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NS4053 Greg Knott People’s Republic of China (PRC) Country Brief. Agenda. PRC Economic History Modern Situation Course Material on China Pieter Bottelier : Handbook of Emerging Economies Robyn Meredith: Legatum Study Implications & Discussion. PRC Economic History.
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NS4053Greg KnottPeople’s Republic of China (PRC) Country Brief
Agenda • PRC Economic History • Modern Situation • Course Material on China • Pieter Bottelier: Handbook of Emerging Economies • Robyn Meredith: Legatum Study • Implications & Discussion
PRC Economic History • Imperialism, dynastic decline, warlords, and the “Century of Humiliation,” Japan invasion WW2 • 1 Oct 1949 – Chinese Communist Party (CCP) forms PRC • Mao Zedong’s revolutionary vanguard • Great Leap Forward (1958-61) • “Third Front” and “People’s War” • Cultural Revolution (1966-76) • Emphasis on capital formation • Deng Xiaoping’s pragmatism • 3rd Plenum of 11th Central Committee (1978) – Economic reform and opening • Agriculture reforms, Special Economic Zones (14 by 1984), incremental moves to pro-business, market reforms (tax, land, pollution, labor regulations) • Internal CCP debate • Tiananmen (1989)
PRC Modern Situation • GDP #2, GDP per capita #77 ($7,599 in 2010, ppp) • Long-term growth ~ 10%, recently 7.3% • Share of world GDP • PRC: 11.4% (2008) 14.3% (2011) • USA: 20.7% (2008) 19.1% (2011) • Largest: • Exporter of merchandise, manufacturing • Emitter of greenhouse gases • Trade partner for 70 countries (USA is largest for 127 countries) • “Workshop for the world” • Largely foreign-owned, mostly foreign technology, innovation • Rising labor costs – employment and demographics • Low value added – 2% of iPad value occurs in China • “Going Out” strategy
PRC Modern Situation • Economic Growth vs Political Repression bargain ~ CCP’s 7% GDP growth target • 2007 – inflation, housing bubble, “hot money” speculation • Beijing aggressively tightened monetary policy • 2008 – international financial crisis • Exports contract • Up to 40M unemployed, mostly migrant workers • Beijing: $586B stimulus program, heavy investment and infrastructure development • Since 2009, stimulus “hangover” prompts questions about rebalancing away from investment/export-driven growth, towards consumption and reforms • Household consumption/GDP ratio = lowest of major economies
Course Material: Bottelier • Will China rebalance its economy away from investment and exports, and towards consumption and innovation? • Optimists - YES • Demographics forcing higher wages • Service sector expanding (less investment, higher skills & wages) • CCP 5-year plan targets - deliberate government programs for poor, authoritarian policy execution = options • Primacy of investment decreasing (environment, reform, corruption, fiscal constraints) • Pessimists - NO • Poor efficiency of investment, non-performing loans/credit; gradual transition unlikely • Declining returns threaten CCP’s 7% growth target • Skewed incentive structure facing regime – short-term stability, corruption, hold on power, growth lever without liberalization • East/west, urban/rural inequality massive investment still needed
Course Material: Meredith • Challenges to growth targets? • Developmental • Middle-income trap, declining productivity gains • Non-performing credit – huge loans to local/provincial gov’t schemes, repayment unlikely • Institutional deficits – failure to develop mature banking, social institutions because of political repression • Demographics • Working-age population will peak in mid-2010s • Ballooning retirement, social welfare costs • Rising quality-of-life expectations – will gov’t deliver? • Growth-at-all-cost model invalid? • Environment and health • Corruption • Inequality
China Private Debt & Declining Growth • Debt-fueled bubbles, amidst slowing GDP growth… • Still, growth is above 7%, and the CCP will employ extraordinary measures to keep it
Is China’s Economic Model Valid? • Photos: Harbin, Heilongjiang Province (2103) • Air pollution forces cities to “shut down” • Extensive health costs projected • 9 of 10 most polluted cities in the world are in PRC