© michael smitka 2007 chinese economy at a crossroads spring 2007 华东师范大学（上海）...

© Michael Smitka 2007

Chinese Economy at a Crossroads

Spring 2007

华东师范大学（上海）Washington & Lee University

Michael Smitka

华李大学经济教授

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Preamble• Starvation in living memory

– Staggering economic mismanagement under Mao• Extreme decentralization• Extreme politicization

– Reforms 1978- Deng Xiaoping, who brought stability (lots of details of what / when / how)

• Now only shards of the old system• SOEs (state owned enterprises)• Rural China (esp. land rights)

• China is now a fully modern economy• With lots of problems on the appropriate govt role


General indicators

• 1990 2001

– Population (in billions) 1.1 1.3

40% urban

– Gross national income (US$ trillion) 0.4 1.1

• now 1.4

– GNI per capita (US$) 320 900• now $1,100 before price corrections

– Adult literacy rate (% ≥ age 15) 78.3 85.8– Total fertility rate (births per woman) 2.1 1.9 – Life expectancy at birth (years) 68.9 70.5– Cell phones per 1,000 (2000 vs 2005) 68 300+


The modern China

• Shenzhen golden skyscrapers


Shopping

• Walmart sign


The Fast Life

• KFC and McDonald's in Shenzhen


What does the future hold for her?

The urban girl

• Little girl on outing with McDonald's kids meal (Xiamen)


On her way to an outing

Xiamen, Fujian 福建省厦门市

• View of downtown Xiamen


Or leisurely dining

• Family eating at outdoor plaza, Kunming


In an outdoor plaza

• Outdoor plaza, kunming


Or the backbreaking work of peasant life

at least for women…

• Woman lugging fertilizer, Baisha Village (Lijiang), Yunnan


With makeshift recreation

• Playing mahjong, Baisha, Lijiang, Yunnan


And lonely vegetable sellers

• Vegetable sellers, mud street, Baisha, Lijiang, Yunnan


But even sleepy mountain towns

• Tibetan men squatting on street corner, Shangrila, Yunnan


With one street

• Main street (only street!), Shangrila


may have a decent market

• Vegetable market

• Shangrila, yunnan


• ditto


With treats for kids

• Kids eating treats on skewers, ditto


Though some peasants make out OK and can afford a foyer

• Peasant mansion, Lin Village, Xiamen


So what is china's place in the world?

• Geography– You just saw geography-based contrasts

• Trade

• Economy– What does 11% growth mean?

• For a formerly "socialist" society?


If China is theplace to watchin the 21st century

Who are itsneighbors?


China in Asia Factoids

• Chinese tourism to Japan and Korea will surpass 1 million visitors in CY2007– Over 1 mil for Singapore and Thailand in CY2006

• We represent a flow in the opposite direction– Overseas tourism to an economist is an import of

services; we're adding to the US trade deficit– But China runs a net trade deficit in goods and

services with much of Asia

• US-China trade is not representative!


Japan's #1 trading partnerFY2006 (April 2006-March 2007)

China-Japan US-Japan

Exports Y11.3 tril Y17.1 trilImports Y14.1 tril Y 8.0 trilTotal Y25.4 tril Y25.1 trilNet -2.8 tril +9.1 trilAuto parts X 0.4 tril X 1.0 tril

M 0.1 tril M <0.1 trilChina is #1 foreign source of Japanese auto parts, with values risin

g rapidly. However, what will happen to exports as local assembly in China by Toyota, Honda and Nissan rise?


Yen vs Yuan: a 20+% appreciation


QuickTime™ and aTIFF (Uncompressed) decompressor

are needed to see this picture.


Economic overview

• GDP ===> "Rule of 72"

– Growth– composition

• Inflation– Consumers– Farm prices (good for farmers!)

• Consumption– Goods and services– Savings




A single number (GDP) captures only part of the story

But it's still a useful reference point


Issues (2)

• Macroeconomic control– Immature financial system– Local government - bank ties

• Regionalization: national market– Legacy of extreme decentralization

• Compounded by sheer size

– Blatant local protection ended• No more toll barriers at provincial borders

– Transport infrastructure and sheer distance


Issues (2)

• Externalities– Negative

• Water use• Pollution

– Positive• Urbanization• Education• Health care


Issues (3)

• Urban political economy– Government has "delivered the goods"

• Links between politics, other areas still muddy– Results in inefficiency

• But political careers competitive

– Increased rule of law• Irregularities but can no longer be blatant• Land plays require that development works


Issues (4)

• Rural political economy– Poor / spotty delivery of the fruits of growth– Poorly enforced property rights

• In many places no political voice• Muddy rules for landholding exacerbate

• Inequality– Huge regional differences– Growing interregional differences

• Good locations vs bad• migrants vs locals


Long-run prospectussupply side

• Demographics still favorable– Working age population will stop growing by 2015

• But plenty of rural would-be migrants• Universal literacy among the young

• Investment chaotic– But high with high savings

• At 10% pa growth, can tolerate inefficiency

– Real darwinian process of corporate selection

• Technology improving rapidly– Lots of engineers, unlike US and Japan– Lots of entrepreneurs, too


Long-run prospectsdemand side

• Trying to "rebalance"– Less trade more consumption– Less investment more consumption– But strong incentives to save

• Uncertainties about pensions, health care• Can no longer rely on children

• How will government role evolve?– Underfunded public services, esp rural– Underfunded social welfare

• How to provide for farmers? Price supports & protection everywhere else (Korea, Japan, US, EU)


Long-run prospectsfactor markets

• Labor markets fluid– But can migrants & peasants accumulate skills?

• Will their children have access to the urban elite system?– The US does that poorly

• Capital markets too fluid– Weak systems amidst huge shifts in economy

• Need credit analysis in banks, accounting in firms

– Stock market may be of modest importance• Caveat emptor - firms need banks, but what's wrong with

fleecing shareholders, esp for "state owned enterprises"?– US execs do it all the time, why shouldn't Chinese!


Risks

• Political transition

• Inflation

• Environmental collapse esp agriculture

• Financial crises of some sort likely• As economy matures imbalances between savi

ngs and investment will worsen• Compounded by structural shifts in industries a

nd firms that grow and those that don't


Not the end

But a glimpse at the future


Addenda: Time Permitting

• Geopolitics– Competition for oil supplies

• Also aluminum, steel scrap, iron ore….

– Chinese companies active in these fields• With apparent central government support

– Perception in US that need to control Persian Gulf


Arguments are flawed

• Neither logic nor empirical foundation – Previous embargoes failed– Price fixing failed

• Nor operationally possible– Over the centuried the following have all tried and f

ailed to control the Persian Gulf:• Greeks, Iranians, Turks, British, Russians and Americans

• Why should China be different?• For example:




US-Canada: +3,570,000 b/d China: +3,064,000 b/dIf there is a villain, why look at China?


Trade

• Protectionism in the US– But until recently, Japan ran a trade surplus with C

hina• Korea still does• As does the rest of Asia

– More issues on the US side than China's• And where do my turtlenecks come from?

– Cambodia!!

– China is now priced out of key markets

• So demagoguery -- hitting China won't help US trade


Rural Reforms

• In 2007, rural tuition free for compulsory education (= 150 million children!)

• Rural co-operative health care experiment– Test in 2007 in about half of China– Extend thereafter

• But starting expenditures only Y20 per person

• Minimum land sale prices & usage fees– Try to limit confiscatory policies & abuses


SOE, other reforms

• SOEs must now pay dividends– Better macro control and less waste

• Lots of environmental reforms– "full cost pricing" for coal (2007 in one province)– Electric power plants

• Problems remain with local government – Electric power good, central can control & monitor– Sewage treatment bad, local emissions not…yet?


China: Millennium Development Goals

• 2015 target = halve 1990 $1 a day poverty and malnutrition rates

• 2005 target = education ratio to 100%• 2015 target = reduce 1990 under 5 mortality by 66%• 2015 target = reduce 1990 maternal mortality by 75%• 2015 target = begin to reverse AIDS, other diseases• various others


1 Eradicate extreme poverty and hunger

1990 2001

• Population below US$1 a day 33.0 16.1• Poverty gap at US$1 a day 8.9 3.9• Share of poorest 20 percent ... 4.7• Prevalence of child malnutrition 17.4 10.0 • Share of population below minimum level of dietary e

nergy consumption 16.0 9.0


2 Achieve universal primary education 2015

target = net enrollment to 100%

1990 2001

• Net primary enrollment ratio (% of relevant age group) 97.4 93.2

• % of cohort reaching grade 5 86.0 (93.8)• Youth literacy rate (ages 15-24) 95.3 97.9


3 Promote gender equality

• 1990 2001

• Ratio of girls to boys in primary and secondary education 87.0 97.6

• Ratio of young literate females to males (ages 15-24) 95.5 98.1

• Share of women employed in the nonagricultural sector 37.7 39.2

• Proportion of seats held by women in national parliament 21.0 22.0


4 Reduce child mortality

• 1990 2001

• Under 5 mortality rate (per 1,000) 49.0 39.0• Infant mortality rate

(per 1,000 live births) 38.0 31.0• Immunization, measles 98.0 84.0


5 Improve maternal health

1990 2001

• Births attended by health staff 50.3% ... 70.0

• Now 97%

• Contraceptive prevalence

(women ages15-49) 84.6 87.0

• Maternal mortality ratio (per 100,000 live births) • no current data, at 60 in 1995 (almost 0 in US)


6 Combat HIV/AIDS, malaria, other diseases

1990 2001

• Prevalence of HIV, female (ages15-24) est 0.1%??

• Number orphaned by HIV/AIDS 76000• Tuberculosis (per 100,000 people) 116.5 104.4• Tuberculosis cases detected under DOTS

14.9 now 42.9


7 Ensure environmental sustainability

• 1990 2001

• Forest area (% of total land area) 15.6 17.0

• Nationally protected areas (% of total land area) 6.4 7.8

• GDP per unit of energy (PPP $/kg oil equivalent) 1.7 4.7

• CO2 emissions (metric tons per capita) 2.1 2.3

• Access to an improved water (% of population) 70.0 75.0

• Access to improved sanitation (% of population) 23.0 38.0

• Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers.


8 Develop a Global Partnership for Development

1990 2001

• Youth unemployment (15-24) 2.5 3.1

• Fixed and mobile telephones (per 1,000 people) 5.9 247.7

now over 500

• Personal computers (per 1,000 people) 0.4 19.0

now double

© michael smitka 2007 chinese economy at a crossroads spring 2007 华东师范大学（上海）...

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