China as a Leader of the World Economy

1. China as a Leader of the World Economy Gregory C Chow Princeton University March 2011

2. Outline • 1. How did China manage to grow so rapidly • 2. China’s Economic Strength • 3. Comparing China's market institutions with US institutions • 4. China's short-term economic policies • 5. China’s long-term economic policies • 6. Role of China as a leader in the world economy

3. 1. How did China manage to grow so rapidly • Three fundamental factors contributing to rapid economic growth: high-quality human capital; functioning market institutions; early stage of development that enables China to catch up. • Government policy of gradualism for reform correct, part of human capital. • Today it is entrepreneurship that propels China economic changes and innovations. • Growth will continue as long as the three fundamental factors remain, given political stability, also part of human capital.

4. 2. China's economic strength • GDP to exceed US in the current decade • In 2010 China's GDP equaled to .692 of the US GDP in purchasing power parity as IMF and World Bank estimated. • From 2011 assume US real GDP to grow as much as 3.5 percent per year, and China's GDP to grow at 8 percent per year. By 2019 China’s GDP will exceed the US GDP.

5. Other signs of China’s economic strength • In technology it has the fastest supercomputer. In 2011 China will file more patents than the US. In the production of alternative energy, it is the world's largest producer of wind energy, nuclear energy and solar panels. Consumer goods produced by China flood the world market. Chinese tourists are seen travelling all over the world and making expensive purchases. • From mostly receiving foreign investment China has increased its investment abroad rapidly.

6. 3. China's market institutions as compared with the US institutions • US institutional weaknesses as shown by the housing bubble and economic downturn. • US financial institutions allowed to take too much risk in the trading of derivatives and in packaging home mortgages as securities for sale. • US consumers allowed to take too much risk in the purchase of houses and the use of credit cards. • China does not have the above institutional weaknesses because the government’s reform of financial institutions has been gradual and cautious. Chinese consumers are more thrifty.

7. Institutional differences reflect cultural differences • Eager to spend v. thrift being virtuous • Individualism v. collectivism • Government as problem v. government as solution • US entrepreneurs avoid the government. Chinese entrepreneurs cooperate with the government • Respect for law v. respect for authority; rule by law v. rule by people • US risk taking causing financial crisis is all legal • Chinese illegal behavior hurts many people but does not affect system. Corruption rampant in China. • Because of cultural differences “China model” might not fit other countries, as “Washington consensus” may not. • Of course some of China’s experience in economic development is useful.

8. Some advantages of the Chinese government • Strong government v. democratic government of the US. In the US democratic government decisions on economic policies are slow and often motivated by need to be re-elected. • US also hindered by the strategy of declaring war on terrorism. Wastes of human and non-human resources. • Under a one-party system the Chinese government makes economic policy efficiently

9. 4. China's short-term economic policies • Should revaluate the RMB to in order to control inflation as inflation is caused by rapid increase in money supply due to trade surplus. • Should spend some of the accumulated foreign exchange reserves to increase imports from the US for consumption and capital formation as specified by the 12th Five-Year Plan. This policy will benefit both China and the US.

10. 5. China's long-term policies • China has been extending influences in Asia, Europe, South America, Africa and even the US. • Strategies succeed in winning friends by pursuing mutual interest rather than asking friends to promote its own objectives (war on terrorism for the US). • China has increased its investment abroad. Investing abroad is advantageous for China as Chinese capital seeks a higher rate of return and China is able to secure control of basic mineral and energy resources abroad. • It is also advantageous to the host countries as it promotes their economic development through the inflow of Chinese human, financial and physical capital, technology and development knowhow.

11. 6. China’s role as a leader in the world economy • The Chinese government has cooperated with Chinese entrepreneurs in investing abroad. It allows competition among Chinese investors, making the investment process more efficient. • In investing overseas and providing foreign aid China can help developing countries better than the US because it has gained recent experience in its own economic development while the US experience is outdated. • China and the United States are both playing important roles as leaders. Both have benefited other countries and have been criticized.

12. China’s role as a leader - continued • China may be asserting its influences too aggressively. • Its relation with Japan deteriorated in 2010 in the incident of a Chinese fishing boat colliding with a Japanese navy patrol boat in territorial water claimed by both countries. Even after the Japanese government released the captured Chinese fisherman, the Chinese government demanded an apology from the Japanese Premier. At about the same time, China was claiming territorial rights in South China sea against objections of Vietnam and some other neighbors. • No matter which parties in such disputes had legitimate claims, we can observe the more aggressive stand in China's foreign policies than before.

13. China’s role as a leader - continued • As another sign of its possible aggression China is building up its military power. China's military buildup includes jet fighters, aircraft carriers and anti-ship ballistic missile, called a “carrier-killer” for its potential to strike the big carriers. Such buildup will challenge the American military presence in the Western Pacific. • US Defense Secretary Robert M. Gates said the Pentagon was investing in more weapons and technology in response to China's military presence.

14. China’s role as a leader - continued • Before World War II the US was peace loving and not expansionary. After World War II, its economic power increased and US military forces are stationed all over the world. It has waged wars in Korea, Vietnam and in recent years in Iraq and Afghanistan. • In the future, China’s military posture is uncertain. • As economic power can corrupt any government we hope that the Chinese government will maintain a peaceful posture in the future according to its announced doctrine of peaceful rise.

15. Possible topics for Q&A inInterpreting China’s Economy Chinese edition 中国经济随笔

16. Part 1 Economic Development Entrepreneurship Propelling Economic Changes in China 1. China’s Economic Reform: Retrospect and Prospect 2. Review of Economic Development of China in twenty years since 1989 3. In what way has the Chinese government changed since the 1980s. 4. Why China’s Economy has grown so rapidly 5. China’s History and its human capital 6. China’s GDP will exceed the US in 2020: a re-estimation of the result 7. From receiving foreign investment to investing overseas 8. From learning in scientific research and education to innovations. 9. How will the Chinese society continue to improve.

17. Part 2. Economic Analysis • 10. A first lesson in micro-economics: demand for education in China • 11.Supply and demand for healthcare in China • 12. Is the price of urban housing in China determined by market forces? • 13. A lesson in macroeconomics: the determination of consumption and investment • 14. Exchange rate, money supply and the overheating of the Chinese macro-economy • 15. Using Friedman’s theory to explain inflation and overheating of the Chinese macro-economy • 16 . Should China revalue its RMB: email exchanges between Gregory Chow and Ronald McKinnon • 17. How are prices of stocks in China determined? • 18. How are the movements of prices of stocks in the Shanghai and New York Stock Exchanges related? • 19. Misunderstanding of China in the Western Press • 20. Are Chinese official statistics reliable? • 21. Will China have serious inflation? • 22. How to put “seek truth from facts” into practice.

18. Part 3 Economic Policy • 23. From economic research to social change • 24. Has China solved its population problem? • 25. The problem of rural poverty in China • 26. Why is healthcare in China so expensive? • 27. How to solve the problem of income inequality • 28. Can we understand corruption using tools of economics? • 29. How to improve the regulation of pollution in China • 30. Two Successful experiences in solving energy and environment problems in China • 31. A Proposal to limit the emission of CO2 through the UN • Part 4 About the US Economy

19. Thank you