The End of Hyper growth: Political and Economic Responses to a Slowing China Barry Naughton IR/PS, UC San Diego 5 th Annual G2 at GW Conference October 12, 2012
Conclusions (Seriously) Forces that are slowing Chinese growth can be grouped into three baskets: long term structural; medium term systemic; and short term macroeconomic (Keynesian). Because of this: 1.Interactions make the economy more unpredictable, and raise possibility of correction. 2.Short run Keynesian stimulus is not an option because it would make it harder to solve medium and long term issues. 3.There is wide recognition of this in Beijing, but no consensus on next steps. 4.This make it more likely that a substantial renewal of market oriented reform can occur next year, although this is still far from certain.
Introduction: The Chinese economy has been growing more slowly. Until the beginning of 2012, the biggest challenge to the Chinese central bank had been to bring inflationary pressures an incipient inflationary episode under control. They were having reasonable success. Starting in April 2012, substantial evidence emerged that the Chinese economy was slowing more abruptly than expected. Amid general nervousness, the central bank shifted to a more accommodative stance, and cut interest rates twice (June 8 and July 6). The downward momentum has increased because global (European) weakness and Chinese weakness are coinciding. Inflation dropped sharply, with falling prices in some months. Market interest rates peaked in Q3 2011, with credit demand weakening since. How steep will the slowdown be? How long lasting? Could the world s fastest growing economy slip into recession? Can China make the transition to stable, balanced and slower growth, under radically new conditions?
Changing Fundamentals A completely new set of economic and political conditions are emerging in China. These are long run changes, but occurring quickly, right now. For the past decade, China has been in a super phase of accelerated growth. China has grown faster, longer, than any economy in history. GDP growth pushed above 10% for five years in a row. This super phase was driven by: Successful reforms in the 1990s; Massive investment that facilitated rapid structural change; WTO membership, and (until 2008) robust global growth. A side effect of these favorable economic conditions was that the impetus for reform evaporated. Even when challenged in the global financial crisis, centralized control over investment and credit seemed entirely adequate, so long as it was decisive. Reformers lost traction, and China s institutions failed to keep up with rapid economic development. This era is now over, and China is launched into a new and challenging economic environment Examine through the lens of three forces operating on different time scales.
I. The Long run: Structural Change and the End of Hyper Growth China s unique features are completely compatible with a classic East Asian hypergrowth story. Virtuous circle of external markets; structural change; high investment in both physical and human capital; rapid upgrading. These phases come to an end, and while we understand the underlying causes well enough, we do not understand the specific triggers and processes of slowdown.
1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 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 14 12 10 8 6 4 2 0 2 Gross Domestic Product (GDP) Growth Rates Japan Economic Miracle Taiwan, Korea Economic Miracle China Economic Miracle China Taiwan South Korea Japan Five Year Moving Average
Underlying Structural Shift in China is Occurring Very Quickly Hyper growth phases eventually end. The end is associated with changes in labor supply conditions, the end of a labor surplus country. This shift is especially dramatic in China because three long run changes in labor market conditions are occurring simultaneously, and right now: Demographic (aging); Structural (rural urban migration); Educational factors (much higher rates of college education). These changes have already begun & will only accelerate.
Male 2010 Population Age Pyramid 100 97 94 91 88 85 82 79 76 73 70 67 64 61 58 55 52 49 46 43 40 37 34 31 28 25 22 19 16 13 10 7 4 1 Female 20,000,000 15,000,000 10,000,000 5,000,000 0 5,000,000 10,000,000 15,000,000 20,000,000
Male Average Retirement Age in 2012 2010 Population Age Pyramid 100 97 94 91 88 85 82 79 76 73 70 67 64 61 58 55 52 49 46 43 40 37 34 31 28 25 22 19 16 13 10 7 4 1 Female 2012 College Graduates 2012 High School Graduates 20,000,000 15,000,000 10,000,000 5,000,000 0 5,000,000 10,000,000 15,000,000 20,000,000
1,050 1,000 950 End of the "Demographic Dividend" LHS: Total labor force age 15 64 plateaus after 2015, then declines. 80% 78% 76% 74% 72% Million 900 70% 850 800 RHS: Share of population at working age has already peaked, and now begins a long, steady decline. 68% 66% 64% 62% 750 2000 2005 2010 2015 2020 2025 2030 2035 60%
Growth in Education Supply: Reinforce changes due to demography and rural urban migration 2000-2010 2010-2020 2020-2030 Total Labor Force Growth 115 20-15 ow: With College Degrees 33 58 57 Non-College Worker Growth 82-38 -72 (Net Change in Labor Force, in Millions)
II. Medium term: Stagnation of Institutional Reforms 1990s Reforms brought a long lasting productivity dividend. (WTO membership and global trade expansion was both a part of this and a fortuitous complement.) Tremendous economic success, combined with reform fatigue produced complacency. The productivity dividend has been spent down, and not replaced by new institutional sources of productivity dividend. Multifarious micro protectionism spreads in many sectors. Expect systemic drag on productivity from this accumulation of institutional barriers.
Government Intervention Strongly Furthers this Process State owned enterprises receive ideological reaffirmation (2005 2006) Wen Jiabao administration steadily increases government intervention for programmatic purposes. Science and Technology (2006 2020). Stimulus Against Global Financial Crisis (2008 2009). Strategic Emerging Industries (2009 present) Housing Policies (recent wave, 2010 present)
III. Macroeconomic Cycle On the down side of three massive investment bubbles: infrastructure, housing, and strategic emerging industries. Easing export demand, driven by slowing mature economies and especially European crisis. China s recent experience has been Keynesian demand maintenance driven by government investment control, with remarkable success. However, this approach can only be partially successful today.
16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2 2 4 4 10 9.1 10 9.1 2002 2003 2002 2003 Sources of Growth in China: Demand Components Sources of Growth in China: Demand Components 12.7 11.3 12.7 10.1 11.3 10.1 2004 2005 2006 2004 2005 2006 14.2 14.2 6.1 6.1 9.6 9.6 5.6 5.6 2.5 2.5 2007 0.8 2008 2007 Net Exports 2008 Net Exports Investment Investment 10.3 10.3 4.6 5.6 4.6 5.6 4.2 4.2 0.8 8.4 8.4 3.8 3.8 4.4 +0.9 4.4 +0.9 2009 2010 2009 3.6 2010 3.6 9.2 9.2 5.0 5.0 4.7 4.7 0.5 2011 0.5 2011 Consumption Consumption
70% China GDP by Expenditure Type 60% Consumption Share 50% 40% Investment Share 30% 20% 10% Share of Net Exports 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
IV. Conclusions 1. Interactions make the economy more unpredictable, and raise possibility of correction. 2. Short run Keynesian stimulus is not an option because it would make it harder to solve medium and long term issues. 3. There is wide recognition of this in Beijing, but no consensus on next steps. 4. This make it more likely that a substantial renewal of market oriented reform can occur next year, although this is still far from certain.