Susan Mays, Ph.D., contact smays999@yahoo.com Globex Faculty Fellow, Peking University; Faculty, The University of Texas at Austin

China’s Economy: Growth and Global Connections July 2015 An Overview of China’s Economy

北京大学工学院 PKU College of Engineering Globex

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Agenda July 6

2. Introduction and administration

1. Welcome to our 90+ students!

3.  Lecture: overview of China’s economy

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China has had four very different economic systems in less than 100 years

PRC High Socialism, <30 years – Mao pursues centrally-planned, socialist development, emphasizing industry & infrastructure for a closed, self-reliant society

PRC Reform Era, >30 years – Deng ushers in an “open door” policy which allows for reform of the centrally planned economy, market growth, and foreign trade

Instability, 40 years: China’s economic growth is thwarted due to warlord disputes, the Sino-Japanese War (1937-1945), and the civil war between the Guomingdang and the CCP

The Qing Dynasty: a mainly agricultural economy but one with significant trade, including foreign trade

1978-Present

1949-1978

1911-1949

1644-1911

4

1980s: “SEZ”s for trade; original 4 were near Hong Kong, Macau, & Taiwan; now many open areas

5

Since 2010, China has been the world’s 2nd largest economy

1. US 16.8 52.0 16.8

2. China 9.2 6.6 16.2

India 1.8 1.5 6.8

3. Japan 4.9 38.6 4.6

4.Germany 3.7 44.6 3.6

5. France 2.8 43.1

~GDP ~GDP/cap ~GDP (US$b) (US$000) (PPP, $US000)

Notice that China’s ~GDP/capita is relatively low)

6

China’s GDP growth has surpassed forecasts…

BRIC, GDP Forecast, shown in US$ trillion1

$0

$5

$10

$15

$20

$25

United States China Japan

India Germany

(1) Goldman Sachs’ Global Paper No. 99, October of 2003.

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Mainly from 2000, China’s economy has grown rapidly and become increasingly globally integrated

(1) Date sources: tradingeconomics.com; China’s General Administration of Customs; World Bank.

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

1980 1985 1990 1995 2000 2005 2010 2013

$US

Bil

lion

s

GDPForeign Trade

8

Today let’s review “three moves”

2.  Moving “up the value chain”

3.  Moving into a mixed economy

1. Moving to the cities

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n  Lack hukou, so lack services

n Abuses and insecurities

n  Education: 64% middle or high school

n Changing demographics:1

•  ~65% not in mfg

• mostly >30, married, w/ jobs

1. Moving to cities: largest migration in history, ~260mm+

(1)  Author’s estimates from various sources. (2)  Estimates from data in Chinese Academy of Social Sciences, Li Chunling, “Institutional and Non-institutional Path: Different Processes of Socioeconomic Status Attainment of

Migrants and Non-migrants,” 2012.

More migrant workers are bringing spouses and children and are staying longer in urban areas

Millions of Migrant Laborers in Chinese Cities

0

50

100

150

200

250

300

1982 1985 1988 1994 1997 2003 2006 2012

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1 (cont.): With moving to cities, China’s total urban population likely crossed the 50% mark in 2010-2011

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Home › Resource Centre › Migrant workers and their children › Migrant workers and their children

Migrant workers and their childrenMigrant workers and their children27 June, 2013

There are an estimated 262 million rural migrant workers in China. They have been the engine of China’s spectacular economicgrowth over the last two decades but, because of the household registration system, they are still marginalized and discriminatedagainst. Their children have limited access to education and healthcare and can be separated from their parents for years on end.

Urbanisation and the household registration system

In 1958, the Chinese government formally reintroduced the household registration (Hukou �口) system. Household registers hadbeen used by Chinese authorities for millennia to facilitate taxation and control migration. This new hukou system was designed bythe Communist government with three main purposes in mind: government welfare and resource distribution, internal migrationcontrol and criminal surveillance. Each town and city issued its own hukou, which entitled only its registered residents access tosocial welfare services in that jurisdiction. Individuals were broadly categorised as "rural" or "urban" based on their place ofresidence. Moreover, the hukou was hereditary: children whose parents held a rural hukou would also have a rural hukouirrespective of their place of birth.

The hukou system was supposed to ensure that China’s rural population stayed in the countryside and continued to provide thefood and other resources that urban residents needed. However, as the economic reforms of the 1980s gained pace, what the citiesneeded most was cheap labour. And so began what is often described as one of the greatest human migrations of all time.Hundreds of millions of young men and women from the countryside poured into the factories and construction sites of coastalboom towns. In many cities such as Shenzhen and Dongguan, the population of migrant workers now far outstrips those with anurban hukou. And in China as a whole, migrants now make up about one third of the total urban population. See graph below.

Actual urban population and population with an urban hukou in China – as a percentage of total population in China

Source: Updated from Chan, Kam Wing, 2012. “Crossing the 50 Percent Population Rubicon: Can China Urbanize to Prosperity?” Eurasian Geography and Economics, Vo1.53, No.1, pp.63-86.

As migrant workers flooded into the cities, it became clear that hukou restrictions on internal migration were not onlyunenforceable but counter-productive to social and economic development. In 2003, a young migrant named Sun Zhigang waskilled in police custody in Guangzhou while awaiting repatriation to his home town. He had been detained by police simply becausehe did not have a temporary resident permit as required by law. The public outcry at Sun’s death led to the abolition of many of themost egregious restrictions on freedom of movement in place at the time. However, the hukou system remains in effect and stillbars migrant workers from access to social welfare, healthcare and schooling for their children in the cities.

Migrant workers

Rural migrant workers (�民工) are those with a rural hukou who are employed in an urban workplace. Traditionally migrantworkers have travelled long distances from poor inland provinces to the more economically developed coastal provinces in searchof employment in factories, construction sites and service industries. While that pattern still holds true today, increasingly however,migrant workers are finding employment in towns and cities closer to home.

According to the annual survey conducted by the National Bureau of Statistics, there were 262 million rural labourers working inChina's cities in 2012, a four percent increase over the previous year. The number of short-distance (本地) migrants increased by5.4 percent to reach 99 million and the number of long-distance (外出) migrants rose by three percent to 163 million. See chartbelow. Typically, short distance migrants are those working in their home area or county.

26LikeLike 0

Home › Resource Centre › Migrant workers and their children › Migrant workers and their children

Migrant workers and their childrenMigrant workers and their children27 June, 2013

There are an estimated 262 million rural migrant workers in China. They have been the engine of China’s spectacular economicgrowth over the last two decades but, because of the household registration system, they are still marginalized and discriminatedagainst. Their children have limited access to education and healthcare and can be separated from their parents for years on end.

Urbanisation and the household registration system

In 1958, the Chinese government formally reintroduced the household registration (Hukou �口) system. Household registers hadbeen used by Chinese authorities for millennia to facilitate taxation and control migration. This new hukou system was designed bythe Communist government with three main purposes in mind: government welfare and resource distribution, internal migrationcontrol and criminal surveillance. Each town and city issued its own hukou, which entitled only its registered residents access tosocial welfare services in that jurisdiction. Individuals were broadly categorised as "rural" or "urban" based on their place ofresidence. Moreover, the hukou was hereditary: children whose parents held a rural hukou would also have a rural hukouirrespective of their place of birth.

The hukou system was supposed to ensure that China’s rural population stayed in the countryside and continued to provide thefood and other resources that urban residents needed. However, as the economic reforms of the 1980s gained pace, what the citiesneeded most was cheap labour. And so began what is often described as one of the greatest human migrations of all time.Hundreds of millions of young men and women from the countryside poured into the factories and construction sites of coastalboom towns. In many cities such as Shenzhen and Dongguan, the population of migrant workers now far outstrips those with anurban hukou. And in China as a whole, migrants now make up about one third of the total urban population. See graph below.

Actual urban population and population with an urban hukou in China – as a percentage of total population in China

Source: Updated from Chan, Kam Wing, 2012. “Crossing the 50 Percent Population Rubicon: Can China Urbanize to Prosperity?” Eurasian Geography and Economics, Vo1.53, No.1, pp.63-86.

As migrant workers flooded into the cities, it became clear that hukou restrictions on internal migration were not onlyunenforceable but counter-productive to social and economic development. In 2003, a young migrant named Sun Zhigang waskilled in police custody in Guangzhou while awaiting repatriation to his home town. He had been detained by police simply becausehe did not have a temporary resident permit as required by law. The public outcry at Sun’s death led to the abolition of many of themost egregious restrictions on freedom of movement in place at the time. However, the hukou system remains in effect and stillbars migrant workers from access to social welfare, healthcare and schooling for their children in the cities.

Migrant workers

Rural migrant workers (�民工) are those with a rural hukou who are employed in an urban workplace. Traditionally migrantworkers have travelled long distances from poor inland provinces to the more economically developed coastal provinces in searchof employment in factories, construction sites and service industries. While that pattern still holds true today, increasingly however,migrant workers are finding employment in towns and cities closer to home.

According to the annual survey conducted by the National Bureau of Statistics, there were 262 million rural labourers working inChina's cities in 2012, a four percent increase over the previous year. The number of short-distance (本地) migrants increased by5.4 percent to reach 99 million and the number of long-distance (外出) migrants rose by three percent to 163 million. See chartbelow. Typically, short distance migrants are those working in their home area or county.

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1 (cont.): Moving to cities; internal labor migration…

12 (1) China’s National Bureau of Statistics, 2011. (2) OECD Economic Surveys: China 2010, page159, Figure 6.2 from China Statistical Yearbook 2009. (3) OECD Economic Surveys: China 2002, page 8, Table 1, from China Statistical Yearbook 2000; CIA World Fact Book 2008.

2. Moving “up the value chain”: China’s labor has increasingly moved from agriculture to mfg & services n  Labor pool is about 1 billion;1 non-agr increased by about 50 percent from 2000-2010

0%

25%

50%

75%

100%

Agriculture Industry Services

1980

2000

2008

West 2008

Share of Employment by Sector3

0%

25%

50%

75%

100%

Agriculture Industry Services

1980

2000

2008

West 2008

Share of GDP by Sector3

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3. Moving to a “mixed” economy, from state ownership

020

4060

80100

1978 1985 1990 1995 1997 1999State Sector Private Sector Other*

In recent years, analysts estimate that the state sector is responsible for about 40% of GDP

(1) “Other” includes urban collectives, cooperatives, & township/village enterprises (per China Statistical Yearbook, 2004), &“private sector” includes: joint ownership, LLCs, share holding corp.s, private enterprises, enterprises funded from HK, TW, and Macau, & self-employed people. Graph data from China Statistical Yearbook, 2000 & 2004.

(2) OECD Economic Surveys: China 2009, pages 27, 106, 160, Figures 1.3, 4.4A, and 6.3, from China Statistical Yearbook 2009, CEIC, National Bureau of Statistics Industrial Microdatabase, and Joint NBS-OECD analysis.

Transition: GDP by Ownership Form1

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3 (cont.): Moving to a “mixed” economy: orgs have different ownership forms, w/ differing practices & cultures

Various ownership forms in China:

n Private Chinese companies

n Private “Chinese” companies

n Joint ventures (Sino-foreign)

n Multi-national companies (MNCs); wholly foreign owned enterprises (WFOEs)

n State owned enterprises (SOEs)

n State invested companies ~40% of China’s economy

n Other forms

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Three consequences

1.  Higher incomes…and consumer spending

2. Mega cities…and mega infrastructure

3. Global integration…and globalizing institutions ???

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1. Higher incomes: Incomes have increased substantially, so demand for consumer products is rising

(1)  National Bureau of Statistics China; People’s Daily; tradingeconomics.com; data trend combines rural and urban averages. (2)  IMF; World Bank; CIA; over 600 million internet users; RMB up 30% since 2005; over 270mm rural migrant workers in cities; migrant worker income tends be between rural and

urban averages.

Annual Disposable Income Per Capita1

0

5,000

10,000

15,000

20,000

25,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 9 10 11 12 13

Ch

ines

e Y

uan

Gini Co-efficients for Income Inequality2

China .40 in 2001 .47 in 2009

.478 in 2012

United States .41 in 1997 .45 in 2007

~.46 in 2012

Urban Income ~ 3x Rural Latest Data 2013: Urban: Y29,945 = ~US$4,325 Rural: Y8,896 = ~US$1,428

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1. Higher incomes, yet China still has great contrasts…

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2. “Mega-cities”: China’s urbanization creates demand for infrastructure, energy, and public services

3 of the world's top 6 “City Clusters” (a.k.a. megalopolises or mega-regions):

•  The Pearl River Delta, ~120 million, near Hong Kong:

•  The Yangtze River Delta, ~88 million, near Shanghai:

•  The Bohai Rim, ~66 million, near Beijing:

__________________________________________

•  5 cities of over 10 million •  versus 3 in India, 2 in the US, Japan, and Brazil

•  14 cities of over 5 million, over 20% of the world total

•  41 cities of over 2 million, 20% of the world total

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2. “Mega-cities”: State-owned banks turn household savings into loans for gov-financed city infrastructure (& SOEs)

IMF Working Paper, “Is China Over-investing and Does it Matter?,” 2012

STATE OWNED BANKS

LARGE STATE OWNED ENTERPRISES

FAMILY

FAMILY

FAMILY

GOV. FINANCED INFRASTRUCTURE

LARGE STATE OWNED ENTERPRISES LARGE STATE OWNED

ENTERPRISES

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Enrollment in Postsecondary Institutions (1,000s)

3. Global integration: global & high-value business links are supported by growth in higher education & China’s HR

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Foreign Direct Investment (FDI), in BoP1

0

50

100

150

200

250

300

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 '0 10 11 12 13

US

$ B

illi

on

s

(1) Data source: World Bank, see data.worldbank.org, “balance of payments” includes non-cash investments and commitments.

3. Increased global business integration: for example, increasing FDI

Note, China’s outbound foreign investment reached US$90B in 2013

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3. Global integration: yet, China is relatively restrictive for FDI

Source: Rhodium Group, Hanemann and Bao, “A New Momentum for FDI Reforms in China,” 2013

BARRIERS REMAIN

Even with aggressive liberalization and the massive inflow of foreign capital, China still has a long way to go to fully open upits FDI regime. China maintains a closed capital account and foreign investors need government approval for their projects;Beijing regularly publishes a catalogue listing the industries in which foreign investment is encouraged, restricted andprohibited. In addition to outright limitations on foreign equity ownership and approval mechanisms, there are alsolimitations on the employment of foreigners as key personnel and operational restrictions. With regard to formal FDIrestrictions, China is still one of the least open of the G-20 countries (Figure 2). And surveys by industry associations suggestinformal discrimination against foreign firms is rampant as well, especially in fast-growing sectors like services and high-tech.

Compared to previous periods, the pace of FDI reform has slowed since the mid-2000s. The level of formal FDI restrictivenesshas remained virtually unchanged over the past seven years, particularly in the tertiary sector (Figure 3). Moreover, informalbarriers seem to have increased along with a general worsening of the business environment for private firms due to theHu/Wen administration’s favoritism for SOEs and the stimulus policies following the financial crisis in 2008/2009. Forexample, the 2013 China Business Climate Survey Report from the American Chamber of Commerce in China shows a sharp

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In the past 15 years, China’s economy has sustained growth, despite fundamental weaknesses in China’s system

A few examples of major debates…

n Rule of law (lacking)

n  Export-led development (over reliance on low-wage manufacturing)

n  Financial system (capital markets and the banking system are inadequate)

n  “State capitalism” (growing and inefficient)

n Corruption: both political and economic

n Over-investment and too-high capital formation (versus a consumer driven economy)

n  Foreign companies: face new obstacles, less favoritism

n  Environmental degradation: food supply, air and water pollution

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Given the sustained growth, we’ll takes a long-term view on accomplishments, trends, and present-day obstacles

n  Interdisciplinary approach

n Qualitative as well as quantitative perspective

n Research by Chinese and foreign analysts

n  Sources: scholars, business leaders, journalists, and others

Other sources and authors: China Labour Bulletin; Human Rights Watch; Reporters Without Borders; Amnesty International; Xiaobo Liu (China); Jamie Horsley,The China Law Center, Yale Law School; and Dali Yang.

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Today: “three moves” and “three outcomes”

2.  Moving “up the value chain”

3.  Moving into a mixed economy

1. Moving to the cities

1.  Higher incomes…and consumer spending

2. Mega cities…and mega infrastructure

3. Global integration…and globalizing institutions?

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Tonight…

2.  Reading

3.  Tomorrow’s topics: “Past to Present” and “Export-led Development”

1. Questions for Luo Dong!

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Political

Communist Party of China (CPC)

Chinese People’s Political

Consultative Conference

CPC’s National Congress

8 Democratic Parties

Executive

State Council

Prime Minister Wen, Jiabao

General Office

Ministries and Commissions

Secretary-General Ma, Kai

Local People’s Governments (Provincial)

Legislative

National People’s Congress

Chairman: Hu, Jintao Constitution

Legislation of NPC’s Standing Committee

Regulations of State Council

Legislation of Local People’s

Congress (Provincial)

Judicial

Supreme People’s

Court

Supreme People’s

Procuratorate

Military Court

Military Procuratorate

Local People’s Governments

(City)

Local People’s Congress

(City)

Superior People’s

court

Intermediate People’s

court

Local People’s

Procuratorate (Provincial)

Local People’s

Procuratorate (City)

Per the PRC Constitution, China is governed by rule of law

(detail provided)