Avoiding the Blind Alley China s Economic Overhaul and its Global Implications Daniel Rosen Partner dhrosen@rhg.com NYU Stern China Research Luncheon New York December 1, 2014 10 East 40 th Street, Suite 3601, New York, NY 10016 Tel: +1.212.532.1158 Fax: +1.212.532.1162 Web: www.rhgroup.net Address: 5 Columbus Circle, New York, NY 10019 Tel: +1.212.532.1157 Fax: +1.212.532.1162 Web: www.rhg.com
China in the Global Economy: 2000 vs. 2012* China s % share of global total 25% 20.7 2000 2012 20% 19.2 15% 11.4 11.1 10% 9.8 9.0 6.1 5% 0% 3.7 3.9 3.4 2.9 1.3 0.1 0.5 0.9 0.2 EXPORT Population GDP Exports of Goods Imports of Goods Inward FDI Outward FDI Inward Porfolio Investment POPULATION GDP TRADE IMPORT INWARD FDI OUTWARD INWARD OUTWARD SECURITIES Outward Porfolio Investment Sources: PBOC, UNCTAD, IMF, UNWTO, RHG. *Latest available data used when 2012 is unavailable.
Diminishing Demographic Growth Population by age group, % of total 100% 90% AGE 65+ 80% 70% 60% 50% 40% DEPENDENCY RATIO* AGE 15-64 30% 20% 10% AGE 0-14 0% 1960 1970 1980 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 * Ratio of people younger than 15 and older than 64 to working-age population (15 64). Sources: China Statistical Yearbook, U.S. Census International Database (1990 2050).
Diminishing Investment Growth: Capital at the Turning Point Investment as % share of GDP v. per capita income (constant 2013 $US)* 50 45 CHINA 40 35 JAPAN 30 25 KOREA 20 15 10 5 0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 * Investment is equal to gross capital formation, or new investment on assets plus net changes in stocks of goods held by firms. Sources: Chinese National Bureau of Statistics, World Bank World Development Indicators, IMF World Economic Outlook (WEO) database, Rhodium Group estimates.
Diminishing Total Factor Productivity: Reform is the Key Components of potential growth and actual growth (annual %)* 16 14 12 10 8 6 4 13.1 7.9 0.4 Capital Labor Total Factor Productivity Potential Growth Actual Growth 10.9 8.0 10.0 9.3 6.0 7.8 7.6 2.0 3.8 2.6 2.0 0.9 0.7 0.6 0.3 10.0 10.1 9.1 8.4 8.3 5.1 2.1 3.6 4.1 4.3 14.2 12.7 11.3 9.6 10.4 9.2 9.3 6.4 6.9 7.3 5.3 6.6 4.6 1.2 1.3 0.5 0.3 0.9 0.0 0.3 0.4 0.7 0.7 3.1 7.7 7.7 4.7 3.8 0.7 0.6 2 4.1 4.4 3.9 3.7 3.8 3.8 4.0 4.0 4.4 4.3 4.2 4.3 4.1 3.8 3.4 4.4 4.3 3.9 3.8 3.7 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-0.5 2010 2011 2012-0.7 2013-2 * Potential growth is the maximum growth rate an economy can achieve without accelerating inflation. Potential growth is a function of the available capital stock, labor force, and total factor productivity (residual output from technological upgrading and structural adjustment that enhances the productive capacity of capital and labor). Source: IMF 2014 Article IV Consultation, Chinese National Bureau of Statistics.
China s GDP Outlook with and without Reform GDP growth (% change year-on-year) 16 14 12 Actual Baseline (rebalanced growth) Hard-Landing Crisis 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: Chinese National Bureau of Statistics, Rhodium Group estimates. Projections begin after 2013.
A Revised Mission for Government Maintain macroeconomic stability Strengthen and improve public services Safeguard fair competition Strengthen oversight of the market Maintain market order Promote sustainable development Promote common prosperity Intervene in situation where market failure occurs
Key Regulatory Objectives Cluster Center-Local Fiscal Competition Policy Financial System Trade and Investment State Enterprises Land Labor & Welfare Environment Innovation Design Major systemic realignment of responsibilities Clear embrace of uniform elevation of competition as default mode with defined negative list, SOE coverage Nearcomprehensive coverage of internationally recognized reform agenda Trade opening and the same laws and regulations for Chinese and foreign investment Withdrawal from state control in competitive sectors; negative list; regulatory neutrality; competitive access to resources Enforcement of land tenant rights; full registration of over 1 billion plots; due process in expropriations; partial end of hukou system Education equality; employment/job creation priority; public expenditure reform; One Child Policy abolition Cross-cutting imperative; quality of growth above quantity; emissions registration; utilize market mechanisms Encourage market mechanisms in innovation; publicly funded research publicly available; education reform Indication (examples) June Overall Plan for fiscal and tax Initial steps to remove anticompetitive authorities, upgrade enforcement, but uneven, and negative list still to come Strong ongoing adjustment of financial price systems, partial new steps on capital markets, regulation, market entry (domestic), and financial account opening Piecemeal trade opening but modest liberalization; good OFDI movement, modest and piecemeal FDI opening; piecemeal portfolio opening Dividend reform; restructuring preparations; modest private investment; audits and management changes; rising private credit formation and market entry Promising launch to registration campaign; audit of all 2008-2013 land takings; approval for 100 million urban hukous Notable new business employment gains; public expenditure reform signs; OCP reform; minor education /health change but fiscal reforms are supportive Amend EPL to permit public interest lawsuits; enhanced energy/coal policy constraint; emissions transparency Modest incremental steps on IPR protection; steps on education reforms; action on public research availability Outcomes (examples) Unfunded mandates; property tax Negative list coverage; due process Interest rate liberalization, financial account opening Trade balance; negotiation completion; negative list promulgation; 2-way FDI balance Negative list terms; change in controlled sectors and firms; foreign restructuring of SOE JVs Titling progress; hukou assignment; rural land prices Increase rural education/ health spending; labor & welfare data improvement AQI improvement; NGO litigation; heavy industry market exit Government directed/private R&D spend; 2-way IPR financial flows; indices of local innovation
China s Trade Profile in 2020 under Baseline, Hard-Landing, and Crisis Scenarios Constant 2013 $US (billions) 4,500 EXPORTS 4,000 3,500 IMPORTS TRADE BALANCE 3,544 3,680 3,475 3,138 3,197 3,000 2,500 2,425 2,190 2,582 2,000 1,500 1,000 500 235 337 615 0-500 2013 BASELINE -137 HARD-LANDING CRISIS Sources: People s Bank of China, State Administration of Foreign Exchange, Rhodium Group estimates. 9
Financial System: Decision 12 Private market entry into banking (small and medium) Repair equity markets and convert to registration-based issuance Deepen market-oriented bond markets Rationalization of the insurance sector Market-determined exchange rates Move to market-based interest rates Marketize the government debt sector Open financial account for two-way capital market flows, with RMB convertibility for those transactions Redefining financial system regulatory functions to facilitate marketization Introducing deposit insurance Facilitate financial institution market exit (avoid too big to fail )
China s Ascent to the World s Third Largest FDI Exporter Countries % share of total global OFDI flows, 3 year moving average 30% 25% UNITED STATES 20% 15% 10% JAPAN 5% 0% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 CHINA HONG KONG GERMANY FRANCE INDIA Source: UNCTAD, Rhodium Group.
Concerns: Economic Considerations FDI Restrictiveness Index, China vs. OECD, 1=closed, 0=open Other media Radio & TV broadcasting Fisheries Maritime transport Mobile telecoms Fixed telecoms Legal services Transport: Air Insurance Electricity distribution Real estate investment Banking Other finance services Accounting & audit services Surface transport Electricity generation Agriculture Retail Mining and oil extraction Construction Transport equipment Forestry CHINA OECD AVERAGE OPEN 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 CLOSED Source: OECD.
China s Global Assets and Liabilities in 2020 under Baseline, Hard-Landing, and Crisis Scenarios Constant 2013 $US (billions) 12,000 ASSETS LIABILITIES 11,204 10,833 10,548 10,000 NET FOREIGN ASSETS 8,684 8,000 6,000 5,937 5,789 5,044 4,549 5,999 4,000 3,965 2,000 1,972 2,520 0 2013 BASELINE HARD-LANDING CRISIS Sources: People s Bank of China, State Administration of Foreign Exchange, Rhodium Group.
Avoiding the Blind Alley Conclusions: 1. A Game-Changing Reform Program 2. A Convergent Economic Picture with Idiosyncrasies 3. Plenty of Exceptions and Counter-indications 4. A Notably Fast Start, and a Move to Transparency 5. A Real Prospect for Political Adjustment? Recommendations 1. Gauge Incremental Progress 2. Demonstrate Support for Reform 3. Focus on a Domestic Response 4. Include a Multilateral Element 5. Stop Negotiating for What Beijing Is Already Doing 14