Hello, welcome to visit Shanghai Forum
Distinguished guests, dear colleagues, ladiesand gentlemen,
Good morning.
It’s my greathonor to give you a report on Chinese economy. My topic is “the Short-runFluctuations and Long-run Growth of Chinese Economy”. Personally, I think 2012is a very unusual year for Chinese economy. Its first quarter in particularsuffers from many strong external and internal shocks, leading to slowdown ineconomic growth rate. Since the theme of our forum today is “Strategies for2011-2020”, I will approach the issue from the long-run perspective. In thelong run, China is faced with challenges concerning factors like changes inpopulation structure, capital accumulation, energy and environmentalconstraints, and TFP growth. The year 2012, considered both in the long run andshort run, is a very difficult year. Today I will talk about three aspects ofChinese economy, challenges in 2012, trends in the future and major reformsneeded.
To begin with,it’s necessary to introduce a general macroeconomic model, a general equilibriummodel. We will look at the economy in both long run and short run against thebackground of globalization. In the long run, as I’ve mentioned, labor supply isof vital importance, which undergoes a significant change in our country.Capital accumulation, as I will deal with later, is also very important. TFPhas much to do with R&D activities, and technological advancement becomesimportant in recent years in China. A critical part in TFP growth is institutionalreforms. As Mr. Long Yongtu mentioned, institutional reforms are essential toour entry to WTO. Lastly, we will consider energy constraint and environmental cost.In the short run, we receive many shocks, such as decline in external demand, abruptchanges in domestic investment, excessively frequent changes in macroeconomic regulationand control policy, all of which exert an impact upon Chinese economy to someextent. That’s why the year 2012 plays a crucial role in both short run andlong run.
Here we can see the decline of investment growth in both officebuildings and residential buildings. As we all know, it is due to propertypurchase restriction policy. For us macroeconomic researchers, we’ll wait andsee this policy takes effect in five years. It is really difficult for us tostudy its periodicity, for its impact is massive. Unlike other policies liketax policy, credit policy, financial policy or interest-rate policy, it is ahard policy and its outcome is unpredictable.
Now we all expect China’s consumption to grow. Mr. Long has alsomentioned domestic demand in relation to economic restructuring, which is veryimportant. It’s likely that China’s consumption will increase after 2015. Butit’s impossible in 2012. As you know, economy growth slows down and employmentdeclines. Considering the fact that consumption accounts for only 34% of thetotal economic growth and labor income only 40% of the total GDP, and the huge dividebetween urban and rural areas in terms of social security, income and access topublic goods in the context of dual economy, I don’t think it is reasonable toexpect an increase in consumption in 2012. What I mean is that the one and onlymethod to promote economic growth in 2012 is to re-launch investment.
OK.Let’s look at a severe challenge confronting us in 2012, that is, problems arisewhen financial resources interject into real economy. In the past ten years andbefore that, our finance, figuratively regarded as blood in economy, entered realeconomy in two channels. One takes the form of dollar reserves which come alongwith trade surplus, that is, what we call foreign exchange earnings andaccounts for a significant source of liquidity interjection. Now that foreign exchangeearnings decline rapidly, the blood that is interjected through this channel isreduced. This affects private enterprises enormously, for their growth reliesheavily on export. In comparison, other enterprises are not much influenced. Theother channel is real estate and real-estate-based local financing platform, thatis, mortgage financing from land and real estate. This channel has been blockeddue to strict real estate regulations. That the two major channels are blocked givesrise to a couple of well-known problems. The central bank in effect implementedloose monetary policies in the first quarter of this year and the reserverequirements were on the decrease. But the interest rate remains the same. Sincewe have just come out of the period of negative interest rate, there’s not muchroom for decrease in interest rate. Monetary policy has become loose. It turnsout that enterprises are reluctant to obtain loans, for there is little profitin investment. I can show you the latest statistics from the first 20 days ofMay this year. China’s four biggest banks only lent a total amount of 34billion yuan. In 2008, new loans per month amounted to 1 trillion. Therefore thenew problem confronting us right now is the decrease in liquidity interjection.
Since time is limited, I won’t elaborate on this. I will talk aboutsome simpler issues. In the long run, we are faced with tough challenges. Themost formidable one is the upcoming changes in China’s population structure. Chinahas implemented the only child policy since 1970s and the number of labor forcewill probably reach its peak in 2015. After that, the percentage of the laborforce in the total population will decline. So will the total population.Besides, since the major part of our labor force comprise people born in 1970s,1980s, 1990s and even 2000s, we also have structuring problems regarding labormarket. Many changes have taken place as a new generation of students goes tocollege. All the only children wish to enter the white-collar class throughcollege education, and there is not enough labor force for blue-collar workers,skilled workers and workers for other jobs.
The change in population structure also leads to the rise in old-agedependency ratio, which may further leads to a huge change in savings rate inChina. A rapid rise in children dependency ratio and a rapid decline in old-agedependency ratio both shatter the foundation that enables Chinese savings rate togrow. Without this foundation, there won’t be a high savings rate in China.What does this mean for capital formation? China’s recent high growth rate isattributable to the high savings rate. What is our savings rate? It’s 52%,which reaches a record high as compared to any other country in the world.Here, I’d like to give a brief mention of corporate savings, especially thehighly profitable savings of our monopolies, and government savings. All theseindicate changes in the long run. In whatever area reforms are implemented,such as tax policy, SOE, and population structure, there will be change insavings rate and decline in capital formation. In that case, investmentincrease or workforce increase won’t be enough for sustaining Chinese economic growth.The only way that will hopefully further promote economic growth in China istechnological advances. Economic restructuring, as Minister Long just mentioned,relies on TFP growth.
Last year, weconducted a project for the State Development and Reform Commission, in whichwe tracked TFP growth, as shown by the green curve. We’ve found out China’s TFPgrows particularly rapidly in three periods. The first period is indicated bythe reform and opening-up policy and rural household contract system. Thesecond one begins with Deng Xiaoping’s south tour speeches. The third one concernsChina’s entry to WTO. What facts do they have in common? Above all, systems arereformed rapidly in China. What’s more, there are large transfers of ruralworkforce, especially after China’s entry to WTO. In peace time, there is over200 million transfer of workforce, which is rare in the world’s history. Shanghai’stotal population, including migrant population, is 23 million. A recent researchthat we conducted with Family Planning Commission shows there is still an unreportedpopulation. The actual population may well exceed 23 million.
Furthermore,China is stuck in a middle-income trap, which is a common problem facing alldeveloping countries when their GDP per capita reaches $15, 000. Japan’s turningpoint came around 1970, and Korea’s turning point came at the time of theFinancial Crisis in Southeast Asia. By comparison, 2012 marks the turning pointfor China. Restructuring is probably what we are bound to experience.
In such a large country with a population of 1.3 billion, when GDPper capita exceeds $10,000, $20,000, $30,000 or even $40, 000 and comes close tothat of a developed country, we are likely to encounter new problems, owing tofactors like energy consumption, gas exhaustion, environmental cost, as well asthe recent large-scale industrial transfer to Middle and Western China. Geographically,the terrain of China is higher in the west and lower in the east. Sources ofwater are everywhere. If a large number of enterprises are moved to Middle andWestern China, what if Yangtze River and Yellow River are polluted? I suggest youcarry out a simple experiment with the weather in Shanghai these days. If thewind blows from the west, we won’t have a good weather in Shanghai. If the windblows from the east, the weather will turn out fine. It is because factoriesare mainly located in the western part of Shanghai.
What are we supposed to do? In what way can China maintainsustainable growth? The growth rate has an inevitable tendency to decline, and isdifficult to stay at 10%. But we would not like to see a sharp decline ingrowth and we still expect a growth rate of 7%- to- 8%. Where’s the room forgrowth? We do have much room and many advantages for growth. First of all, wewill have large dividends from institutional reforms. Secondly, we have theadvantage of labor instruments. I said that the number of workforce will reachits highest point in 2015, but I don’t agree with the idea as is adopted byquite some other scholars that we have come to Lewisian turning point. China stillhas a lot of work force that can be transferred from the rural areas. Inessence, institutional reforms make room for the transfer. Agriculturalworkforce in U.S. merely accounts for 2% of the total working population. By thisstandard, we can estimate the number of work force that can be transferred fromrural areas in China. Thirdly, we have much room for capital formation. Thoughour savings rate has decreased, given Chinese people’s particular consumptionand saving habit, there is still much potential for a further decline insavings rate as compared to other countries in the world. Moreover, we willconsider investment in human resources and regional differences. Neverthelesswe have a lot of unfavorable factors, upon which I won’t elaborate. In a wordour factor market is distorted to a great extent.
In my view, themost essential and difficult reform is factor market reform. China achievedsuccess in the first 30 years’ reforms in goods markets. But the reforms infactor markets flounder around, for factor market reforms involve vestedinterests and it is difficult for the reforms to proceed. Firstly, we havelabor market reform. Our 1978 reform begins with rural land contract system. Butthe collective land ownership doesn’t suit the current economic development inChina. It is difficult to decide whether land allocations should be affected bychanges in household population. Secondly, how can we make industrialization,land-use in urbanization compatible with collective land ownership in ruralareas? More problems come up when local governments take land from ruralresidents. Our solution is simple, that is, to allocate the land ownership tofarmers. The real difference between urban and rural areas is the difference inwealth. During the reform, when production factors are capitalized, especiallywhen land is capitalized, farmers don’t feel much of a wealth effect. Landreform will enable us to define land ownership in a new way. The centralgovernment, as I know, is working on this. Early this year, DevelopmentResearch Center of the State Council aims to make sure about the exact amount ofland in China. When the land is registered and the ownership is well defined,we all know what is going to happen. Since financing involves collateral andcapitalization of collateral, the reform will make room for urbanization and financialgrowth. Zhu Min has referred to China as a small country in terms of finance.The scale of finance is out of proportion with that of real economy. While HongKong has a very large financial sector, ours is very small and the one forShanghai is even smaller. Suppose Shanghai has a financial sector as large asthat of Hong Kong, how many students are supposed to graduate from FudanUniversity? What constitutes the foundation? Land. The government should nothesitate to give land to farmers, and the process of urbanization will be accelerated.
Next, we shouldcarry out reforms to create a uniform labor market. Now we have much distortionat the labor market and many problems in social security construction. Thereare a number of obstacles to labor mobility.
Finally, we’ll come to capital market reforms. If China is to expandits financial sector, it must make its financial services strong and active.Suppose the financial enterprises can’t serve the financial market well, it’simpossible for Chinese financial market to maintain healthy development.Chinese financial market aims at financing. Initially companies listed on GEM enjoystratospheric prices, and their prices decline sharply, which causes losses to smallshareholders. U.S. Facebook was listed with the price of $38. The prices fellrecently. Small shareholder had planned to charge the distributors withcheating. I would like to introduce such system into China, giving people theknowledge that they can sue if the stock price drops though it is very high whenthe stock is listed. If Chinese financial market and capital market can protectthe interest of small shareholders, the sound development of Chinese finance isensured. What is the main objective of finance? It is to serve real economy,industrial structure upgrading, and risk investment. It must combine with younglabor resources. It should rely on returns on real economy rather than on over-hypingbubbles and manipulations by interest groups. Therefore, reforms in factormarket and financial market are crucially important to China.
If all thesereforms are well implemented, I believe we can have full confidence in rapideconomic growth in China. In this sense, 2012 also represents a starting pointfor China, and we expect all the reforms to be on the right track, whichprevents the decline in economic growth and makes Chinese economy healthier.
Since time islimited, I have to stop here. Thank you.
