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China's Sustainable Growth: Challenges and Opportunities

This article discusses the recent bearish predictions on China's economy and argues that China can sustain high growth in the coming years. It explores the challenges faced by China's economy and presents reasons why it can continue to grow. The article also highlights the solid balance sheets and policy consistency that support China's growth potential.

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China's Sustainable Growth: Challenges and Opportunities

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  1. Why China can sustain high growth?--- Comments on Prof. Krugman’s prediction of China’s Crisis Feng Lu China Center for Economic Research (CCER) National School of Development (NSD) Peking University 9th January 2012 New York Stock Exchange

  2. Background • The recent situation produced numerous bearish predictions on China’s economy. • Professor Krugman: China “is emerging as another danger spot” and “a new epicenter of crisis”. “China’s story just sounds too much like the crack-ups we’ve already seen elsewhere” (“Will China Break” 18 Dec. 2011, The New York Times). • He dismissed China’s data “more fictional than most” and reached his conclusion using anecdotal “recent news” on China’s economy.

  3. Introduction • I shall argue China can sustain high growth in coming years despite of existing problems. • After a brief look at challenges faced by China’s economy, I shall discuss reasons why China can sustain high growth. • Using IMF data that may be less than “fictional”, I shall present projections of China’s growth and its contribution to the global economy.

  4. Economic growth is slowing down:China economic situation & problem (1) • Quarterly GDP growth rate has declined from the prior-crisis peak of 14% and the post-crisis peak of 11.9% to around 9% now.

  5. Industrial activity is slowing down:China economic situation & problem (2) • Monthly growth rate of industrial production on yoy basis declined from the prior-crisis peak of 30% and the post-crisis peak of 25% to around 10-15% now.

  6. Investment growth is slowing down:China economic situation & problem (3) • Monthly growth rate of fixed asset investment on yoy basis declined from more than 40% to around 20-25% now.

  7. Export growth is slowing down:China economic situation & problem (4) • Export growth rate has been slowed down in 2011 but import growth rate has picked up recently, trade surplus has gradually declined through fluctuation.

  8. July 2011 Price hiked by more than 40% in a period of 15 months. Housing price fluctuation:China economic situation & problem (5) • Housing price hike and velocity: Housing price increased by over 40% from 3690 ￥/M2 to 5436 ￥/M2 during a period of 15 months from Nov. 2008 to Apr. 2010. But the housing price hike has been controlled recently.

  9. Lagging reforms & external uncertainties: China economic situation & problem (6 and 7) • Reform on crucial areas are sluggish and lagging: • Rural land reform; • Household registration system reform; • Non-SOEs market excess reform; • Public finance reform; • Exchange rate & interest rate regimes reform. • …… • Uncertainties in Eurozone and other areas may produce shocks to China’s economic growth.

  10. Why China can sustain high growth? • Albeit numerous problems, China can sustain high growth in many years to come due to reasons: • 1) The late comer advantage factor is still at play; • 2) The balance sheets of basic sectors are solid; • 3) Effects of long run reform are consistent with short term pro-growth objective;

  11. China / USA: 9.5% in 2010 35% in 2010 China / USA: 2.8% in 2000 China / USA: 1.5% in 1990 Still at high growth phase of development • The late-comer advantage factor is still at play though it has gradually declined.

  12. Solid balance sheets for basic sectors (1) • Strong and steady trend growth of profitability for industrial firms and major banks over the last decade or so indicates solid balance sheet for China’s corporate sectors.

  13. Solid balance sheets for basic sectors (2) • Fiscal strength of central government is solid: average deficit ratio in the recent decade is 1.7% and debt ratio less than 18%. China holds positive NIIP of $1.93 trillion, about 30% of GDP.

  14. Solid balance sheets for basic sectors (3) • Household loans increased from ￥4 trillion in 2007 to ￥ 13.3 trillion last year of which mortgage loans takes up 7 trillion. But household bank deposit is about 2.5 times as loans.

  15. Solid balance sheets for basic sectors (4) • Local government debts grew from ￥5.7 tril. to over ￥10 tril. during 2008-2010. But debt surge mainly occurred in 2009 and slowed down in 2010-11. The debt ratio 27% is still in a manageable range. Most of debts are used in social investments rather than consumption.

  16. Short & long run policy consistency (1) • Reforms are necessary in dealing with long-term structural problems, and fortunately most of the remaining reform is likely to produce pro-growth effects in the short term. • For example, reforming the current land system to allow rural households to assume full land rights may help housing sector grow in a more sustainable way . • Non-SOEs market excess and public financial reforms may boost private investments and consumption.

  17. Short & long run policy consistency (2) • Further reform in the household registration system to assign all citizens equal rights in choosing location of residence may further push forward urbanization with pro-growth effects. • In comparison, countries troubled by “the twin problems of heavy debts and unemployment” face a policy dilemma that taking of austerity measures to reduce debt produce downward pressure making macro-situation worse.

  18. China future contribution to global growth (1) • All data are from IMF (Sep. 2011) except one revision: China’s growth rate of GDP in USD for 2011-2015 is estimated assuming that it will fall by one percentage point each year from its actual level in 2005-2010.

  19. China future contribution to global growth (2) • China will contribute 2.44 percentage points of global GDP growth per annum, about 37% of global growth during 2011-2015. China’s growth contribution will be higher than the total of US, Japan and Euroarea.

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