1. 6/10/2016 Fan He IWEP, CASS Structural Changes after the Global Financial Crisis： China's Perspective

2. CASS Fan He 6/10/2016 Structural imbalances before 2007 Weak consumption vs. Strong investment  From 2000-2007, the share of private consumption to GDP decreased 46.4% to 36.0%,the share of Investment to GDP increased from 35.2% to 41.7% Why?  (1) The labor income share GDP dropped from 51.4% to 39.7%.  (2) Weak social security leads to precautionary saving of households.  (3) High saving rate for the enterprises.  (4) Inequality in distribution of wealth  (5) Financial repression.

3. CASS Fan He 6/10/2016 Structural imbalances before 2007 Underdeveloped service sector vs. very competitive manufacturing  The share of service sector in China’s GDP just increased from 39.0% to about 42% during 2000-2007  China’s value added (% of GDP) in manufacturing is much higher than other emerging countries, which is 32.9% in 2007 (Brazil:15.4%, India: 16.0%, Russia: 17.6%) Why？  (1)Globalization and trade liberalization.  (2)Free entry in the manufacturing sector but tight control on service sectors.  (3) No incentives for the local government to encourage the development of service sector.  (4)Price distortion.

4. CASS Fan He 6/10/2016 Structural imbalances before 2007 Heavy reliance on foreign demand  The share of exports in GDP increased from 20.8% to 35.2% from 2000 to 2007,and the share of net exports reached 8.8% Then?  (1) Trade surplus.  (2) More than 3 trillion USD foreign exchange  (3) Environment pollution.  (4) Energy security.

5. CASS Fan He 6/10/2016 Stimulus Policy after Crisis 2008-11-18 “4 trillion yuan plan”.  Destination of funds 1%, Health, Education and so on 4%, Industrial Innovation 7%, Indemnificatory Housing 8.75%, Environment 9.25%, Rural Welfare 25%, Reconstruction 45%, Infrastructure Figure 1 Destination of “4 trillion yuan plan”

6. CASS Fan He 6/10/2016 Stimulus Policy after Crisis It’s rather a monetary stimulus than a fiscal one Other sources include: (1) Local government bonds  the scale of local government remains small, about 200 billion yuan per year (2) Local government-backed investment platform  its money is mainly from bank credit. Central government budget: 1.18 trillion Other sources: 2.88 trillion Figure 2 Source of “4 trillion yuan plan”

7. CASS Fan He 6/10/2016 Economic Performance after 2008 Figure 3 China’s Economic Growth from 2008 to present (Quarterly, YoY, %) Financial Crisis “4 trillion plan” A new round of slowdown

8. CASS Fan He 6/10/2016 Deterioration of Structural imbalances Deterioration in internal imbalance (1)Investment explodes  The share of investment in GDP increased by another 8 percentage in 4 years between 2008 and 2011 (2)Too much investment in infrastructure building  It counts nearly half of the “4 trillion policy”  Mainly “Rail way, high way and other infrastructure” (3)State-owned sector resurges  Growth rate of investment in state-owned sector increase(18% to 21%) in 2009-2011, while private sector drops (48% to 38% )compared to 2005-2008

9. CASS Fan He 6/10/2016 Deterioration of Structural imbalances (3)Heavy reliance on local government and bank credit  2010, China published the only data of local government’s debt, which is 10,717 billion yuan, more than 200% of local government’s revenue in 2011 Figure 4 Credit expansion in RMB, SA, 100 million yuan

10. CASS Fan He 6/10/2016 Hard landing or soft landing? China is faced with a new round of slow down after 2011, with growth rate’s graduate declining to below 8% YoY growth in 2012Q2 Figure 5 Growth rate after 2009, YoY, %

11. CASS Fan He 6/10/2016 Hard landing or soft landing? How does slowdown happen? Macro-Policy is the main reason In 2012H1, policy tightening explains 52% of the decrease in investment, most significant are investment in real estate sector (27%) and infrastructure sector (25%). Policy tightening:  (1) end of the stimulus policy  (2) to suppress the housing price  (3) to control the inflationary pressure after the stimulus (CPI reached 6.5% in July, 2011, and is above 4% in 2011)

12. CASS Fan He 6/10/2016 Silent revolution in 2012 Consumption becomes strong Growth rate of consumption per capita is 9.3% in 2012Q2, which is higher than 6.1% in 2010Q2 and 8.4% in 2011Q2, and is also above the average rate between 2003 and 2012 Figure 6 Growth in consumption per resident(after moved average), YoY, %

13. CASS Fan He 6/10/2016 Silent revolution in 2012 Structure of investment is improving in 2012H1  Investment growth rate increases in service sectors finance(130% v.s 28%) science & technology (46% v.s 25%) ICT (43% v.s 3%),  The increase of investment in private sector outpaced that in the public sector.  the growth rate of investment in west and mid China outsized that of east China in 2012H1 East West Mid

14. CASS Fan He 6/10/2016 Silent revolution in 2012  Industrial structure is changing  There is a divergence in manufacturing PMI and non-manufacturing PMI after April, 2012 Figure 7 Manufacturing PMI and non manufacturing PMI, SA

15. CASS Fan He 6/10/2016 Why structural change?  Can not be credited to the government. Thanks to the market forces. (1) Consumption rise because of fundamental changes, especially the change of demographic profile, causing a lower saving rate Figure 8 Share of population aged between 15-64, %

16. CASS Fan He 6/10/2016 Why structural change? (2) exports sector is adjusting because of increasing labor cost Figure 8 Average minimum wage in different region of China, Yuan

17. CASS Fan He 6/10/2016 Why structural change? (3) Investment redistribution in sectors is the result of mixed events:  Slumped foreign demand, and thus there is no motive to invest more in export sector  Weak internal demand in steel and other industries, plus increasing cost in energy and labor  Improvement in financial repression

18. CASS Fan He 6/10/2016 Implication (1)Growth drops in the short run, but there is a positive structural change (2)trade surplus will be back to a reasonable level, and China’s ODI will expand, both for market seeking and resource seeking, thus external imbalances will diminish gradually (3)there are also short run factors which may cause these changes:  Slowing invest make consumption “seems ” strong and structure “seems” change  Policy support on ICT and other technology intensive industries

19. CASS Fan He 6/10/2016 Australia’s opportunity and challenge  Bilateral trade is increasing fast, but it’s mainly a mining story.  More opportunities for high-quality agricultural produces, high-end manufactured products.  A ready market for Australian service sector.  Is Australia ready?

20. Thank you LOGO Fan He IWEP, CASS