1. Walled In: China’s Great Dilemma
Presentations by:
Yansee Mata and Jarrod Van Doren

2. Overview China’s Economy: Slowing and Slowly Rebalancing
Presented by Jarrod
Economic Outlook: Short, Intermediate, and Long Terms
Presented by Yansee

3. Third Plenum of 2013
November of 2013, the Communist Party of China proposed reform:
State-Owned Enterprises and the Private Sector
Financial System
Fiscal Policy
Rural Land Reform and Hukou Reform
Market Access and Foreign Investment
Environmental Regulation

4. Economic Outlooks
China’s leadership has the right ideas to achieve high and sustainable growth, the concern is that that is easier said than done.
Pros:
Second-largest economy
PPP basis, the largest
Cons:
Rising debt-to-GDP ratio
Less friendly global backdrop
Vast and populous country
Multiple interests

5. Short Term China’s goal of real GDP growth of 6.5%:
Fixed asset investments:
Manufacturing
Infrastructure
Real Estate
Consumption:
Unemployment VS Wage Growth
Poor data: Migrant workers and unemployment benefits
Service Industry and SOE’s
Contribution to Net Exports
Interest Rate cuts
Reserve Ratio
Public-Private relationships

6. Intermediate Term Base Case Scenario Alternative Scenario
China will delay reform and achieve GDP above 6.5% for a few years but this will cause decline in TFP growth. A stimulus will increase Investment of GDP but debt will be at a high.
Alternative Scenario
Slowing the growth of GDP and credit. Reform would be introduced steadily to increase TFP from 1.6% today to 2.0% over a decade. Investment from GDP declines and debt grows at a slower pace.

7. Fiscal and Monetary Policy
Intermediate Term
Fiscal and Monetary Policy
This can be achieved with an increase in debt and investment, and would produce wanted results for the first few years. It would then result in a decline in GDP. It will most likely not be the path taken due to China’s leadership.
Implement Reform
This path would result in a slower growth of GDP but would provide economic stability in the long run. The reason it would not be used is due to political and social instability. The Chinese Communist Party will want to guarantee it can remain in control.

8. Long Term A large and growing debt burden-
If interest rates and credit growth do not decrease, China will continue to pay a growing share of GDP to interest payments.
Diminishing export competitiveness-
China has increased manufacturing costs over the last decade. Indonesia, Thailand, India and Mexico are now less expensive than China and Mexico has a proximity advantage.

9. Long Term The weight of history-
Growth inputs cannot be replicated from what was done from
(Employment, Education, and Investment in Physical Captial)
Persistent structural fault lines-
China has low productivity levels but it is not spending enough on education to increase those productivity levels. What is spent on education is low compared to other developed countries.
Two graphs overlapped.

10. Japan-Style Slowdown China’s starting point: Lower GDP per capita
Demographics are less favorable
Labor pool is not as educated
Bigger rebalancing task
Lower rank on business factors

11. Return Expectations 2016 Returns:
If there are SOE reforms there will be deterioration in Chinese equities. Currency will also depreciate if there are rate cuts.
Returns:
Long term Returns:
The depreciation of the Renminbi will bring down emerging market currencies.

12. Conclusion
China has goals of reform to double GDP by 2010 and change the direction of the way its economy functions.
The task ahead will be difficult and the next 5 years will bring market volatility to emerging markets.
The U.S. will be impacted by Chinese reform and investors should be aware of these changes.
Moving from export-drive and investment-led economy, to consumption-oriented economy.