook of Industrial Statistics 2010, 18 March 2010; 2009 data is from Zhongyu Wang (2010)。

23. Post-evaluation of International Financial Crisis • China’s global economic position has been strengthened during the crisis • China has been the largest exporter and second largest importer in the world Top 5 merchandise trader (2009) Top 5 service trader (2009) Data source: WTO, International Trade Statistics 2010, 26 March 2010

24. Post-evaluation of International Financial Crisis • China’s global economic position has been strengthened during the crisis • China has been the forth largest sourcing country of patent application Rank and Ratio of China’s Selected R&D indicators in the World Source: Center for China Studies, Report on overall thoughts and targets of twelfth five-year plan, 2009.9.

25. China’s Experiences of Cope with International Financial Crisis • Accumulations of 30 years’ reform • China’s learning, adoption and competition capacity • China’s specific state capacity • Capacity of distinguishing and dealing with potential crisis • Decision capacity • Political mobilization capacity • Fiscal capacity • Social governance capacity • Two hands: balance of invisible hand (market) and visible hand (governemnt) • Initiative coming from both central and local sources

26. From Accelerating Development to Accelerating Transition • Crisis has pushed China to spur its transition • Improve industrial structure • Industry (secondary sector) is the main driver of economic growth • Service (tertiary sector) should be improved in coming years • Social service expenditure, especially education expenditure needs to increased, at least to 4% of GDP • Promote energy conservation

27. 4. From Accelerating Development to Accelerating Transition • Challenges on carbon emission and environmental protection Note: * is estimated data, and energy consumption is calculated in 2005 instant price, brackets present data from bulletin on first national pollution census. Data source: China Statistical yearbook (2009) and Bulletin on First National Pollution Census (2010).

28. From Accelerating Development to Accelerating Transition • Over-industrialization, over-heavy-industrialization, over-dependent on export, over-investment and over-extensive growing Note: TCE refers to Tonne Oil Equivalent. Data source: Bulletin of Economic and Social Statistics (2009).

29. From Accelerating Development to Accelerating Transition • Challenges of climate change Carbon Emission in China (2005-2030) Data source: IEA, 2007.

30. Conclusion • Crisis is external pressure of China’s transition and development • China needs to continue its reform and transition • Balanced development among urban and rural, different regions, income gaps, investment and consumption • Innovative development: from factor driving to innovation driving • Green development: from black development into green development • Sharing development: from let somebody rich first to all people rich together

31. Conclusion • China: a new engine of growth • Emerging and developing countries contribute to an increasingly large share of global growth • As the crisis has unfolded, global growth has relied primarily on the emerging and developing economies, with nearly half coming from China alone • Indeed, China has become a global growth engine that should be treated as an additional driving force behind the recent growth performance in converging countries • China also has more power to influence global factor and goods prices than any other converging country (OECD, 2010)

32. Thank you!