Current macro management and Long-term growth scenarios of Chinese economy FAN Gang National Economic Research Institute & Peking University

I. Global Crisis and China: Policies and Scenarios

I-1, The reasons for the slowdown Global crisis; Domestic adjustment by itself: –It is better to have a strong macroeconomic policy during the booming time, instead of doing little to let things bubble up! –Having had that, China does not have big bubble- burst to deal with and possible to recover quicker;

I-2, The good rooms for policy maneuver Gov’t debt / GDP = 22% Banking sector in good shape; 2 trillion foreign reserve. -- China has been paid off for its financial prudence and patience.

I-3, Stimulus policies

Fiscal stimulus package and 8% growth The net fiscal stimulus is counted for almost 3% of GDP 8% may not be difficult if the stimulus big enough, but market may feel still cold and unemployment still high – over capacities. It is “sustainable” for one or two more years.

Monetary policy? Quantitative management. Interest – rate management is constrained by the exchange-rate relationships.

Other policies! Investment approval and local autonomy; Industrial policies; Financial policies, such as lending policies to SMEs and mortgage/real estate. Land policies. ……

I-4. Signs of bottom-up

Figure: Change in Retail Sales of Social Consumption Goods (M/M, %) Source: Chinese State Statistical Bureau

1.5 Risks of monetary expansion The credit expansion is already over the target (RMB5 trillion); M2 growth rate is historically rarely high at 25.5% ; World commodity prices are increasing.

Naturally, people start to worry about: Inflation, or asset bubbles; Bank NPL;

Policy makers are watch too! Deflation is still deepen (CPI -1.5% in April, from 1.2% in March, yoy); Not much credit has “sneaked” into the asset market so far; Policy may “switch” the direction, if needed.

II. Structural Problems: High savings and low consumption

As observed by everyone, China’s recovery or growth is still relying on either export or investment. Consumption is still a week spot. And this is particularly a problem in long run given the possibility that US consumption-saving relationship may be changed (a bit) by the restructuring of financial market after the crisis. So, for the medium and long run, the key question remain: how China can increase its domestic consumption?

Household sector savings rate

Various sectors as % of total savings

Households’ disposable income / other incomes

Wage as % of GDP

“Corporate net revenue” as % of GDP

How to increase Households’ Income Increasing gov’t expenditures on social security/health care? Minimum wage increase? Fiscal / taxation reforms – transfers between different sectors; Redistribution of wealth?

III. Factors Behind 3-decades Growth and Beyond

Most Factors of Growth are still working and will work for the next years

High savings; Low labor cost; Reform effects; Globalization effects; Education and Technology progress. Urbanization.