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China’s New Economic Transition and Its Global Implications

China’s New Economic Transition and Its Global Implications. Yiping Huang Peking University May 2013 Beijing. The key issues.

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China’s New Economic Transition and Its Global Implications

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  1. China’s New Economic Transition and Its Global Implications Yiping Huang Peking University May 2013 Beijing

  2. The key issues • A puzzle during China’s reform period (Huang 2010) – economic miracle (Justin Lin et al 1995) combined with an unsustainable growth model (Wen Jiabao 2006)“If the transition is not mismanaged, average Chinese GDP growth rates will drop to 3% for the 2010-20 decade.” (Michael Pettis) • (1) Change of the growth model is already underway but is underappreciated; • (2) This was primarily triggered by changes in factor costs, especially labor shortage and wage growth; • (3) The Chinese economy will see important changes in six areas, with significant implications for the rest of the world

  3. TOWARD THE NEW NORMAL - Growth potential Source: Cai, Fang and Lu, Yang, 2012, “At what rate can Chinese economy grow in the next 10 years?”, (in Chinese) in Chen, Jiagui et al (eds.), Chinese Economy Blue Cover Book 2012, Social Science Literature Press.

  4. TOWARD THE NEW NORMAL - Current account % GDP Source: National Bureau of Statistics.

  5. TOWARD THE NEW NORMAL - Urban-rural income gap Source: National Bureau of Statistics.

  6. TOWARD THE NEW NORMAL - Regional disparity Source: National Bureau of Statistics.

  7. TOWARD THE NEW NORMAL - Gini coefficient Source: National Bureau of Statistics.

  8. TOWARD THE NEW NORMAL - Contribution to GDP growth Source: National Bureau of Statistics.

  9. TOWARD THE NEW NORMAL - Total consumption share Source: Huang, Yiping, Jian Chang, Lingxiu Yang, 2013, “Recovery of consumption and rebalance of the economy in China”, Asian Economic Papers.

  10. TOWARD THE NEW NORMAL - Private consumption share Source: Li, David and Sean Xu, 2012, “The rebalancing of the Chinese economy”, CCER-NBER Conference on the Chinese economy, Peking University, June 25-26, 2012, Beijing.

  11. KEY CAUSES –Normalization of costs • Asymmetric liberalization approach: product versus factor markets • Cost distortions are like subsidies to corporates and taxes on households, which was responsible for strong growth and structural risks • Costs began to normalize recently, through labor shortage and shadow banking • These contribute to rise of the new development pattern Source: Lu Feng, 2011, "Employment expansion and wage growth (2001-2010)", China Macroeconomic Research Center, Peking University, Beijing, 12 June 2011. Updated by the author.

  12. THE NEW GROWTH MODEL –& its implications • Chinese economic performance will look increasingly similar to that of other rapidly growing emerging market economies- Slower growth, higher inflation, more equal income distribution, more balanced economic structure, accelerated industry upgrading and more volatile economic cycle • Implications for the rest of the world:- Support to global growth may weaken (likely the first China-induced global recession)- China may shift from source of global disinflation to source of global inflation- China will force new international division of labor (it may lose low-cost industries faster than may anticipate)- China may turn from a global manufacturer and commodity importer to a global consumer

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