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Sustaining China ’ s Growth Miracle A Delicate Balancing Act

Sustaining China ’ s Growth Miracle A Delicate Balancing Act. Eswar S. Prasad Cornell University, Brookings Institution and NBER. Outline of Talk. Characterizing China ’ s ascendance Getting behind the growth story Policy challenges: short term, long term The rebalancing challenge

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Sustaining China ’ s Growth Miracle A Delicate Balancing Act

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  1. Sustaining China’s Growth Miracle A Delicate Balancing Act Eswar S. Prasad Cornell University, Brookings Institution and NBER

  2. Outline of Talk • Characterizing China’s ascendance • Getting behind the growth story • Policy challenges: short term, long term • The rebalancing challenge • China-US relationship

  3. 30 30 Nominal PPP 25 25 20 20 15 15 10 10 5 5 0 0 1996 2010 1996 2010 Shares of World GDP (in percent)

  4. 70 40 Nominal PPP 60 30 50 40 20 30 20 10 10 0 0 1996 2010 1996 2010 Contributions to World GDP Growth (in percent)

  5. 50 50 Nominal PPP 40 40 30 30 20 20 10 10 0 0 1996 2010 1996 2010 Income per Capita(USD thousand)

  6. 3.0 12 Investment Consumption 2.5 10 2.0 8 1.5 6 1.0 4 0.5 2 0.0 0 1996 2010 1996 2010 Domestic Demand(USD trillion)

  7. Share of World Exports Public Debt 10 16 (in percent) (USD trillion) 14 8 12 10 6 8 4 6 4 2 2 0 0 1996 2010 1996 2010 Trade and Debt

  8. Parsing the Growth Numbers

  9. Composition of Growth

  10. Source: IMF.

  11. Source: IMF.

  12. Investment and Private Consumption (Percent of GDP)

  13. Growth of Personal Disposable Income, Fixed Asset Investment, and Nominal GDP

  14. Exports and Imports(12-Month Growth Rates)

  15. Exports and Imports(Billions USD)

  16. Trade and Current Account Balances(Billions USD)

  17. Trade and Current Account Balances(Percent of GDP)

  18. Macroeconomic Policies • Fiscal policy • Monetary policy • Exchange rate regime

  19. Source: IMF.

  20. Money and Credit Growth

  21. Nominal Exchange Rates

  22. Real Effective Exchange Rate Indices

  23. Foreign Exchange Reserves: Flows and Stocks(Billions USD)

  24. Inflation Rates(Year on Year)

  25. Chinese Bond Yields

  26. U.S. Treasuries

  27. Short-Term Policy Challenges • Controlling inflation • Restraining credit growth • Asset bubbles: Real estate? • Managing capital inflows

  28. Equity Market Indices

  29. Source: IMF.

  30. Balance of Payments(Billions USD)

  31. Improving the Balance of Growth • From exports to domestic demand • Investment to consumption-led growth • Employment growth • Reducing regional disparities

  32. Investment and Private Consumption (Percent of GDP)

  33. Labor Share of National IncomeFlow of Funds Data

  34. Labor Share of National IncomeGDP-Income Approach

  35. Personal Disposable Income(Percent of GDP)

  36. Composition of National Saving(Percent of GDP)

  37. Age Effects on Income, Consumption, and Saving Rates

  38. Why is Urban Household Savings Rate Rising? • Chamon, Prasad (Jan. 2010), AEJ: Macroeconomics • Chamon, Liu, Prasad (Dec. 2010), NBER WP 16565 • Precautionary motives: Buffer stock savings (young, middle-aged); Health risk (elderly) • Structural factors: Financial market underdevelopment; Pension reforms

  39. Twelfth 5-Year Plan • Comprehensive assessment of growth challenges • Key short-term priority: managing inflation • Lower but higher-quality growth: less resource- intensive, employment-generating, equitable • Strong signals to common households, local govts. • Financial system reforms; Capital a/c convertibility • But all reforms in China’s way, at China’s pace

  40. Tensions: Short-term vs. Long-term Objectives • Long-term goal: Raising wages • Short-term problem: Inflation • Long-term goal: Making RMB international currency • Short-term problem: Capital inflows

  41. Reform Priorities • Financial sector development • Better monetary policy framework • Fx flexibility a piece of the puzzle • Social safety nets • Governance reforms (corruption)

  42. Growth Prospects

  43. China: Population Projections

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