Chinese Economy: Current Issues and Future Scenarios

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Chinese Economy Current Issues and Future
Scenarios

• FAN Gang
• National Economic Research Institute
• China Reform Foundation
• November, 2004

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Trends or Scenarios

• Short-run possible soft-landing Government took
  actions much quicker
• Long-run Possibility of high growth for another
  decadefundamentals are still favorable.

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• Short-run Growth Cycles

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There has been a Over-heating again
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The main contributor Investment Boom
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Why should (Chinese) economists worry about?

• Potential growth rate 8-9
• Early find-tuning to stop the acceleration!
• The economy is vulnerable to the fluctuations

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A nice Soft-landing is highly likely

• Government was quite quick to respond, so the
  over-heating was not fully developed
• Realistic policies, including administrative
  ones
• No hard-landing, if policy-making with normal
  wisdom.

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What will be the next?

• With the growth rate back to the zone of 8-9,
  China may continue the current boom for next 2-3
  years
• While macroeconomic stability stays, more reforms
  will take place banking, capital market,
  taxation..

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• Long-Run Development

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China is full of Problems and difficulties Two
Sets

• Set I. As a developing country
• -- Per capita GDP US1,000 by 2002 65 of
  population are rural.
• Industrialization
• Modern corporate system
• Financial market development
• Rule of law
• Rural-urban difference and urbanization
• Regional disparity and migration
• Opening and competition
• Unemployment various categories
• Democratization

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• Set II. As the economy in transition
• -- Legacy of Soviet-type system, currently 80
  millions working as state employees.
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• The state owned enterprise (SOEs)
• The state banking system
• Social security system
• Planning to Market
• Government reform and political changes

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Achievements or Reasons for Achievements

• No longer as a State company dominated economy
  (up to 70 of GDP comes from Non-state sectors,
  most of small SOEs privatized)
• Opening up (trade and FDI, WTO)
• Decentralization of decision-making and
  diversification of society.

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Major concerns

• There are many concerns about if Chinas growth
  would be interrupted by any kind of crises or
  upside downs.
• 2 biggest selected
• Financial crisis NPL, etc,
• Social crisis Unemployment and social
  instability

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Financial Risks

• Financial Reform is seriously lagged behind as a
  bottleneck
• Foreign participation may cause financial
  difficulties for the state banks, but may improve
  the overall quality of financial assets, and
  therefore reduce the risk
• For the state banks, the NPL risk is still
  manageable.

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• Unemployment
• and
• Social Stability

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Basic facts

• 25 millions of state workers were laid off in
  past 5-6 years 6 millions still unemployed at
  least 20 mil. More to come.
• 45 of labor force, or 350400 millions, are
  still dependent on farming, mostly
  under-employed
• 15 millions new non-farming jobs created by 7-8
  growth per year

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Why is still there the social stability

• Special programs for the laid-off state workers
• New job creation by the growth
• Improvement of labor mobility
• Rural land system serving as Chinas special
  social security for the rural unemployment

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The realistic policies

• Prepared to go through a painful historical
  process of modernization
• Do not raise the expectations for the government
  subsidies
• Do more for education within the budgetary
  affordability
• Increase gradually the medical protection of the
  rural poor.

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Foreign Exchange Issues

• Most South-East Asian currencies have been
  floating after 1997
• But China was forced to return to fixed regime
  since then.

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Market speculation still strong
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Revaluation seems less urgent in past months

• -- Overall trade balance
• -- Inflation is increasing
• -- Uncertainty about the oil price and its
• impacts
• -- US was not fast weakening until recently

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The real Issues

• How to de-peg from US, and change to a
  basket-pegging system with higher flexibility?
  That is Chinas self-interest, not others.
• How to minimize the speculation
• How to catch up the good opportunity in the
  market to do so?