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China at Crossroads

China at Crossroads. — Is the Snake Tonic , Venomous or Lucrative ?. Tailan Chi School of Business University of Kansas. Unprecedented Growth? A Comparison. Sources: The World Bank ( 2012); Japan Economic Institute (2000). What Good Has the Rapid Growth Done?.

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China at Crossroads

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  1. China at Crossroads — Is the Snake Tonic, Venomousor Lucrative? Tailan Chi School of Business University of Kansas

  2. Unprecedented Growth? A Comparison Sources: The World Bank (2012); Japan Economic Institute (2000).

  3. What Good Has the Rapid Growth Done? • Per capita GDP rising 16-17 folds in constant prices since the start of reform on 1978. • An increase of the human development index (HDI) from 0.404 to 0.687. • A UNDP index reflecting • life expectancy • education level and • per capita income. • Comparison • U.S. = 0.910 • India = 0.547 • Congo (D.R.) = 0.286

  4. Rapid Improvement in Human Development Index (HDI)

  5. Growth of Beer Consumption Source: World Food Organization

  6. What Good Has the Rapid Growth Done? • Per capita GDP rising 16-17 folds in constant prices since the start of reform on 1978. • An increase of the human development index (HDI) from 0.404 to 0.687. • A UNDP index reflecting • life expectancy • education level and • per capita income. • Comparison • U.S. = 0.910 • India = 0.547 • Congo (D.R.) = 0.286 • 500 million people lifted out of poverty. • Child malnutrition fell from over 30% to 3.3%. • Literacy rate among 15-25 year olds is now 99%. • A world economic power • 2ndlargest economy since 2010 • Only after the U.S. • Projected to be the largest on PPP basis in 2016 • Largest exporter since 2009. • East Asian value chain • Projected to be the largest importer in 2014

  7. Structural imbalance Heavy dependence on export and investment Low consumption Asset bubbles But Strains on Current Economic, Political and Social Systems also Becoming Severe

  8. Low Consumption and High Investment  Rudimentary welfare system → Low consumption  High infrastructure expenses → High investment And also asset bubbles!  Undervalued domestic currency → High trade surplus Source: China National Bureau of Statistic

  9. China’s Foreign Trade Source: China National Bureau of Statistics

  10. China’s Foreign Exchange Reserves Source: International Monetary Fund

  11. Values of RMB¥ in Terms of J¥, Euro and US$ The RMB¥ has risen in value by over 30% against the US$ since 2005. RMB¥ convertibility and capital market opening are 2 major financial reform tasks for the future.

  12. China’s Rebalancing: Retail Grows Faster than GDP • Measures Already Taken • Elimination of agricultural tax • Better protection of worker rights • Broadened healthcare coverage • Subsidized housingin cities • New/Pending Measures • Freer migration from rural to urban areas • Financial reform to provide more capital for entrepreneurs, esp. in service sector Source: China National Bureau of Statistics

  13. Structural imbalance Heavy dependence on export and investment Low consumption Asset bubbles Widening income inequality Gini coefficient rose from a low level of 0.33in 1980 to 0.47 in 2009 Compared to Sweden = 0.23 USA = 0.45 (2007) Brazil = 0.54 But Strains on Current Economic, Political and Social Systems also Becoming Severe

  14. Poverty, Inequality and Literacy: An International Comparison Source: World Bank (per capita GNI), UNDP (poverty), CIA (income inequality), UNESCO (adult literacy).

  15. Growth in China’s Labor Cost Compared to Other Countries Source: U.S. Bureau of Labor Statistics and China National Bureau of Statistics

  16. Brisk Rises in Labor Productivity Labor Productivity Index (1990 = 100) Source: International Labor Organization (2010)

  17. China’s Labor Productivity Compared to More Industrialized Economies US$/person engaged (constant 1990 US$) Source: International Labor Organization

  18. China’s Labor Productivity Compared to Other Emerging Economies US$/person engaged (constant 1990 US$) Source: International Labor Organization

  19. Structural imbalance Heavy dependence on export and investment Low consumption Asset bubbles Widening income inequality Gini coefficient rose from a low level of 0.33 in 1980 to 0.47 in 2009 Compared to Sweden = 0.23 USA = 0.45 (2007) Brazil = 0.54 But Strains on Current Economic, Political and Social Systems also Becoming Severe • Severe environmental damage • Multifaceted problem • Toxic chemicals in air, rivers, lakes and ground water • Serious water shortage and falling ground water levels • High 2.5PM levels in cities • Has 16 of the 20 most polluted cities in the world

  20. A Typical Hazy Day in Beijing (Similar to London in the mid 1950s?) • Institutional Roots of Failure to Control Pollution • Promotion of officials based on ability to deliver GDP growth. • Environmental agency has little enforcement power.

  21. Measures Taken or Under Consideration • More enforcement power for the environmental protection agency • Government subsidies for investment in clean energy technologies • Higher vehicle emission standards • Use “Green GDP” measure to evaluate officials. A Rare “Blue-Sky” Day After Heavy Rain

  22. China’s Environmental Performance Source: Yale University

  23. Structural imbalance Heavy dependence on export and investment Low consumption Asset bubbles Widening income inequality Gini coefficient rose from a low level of 0.33 in 1980 to 0.47 in 2009 Compared to Sweden = 0.23 USA = 0.45 (2007) Brazil = 0.54 But Strains on Current Economic, Political and Social Systems also Becoming Severe • Severe environmental damage • Multifaceted problem • Toxic chemicals in air, rivers, lakes and ground water • Serous water shortage and falling ground water levels • High 2.5PM levels in cities • Has 16 of the 20 most polluted cities in the world. • Rampant corruption • Land seizures • Crony capitalism • 120,000 mass protests in 2012

  24. Recent Wukan Protest

  25. Corruption and Institutional Roots • Lack of effective constraints on the power of party officials • Top-down political system. • Higher officials tend to protect their protégés. • Anti-corruption campaigns are easily used to eliminate opponents. • Remedies under consideration • Implement “constitutional rule” • More concrete checks on power • Specific rules to guarantee freedoms • Centralize appointment of judges • Transparency in governance • Public hearings • Publication of government decisions on the web • Limit media censorship Source: Transparency International

  26. Can the Incoming Generation of Leaders Accomplish these Tasks? • The retiring president, Hu Jintao, was too cautious and timid to undertake deeper reforms. • Powerful interest groups have formed to protect the status quo. • Corrupt/stasist officials • Monopolistic SOEs • Entrepreneurs who got rich by colluding with officials • Two anti-establishment factions have also emerged. • Liberals wanting deeper reforms • Conservatives wanting to go back to Maoist policies • The incoming president, Xi Jinping, appears to realize how perilous the status quo is. • But it is unclear whether he can effectively tackle the oppositions. • Many of the “princelings” who are considered part of his power base tend to be conservative. • Several of the Political Bureau members are wary of change. • He currently seems to be trying to build up his credibility by • attacking corruption • placing reformers in some key positions and talking up reform. Signs point to gradually intensifying reforms in the next few years.

  27. The Great WallThank you for your attention!

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