1. The Chinese Economy in Transition – a macroeconomic perspective Adam McKissack 20 November 2015 Resource and Energy Workshop

2. 2 The China model One party, authoritarian political regime. Implicit social contract. Economic model means to political/social ends.

3. 3 Economic model Heavy reliance on investment –large pool of low cost, surplus labour –low cost of capital –mobilised other resources (eg land) –closing of rural/urban divide Leverage off globalisation of markets

4. 4 30 years of growth

5. 5 Current challenges Over-capacity and resource misallocation High leverage (local government and SOEs) Labour force shrinking Income inequality Environmental degradation

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7. 7 Overcapacity in crude steel production Source: CEIC China database.

8. 8 Credit to GDP ratio Source: CEIC China database and Treasury.

9. 9 Dependency ratio Source: UN

10. 10 Real deposit rate Source: CEIC China database.

11. 11 Gini Coefficient – Income inequality Source: CEIC China database; World Bank World Development Indicators; Ravallion and Chen (2007).

12. 12 China’s quasi-urbanisation Source: CEIC China database. 0 10 20 30 40 50 60 0 10 20 30 40 50 60 1949195619631970197719841991199820052012 Per cent Urbanisation rate Proportionof registered non-ag population

13. 13 Low migrant wages Source: CEIC China database.

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16. 16 China’s reform agenda To achieve sustainable growth, China is transitioning –Lower investment share, more consumption –Less low value manufacturing, more high value manufacturing and services –Less income inequality, strengthened social safety nets –Environmental policies.

17. 17 Reforms in progress Streamlining investment approvals Partial Hukou reform Central and local government fiscal relations Anti-corruption campaign Liberalising interest rates Gradual SOE reform Moving towards more market based exchange rate regime

18. 18 From investment to consumption Source: CEIC China database.

19. 19 From manufacturing to services Source: CEIC China database.

20. 20 Risks Managing markets to allow an orderly gradual economic transition Pursuing structural reform in the face of political resistance –Power fragmented –Vested interests Maintaining social stability with economic adjustment

21. 21 The Chinese yuan - onshore CNY and offshore CNH)rates (inverted scales) Source: Bloomberg.

22. 22 China estimated capital flow Source: Bloomberg.

23. 23 Energy and resource? Source: Bloomberg.

24. 24 Opportunities? Investment is still a significant component of a bigger base –There remain significant needs for infrastructure investment with on-going urbanisation Import volumes remain relatively resilient –Particularly for iron ore Australia continues to gain market share

25. 25 China iron ore import volumes Source: Bloomberg.