Chinas MacroEconomic Analysis 19902004

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Chinas Macro-Economic Analysis (1990-2004)

• Hu Angang
• Center of China Study
• China Science Academy Tsinghua University
• June 2004

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Chinas Macro-Economic Analysis

• I Economic Overheating and 1st Soft Landing
• II Financial Storm and Expanding Domestic
  Demand
• III Victory Over SARS New Development
  Viewpoint
• IV Investment Overheating 2nd Soft Landing

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I Economic Overheating and 1st Soft Landing

• From Overheating to Soft Landing
• Difficulties in Macro adjustment 1993-1994,
  economic growth rate, investment growth rate, and
  inflation rate were higher than those of 1988 in
  different degrees.
• China achieved soft landing for the first time
  in Chinese history, a miracle in the World
  economic development history.

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I Economic Overheating and 1st Soft Landing
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I Economic Overheating and 1st Soft Landing
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I Economic Overheating and 1st Soft Landing
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I Economic Overheating and 1st Soft Landing

• Soft Landing Experiences
• Correct understanding and dealing with the
  relationships among reform, development and
  stability
• Correct understanding and dealing with the
  relationship between market mechanism and macro
  adjustment
• Specifying responsibilities of central government
  in economic stabilization
• Implementing flexible, adaptive, and timely macro
  economic policies is the key to achieve soft
  landing
• Combination of Macro economic adjustment and
  system innovation.

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II Financial Storm and Expanding Domestic Demand

• Impacts of Asian Financial Storm on China
• Decline in Trade
• Decline in Foreign Direct Investment

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II Financial Storm and Expanding Domestic Demand

• Domestic Background
• Domestic market transformed from sellers market
  to buyers market, excessive supplies of many
  products, and idol production capacity
• Agricultural products prices continued to fall
  sharply, farmers income increased very slowly,
  agriculture income as share of GDP continued to
  fall, the rural, agriculture and farmers
  problem deteriorating
• Consumer demand is insufficient, mainly farmers
  household consumption demand remains low
• From high inflation to high unemployment
• From inflation to deflation

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II Financial Storm and Expanding Domestic
Demand

• Differences between China and other countries
  caught in the Financial Storm
• China has big country advantages
• Fast economic growth, in the process of
  industrialization, urbanization,
  informationalization, fast growing of service
  sector, and massive infrastructure construction
• Improved macro economic adjustment capability a
  good beginning is half way to success
• Foreign exchange surplus, foreign reserve
  increased steadily

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II Financial Storm and Expanding Domestic Demand

• Expanding Domestic Demand
• From soft-landing to expand domestic demand from
  braking slowly to stepping on accelerator
• From double-tightening policies to expansionary
  policies a whole package of fiscal stimulation
  policies, including issue treasury bonds,
  investing in social infrastructures, establishing
  social security system

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II Financial Storm and Expanding Domestic
Demand

• Economic growth rate comparison
• Three curves V shaped curve, means economic
  growth rate dropped sharply and recovered
  quickly U shaped curve, economic growth rate
  dropped sharply followed by a short-term
  stagnation and then started to recover L shaped
  curve, economic growth remained in stagnation
  with no sign of recovery.
• Three scenarios (1) economic growth slowed down
  gradually, such as China and Vietnam (2) Shallow
  V shaped growth, even at the bottom of the
  economic growth cycle, the growth rate remained
  positive, only Taiwan (3) deep V shaped growth,
  means at the bottom of economic cycle, economic
  growth rate reached zero or negative growth.

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II Financial Storm and Expanding Domestic
Demand

• GDP Growth Rate Comparison Between China
• and Asian Four Little Dragons

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II Financial Storm and Expanding Domestic
Demand

• GDP Growth Rate Comparison between
• China and Selected ASEAN Countries

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II Financial Storm and Expanding Domestic
Demand

• Export Growth Rate Comparison (Three Patterns)
• U shaped pattern, export growth plumped followed
  by a short-term stagnation and recover, only
  Korea (among all the ten countries) followed this
  pattern
• shallow V shaped pattern, even when export growth
  rate fell to the bottom it was still positive,
  China, Vietnam, Thailand followed this pattern,
  Chinas export growth rate was as high as 7
• deep V shaped pattern, export growth rate at the
  bottom was zero or negative.

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II Financial Storm and Expanding Domestic
Demand

• Export Growth Rate Comparison between China
• and Asian Four Little Dragons

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II Financial Storm and Expanding Domestic
Demand

• Export Growth Rate Comparison between China
• and Selected ASEAN Countries

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II Financial Storm and Expanding Domestic Demand

• The international importance and impacts of the
  policies that aimed at expanding domestic demand
• China is the only Asian country that maintained
  economic prosperity
• RMB remained stable, and became the backbone in
  combating Asia Financial Crisis
• China became the economic stabilizer after Asia
  Financial Crisis
• China is the only country without personal and
  enterprises wealth losses
• China successfully sustained the shock of
  financial crisis
• For the same external shocks, large countries,
  stable economies with strong macro control are
  more likely to withstand the shocks
• Countries with weak financial sector are likely
  to become victim of the shock and should be
  careful in capital market liberalization.
• Chinas closed financial market protects China
  from international hot money

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III Victory Over SARS and New Development
Viewpoint

• Estimated losses

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III Victory Over SARS and New Development
Viewpoint

• Major Economic Indicators Growth Rate

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III Victory Over SARS and New Development
Viewpoint

• How to see the SARS Crisis
• SARS crisis is not an economic crisis, but a
  public health crisis that has great impact on
  economic growth. It incurred substantial economic
  losses and affected GDP growth. SARS is a live
  case for studying the relationship between macro
  economy and public health.
• SARS crisis is an outbreak of the conflict
  between health and development over the past 20
  years government and public health sector in
  particular did not solve the challenges posed to
  health by development and evolved into health
  crisis and adversely affected development.

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III Victory Over SARS and New Development
Viewpoint

• New viewpoint of development of putting people
  first
• First generation of development strategy in 1978
  at the 3rd session of the 11th National Congress
  of the CPC, Deng Xiaoping for the first time
  introduced a development strategy that aimed to
  accelerate development, encourage imbalanced
  development, and let some regions and some people
  to get rich first and accelerate the development
  of coastal regions.
• Second generation of development strategy
  comprehensive coordinated, balanced, sustainable
  development, and getting rich together.
• New ruling concept, new ruling principles, and
  new ruling policies.
• Contribution to the development of development
  viewpoint is also an important contribution to
  global development.

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III Victory Over SARS and New Development
Viewpoint
Economic Growth and Employment
Increasing Rural and Urban Gaps
Increasing Regional Disparities
Social and Economic Imbalance
Resources, Environment, Development

• Increasing gap between rural and urban household
  income
• Increasing gap between rural and urban household
  consumption
• Gap in urban and rural public services
• Gap in rural and urban labor productivity

• A country with largest employment pressure
• Laid off, unemployment, transitional poverty
  increase dramatically

• Resources problems
• Seven major ecological environment issues
• Ecological issues cause great losses

• Huge gap in per capita GDP
• Huge gap in social and economic indicators
• One China, four worlds
• One China, Four societies

• Inconsistency between economic development and
  health
• Mismatch of hardware and software investment

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III Victory Over SARS and New Development
Viewpoint
New Development Viewpoint of Putting People
First

• Centered around economic development
• Adhered to coordinated development of rural and
  urban areas
• Adhered to sustainable development
• Adhered to Putting People First

• Adhered to social and economic coordinated
  development
• Adhered to coordinated development among regions
• Adhered to opening to the outside world

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III Victory Over SARS and New Development
Viewpoint

• Growth is not the purpose but one of the means to
  achieve human development
• The core of development is human development,
  that is a development of putting people first
• Growth is to improve human development level that
  centered around the quality of living, not only
  improve per capita GDP
• The indicator of per capita GDP often hide the
  huge wealth gap among households, imbalance in
  regional development, social distribution
  unfairness
• An unfair and imbalanced unsustainable
  development with high inflation and high
  unemployment can not maintain and does not worth
  maintaining
• The ultimate goal of growth is to achieve social
  and economic development and meet the needs of
  people. Growth should serve the interests of the
  people, not the other way round.

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III Victory Over SARS and New Development
Viewpoint

• Two Possibilities in Chinas Development
• Per capita GDP in our country has reached US
  1000, and according to our plan and current
  exchange rate, by 2020 it will reach US 3000. It
  is a very critical phase in the overall
  modernization process and a very important phase
  when social economic structures undergo
  significant changes. The development processes in
  many countries show that there are two
  possibilities in this phase one is that the
  economy continues to develop and
  industrialization and modernization will be
  achieved smoothly the other one is that with the
  increasing gap between the rich and the poor, the
  increase of unemployment, the growing disparities
  between urban and rural regions, intensified
  social conflicts, and worsening ecological
  environment, the economic and social development
  will fall into stagnation, even social unrest and
  going backwards (Wen Jiabao, February 2004).

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III Victory Over SARS and New Development
Viewpoint

• Common prosperity theory is a choice of future
  human development, and theoretical goals of China
  in achieving socialism.
• Provide a system platform for every individual,
  every region, every sector to achieve equal, fair
  and coordinated development, it is helpful for
  achieving common prosperity.
• To achieve the development goal of building
  well-off society, and realize five coordinated
  development we need to uphold the principles of
  putting people first, enrich the people,
  development together, sharing the development,
  and getting prosperity together.

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III Victory Over SARS and New Development
Viewpoint

• The significance of the new development viewpoint
  of putting people first
• It is an important breakthrough and innovation of
  Chinese government in development viewpoint, as
  important as ideological liberation in 1978
• It is an important summaries of Chinas 50 years
  of industrialization and modernization
  experiences, especially 25 years of reform and
  opening to the outside world
• It is active respond to social and economic
  challenges in our country
• As a direct cause, SARS crisis accelerated the
  transformation of the new development viewpoint.

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IV Investment Overheating 2nd Soft Landing

• Four Surprises
• From the first quarter of 2002, China has entered
  into a new stage of economic growth. The growth
  rate of GDP in this period is as high as 9.9,
  creating a new record of growth rate in recent 6
  years(April 9,2003).
• New Premier Wen Jiabao, when speaking of the
  nature of SARS, defined it as a suddenly-arising
  catastrophic disaster(April 13,2003).
• SARS was effectively controlled (June 23, 2003).
• China is facing investment overheating

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IV Investment Overheating 2nd Soft Landing

• China Shock
• Reuters coverage of interview with Premier Wen
  Jiabao on April 28, 2004
• Korea stock exchange dropped by 10
• Production prices rose in neighboring countries,
  such as coking coal price in Japan rose by 25
• Chinas instable macro economy affecting
  neighboring countries, even the world.

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IV Investment Overheating 2nd Soft Landing

• Is Chinas Macro Economy Overheated Again?
• From 1979-2001, Chinas long-term growth trend is
  9.2-9.5. If we say when the growth rate is 50
  higher than the trend, the economy is overheated
  on the contrary, if the growth rate is lower than
  the trend by 50, the economy is over-cold if
  the growth rate fluctuate within 25, the economy
  is stable if the growth rate fluctuate between
  25 and 50, the economy is not overheated but
  instable.
• Last year, GDP growth rate was 9.1 that fitted
  the trend. 2004, first quarter is 9.9,higher
  than the trend.

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IV Investment Overheating 2nd Soft Landing

• Chinas Economy Overheated Four Times since 1977
• 1977-1978, 11th National Congress of the CPC
  ,yang yue jing, a great leap forward to catch
  up with the western developed countries
• 1982-1984, 12th National Congress of the CPC,
  Industrial and Agricultural total production
  quadrupled
• 1987-1988, 13th National Congress of the CPC,
  GNP quadrupled and price system reform to rush
  over the hurdle
• 1992-1993, 14th National Congress of the CPC,
  double accelerate (accelerate reform, opening
  to the outside world and modernization.

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IV Investment Overheating 2nd Soft Landing

• Comparing current Overheating with the last
  Overheat
• For the current overheating (2002-2004), economic
  growth rate, investment growth rate and inflation
  rate are much lower than that of last round of
  overheated economy (1991-1993)

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IV Investment Overheating 2nd Soft Landing
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IV Investment Overheating 2nd Soft Landing
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IV Investment Overheating 2nd Soft Landing
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IV Investment Overheating 2nd Soft Landing

• We are confident that China can realize macro
  stabilization through macro adjustment
• The current overheating is far from close to
  1991-1993 overheat
• We can draw lessons from last soft landing
• Consensus has been reached at early stages
• Market based measures plus administrative
  measures

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IV Investment Overheating 2nd Soft Landing

• Chinas economy has high potential growth rate
• China is among the countries with highest
  potential growth rate(9.3-9.5) in the world.
• Chinas economic system has strong self-driving
  function.
• Chinas macro economy is basically stable, and
  Chinas ability to restrain from external shocks
  has obviously become stronger.