1. China’s Economic Growth: Past, Present and Future ECON 6470 Economic Growth and Development: Spring Case Study 2015 Professor Dr. Darryl McLeod Presented By: Chuan Shi, Ph.D. Economics Candidate 2016 1

2. Introduction: China Progression through comparative peers 2  Stage I – Initial Growth Phase & Absolute Convergence  Fiscal, monetary & socioeconomic reform measures  Historic political & institutional landscape  Reform implementation  TFP: -Regional cooperatives (Township & Village Enterprises) -Infrastructure -SEZ’s -FDI & trade liberalization (export-reliance model)

3. Growth Factor Analysis – Steady State (Absolute Convergence) 3  Peer countries include BRICS, except for Russia (no data is available), Singapore and US as the base countries to compare  Among peer economies, China had the lowest GDP 0.097 in 1997 comparing to the USA’s GDP as 1  According to absolute convergence, China should have grown the fastest amongst peer countries  Using its own TFP (A) from 1990, China has 0.063 as steady state GDP, which is less than 0.097 GPD level of 1997. If China used its TFP level in 1990, it’d not grow during the 90’s.

4. Fiscal, monetary & socioeconomic reform measures 1 4  Fiscal Reform  Collative farming system to household-responsibility system: increased TFP in agricultural sectors  Encourage private companies and non-state sectors to grow: increase TFP in non- agricultural sectors  Special Economic Zones  Monetary  Fixed exchange rate  High interest rate to encourage savings  Socioeconomic  Trade liberalization

5. Historic political & institutional landscape 5  After the death of Mao Zedong, cultural revolution ended. Deng XiaoPing came into power and began the policy of “reform and opening up”  Special Economic Zones  Foreign Direct Investment  Trade Liberalization

6. TFP: Regional cooperatives, infrastructure, SEZ’s, FDI & trade liberalization (export reliance model) 6  China’s overall TFP decreased in 2006-10 partially due to the decrease in capital input (ICT). Brazil, Russia, India, and South Africa, increased capital input (ICT) during this period  China increased capital input (non-ICT) in the period of 2006-10, which was a trend among all the peer economies  India increased TFP between 2006-10, while Russia had the deepest reduction in TFP Source:

7. TFP: Regional cooperatives, infrastructure, SEZ’s, FDI & trade liberalization (export reliance model) 7 Source: Zhu, 2012, pg. 18 Source: Reuters, Goldman Sachs

8. Introduction: China Progression through comparative peers 8  Stage II – Intermediary Structural Transition Phase to Conditional Convergence  End of export reliant growth; Beginning of fiscal reallocation  SOE reform & new industry champions for higher value-added growth  Socioeconomic reform: social safety net creation  TFP: -Population growth -Savings -“New normal”

9. Growth Factor Analysis – Steady State (Conditional Convergence) 9  With US TFP to recalculate China’s steady state GDP, China has the highest growth as 6.09 among all peer economies  With US schooling u as 11.9, instead of China’s schooling as 6.11, China has higher growth than that with its own schooling system  With US saving rate n as 0.01, instead of China’s saving rate as 0.013, China has slower growth than that with its own saving rate  To conclude, China needs to improve its schooling and TFP in order to have higher conditional convergence of growth

10. End of US export reliant growth 10  Chinese Exports to US as % of Total Chinese Exports Source: Zero Hedge, Bloomberg

11. SOE reform & new industry champions for higher value-added growth 11  Private companies in China are gaining more profitable, while state owned enterprises (SOE’s) reinvest: SOE consolidation and asset injection Source: Bruegel, Egawa.

12. Socioeconomic reform: social safety net creation 12 Source: IMF WEO 2014  China has the highest national savings among peer economies partially due to inefficient social safety net Source: IMF WEO 2014  China has relatively low government expenditure in comparison to peer countries. To increase social safety net, government will need to continue to increase expenditure

13. TFP: From population growth & savings to “new normal” 13 Source: NBS,CITIC-CLSA Source: United Nations ……

14. Introduction: China Progression through comparative peers 14  Stage III – Future Steady State Growth Rate Normalization  TFP: -Consumption -Education -Technology -Institutional expansion  Positive growth incidence curve  Negative growth incidence curve

15. TFP: Consumption, education, technology & regional & institutional expansion 15 Source: World Development Indicators, World Bank Source: Goldman Sachs  China had only 5,832 patent applications in 1990, while the United States had 90,634. China had 704,936 patent applications in 2013, while the United States had 287,831. China’s education and technology has positively contributed to TFP growth  China’s consumption has not increased proportionally to GDP growth. Simulating domestic consumption will contribute to economic growth  China will transition to domestic consumption; India to export-led; Brazil & Russia regress and continue commodity dependency due to institutional erosion  Technology, innovation and highly skilled labor key to conditional convergence for China; Infrastructure and basic education for India

16. Positive growth incidence curve 16  Sustainable reforms (albeit slower than expected)  China – clean energy  Less pollution  Economic transformation plan  India – Infrastructure investment / favorable Gini curve impact  Institutional regional and global transformation  AIIB – Asian Investment Infrastructure Bank (China): Global liquidity & risk reduction  Regional Co-integration Source: US News

17. Negative growth incidence curve 17  Pollution: Kuznet Curve impact from rising pollution may impact growth for India & China  How much growth will be sacrificed for better health in India & China?  Russian – Geopolitical tensions; Brazil – Lack of fiscal austerity and inflation;  Corruption Source: http://g.foolcdn.com/editorial/images/26223/kuznets-curve- china_032213_large.png, Kuznetshttp://g.foolcdn.com/editorial/images/26223/kuznets-curve- china_032213_large.png

18. Negative growth incidence curve (cont.) 18  Aging Population: China & Russia face major Gini deficiency in working age population  Will India emerge as the dominant force of global growth?

19. Conclusions 19  High TPF growth due to education and science, and economic system improvement  Domestic consumption needs to further grow  Inequality has increased  Social safety net is needed to address inequality and domestic consumption

20. Sources 20 1.Zhu, Xiaodong. “Understanding China’s Growth: Past, Present, and Future”. Journal of Economic Perspectives, Volume 26, Fall 2012, page 103-124. http://homes.chass.utoronto.ca/~xzhu/paper/JEP2012.pdf http://homes.chass.utoronto.ca/~xzhu/paper/JEP2012.pdf 2. Rodrik, Dani. “What’s So Special About China’s Exports”. Jan 2006,, Harvard University. https://www.sss.ias.edu/files/pdfs/Rodrik/Research/Whats-special-China-exports.pdfhttps://www.sss.ias.edu/files/pdfs/Rodrik/Research/Whats-special-China-exports.pdf 3. IMF World Economic Outlook (WEO) update: http://www.imf.org/external/pubs/ft/weo/2015/update/01/http://www.imf.org/external/pubs/ft/weo/2015/update/01/ 4. World Development Indicators (World Bank ): http://data.worldbank.org/data-catalog/world-development-indicators 5. Egawa, Akio Decoded BRIC, “The Old emerging economies and their “new” attractiveness as the centre of consumption power”, 8 th January 2014:http://data.worldbank.org/data-catalog/world-development-indicators http://g.foolcdn.com/editorial/images/26223/kuznets-curve-china_032213_large.png 6. UNCTAD, World Investment Report, 2012, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_WebFlyer.aspxhttp://unctad.org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_WebFlyer.aspx 7. Durden, Tyler, “Watch Out For Falling Objects: US Share Of Total Chinese Exports Plunges To All Time Low “, 9/2013, http://www.zerohedge.com/news/2013-03-09/watch-out-falling- objects-us-share-total-chinese-exports-plunges-all-time-lowhttp://www.zerohedge.com/news/2013-03-09/watch-out-falling- objects-us-share-total-chinese-exports-plunges-all-time-low 8. Keohane, David,” SOE this is what passes for reform”, /2014 http://ftalphaville.ft.com/2014/04/14/1828032/soe-this-is-what-passes-for-reform/http://ftalphaville.ft.com/2014/04/14/1828032/soe-this-is-what-passes-for-reform/ 9. Murphy, David – Zhang, Nancy – Zhang, Xiao, “ Mr. & Mrs. China dare to dream”, CITIC/CLSA, 2013 (Unpublished Bank Research) 10. UN Population Division Database: http://www.un.org/en/development/desa/population/theme/trends/index.shtmlhttp://www.un.org/en/development/desa/population/theme/trends/index.shtml 11.Goldman Sachs Report, Global Sherpa, ”Globalization, Sustainable Development and Social Impact in World Rankings, Countries and Cities”, http://www.globalsherpa.org/bric- countries-bricshttp://www.globalsherpa.org/bric- countries-brics 12.Magill, Bobby, “ World’s Most Polluting County Leads in Clean Energy Investment”, 2014, Bloomberg http://www.bloomberg.com/news/2014-04-04/world-s-most-polluting-country- leads-in-clean-energy-investment.htmlhttp://www.bloomberg.com/news/2014-04-04/world-s-most-polluting-country- leads-in-clean-energy-investment.html 13.Kuznets, Simon, “Economic Growth and Income Inequality”, The American Economic Review, March – 1955, Vol. XLV. 14.Scrutinio, Vincenzo, “ A Gray Future for the BRIC’s, 2013, http://www.openpop.org/?p=661http://www.openpop.org/?p=661