China at Crossroads

Tailan ChiSchool of Business

University of Kansas

— Is the Snake Tonic, Venomous or Lucrative?

Unprecedented Growth? A ComparisonHighest 10

YearsHighest 20

YearsHighest 30

Years

China 10.58%(2001-2011)

10.46%(1991-2011)

10.20%(1981-2011)

Brazil 9.59%(1966-1976)

7.29%(1960-1980)

5.34%(1960-1990)

India 7.64%(2001-2011)

6.79%(1991-2011)

6.21%(1981-2011)

Indonesia

8.13%(1967-1977)

7.28%(1967-1987)

7.39%(1967-1997)

Japan 10.45%(1960-1970)

9.66%(1949-1969)

8.43%(1946-1976)

Korea 9.22%(1967-1977)

8.35%(1967-1987)

8.38%(1965-1995)

Malaysia 9.27%(1987-1997)

7.48%(1975-1995)

7.38%(1967-1997)

Singapore

12.08%(1964-1974)

10.17%(1964-1984)

9.36%(1964-1994)Sources: The World Bank (2012); Japan Economic

Institute (2000).

What Good Has the Rapid Growth Done? Per capita GDP rising 16-

17 folds in constant prices since the start of reform on 1978.

An increase of the human development index (HDI) from 0.404 to 0.687. A UNDP index reflecting

life expectancy education level and per capita income.

Comparison U.S. = 0.910 India = 0.547 Congo (D.R.) = 0.286

Rapid Improvement in Human Development Index (HDI)

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1980 1985 1990 1995 2000 2005 2010

China Brazil India Indonesia

Japan Korea Malaysia U.S.

Growth of Beer Consumption

Source: World Food Organization

0

5

10

15

20

25

30

35

40

4519

6119

6319

6519

6719

6919

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

07

Mill

ion

Tonn

es

Brazil ChinaFrance GermanyIndia JapanRepublic of Korea Russian FederationUnited Kingdom United States

What Good Has the Rapid Growth Done? Per capita GDP rising 16-

17 folds in constant prices since the start of reform on 1978.

An increase of the human development index (HDI) from 0.404 to 0.687. A UNDP index reflecting

life expectancy education level and per capita income.

Comparison U.S. = 0.910 India = 0.547 Congo (D.R.) = 0.286

500 million people lifted out of poverty. Child malnutrition fell from

over 30% to 3.3%. Literacy rate among 15-25

year olds is now 99%. A world economic power

2nd largest economy since 2010

Only after the U.S. Projected to be the largest

on PPP basis in 2016 Largest exporter since

2009. East Asian value chain Projected to be the largest

importer in 2014

But Strains on Current Economic, Political and Social Systems also

Becoming Severe Structural imbalance

Heavy dependence on export and investment

Low consumption Asset bubbles

Low Consumption and High Investment

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

1978 1982 1986 1990 1994 1998 2002 2006 2010

Ratio of Private Consumption to GDP

Ratio of Capital Investment to GDP

Ratio of Government Consumption to GDP

Ratio of Net Export to GDP

Source: China National Bureau of Statistic

Rudimentary welfare system → Low consumption

High infrastructure expenses → High investment

Undervalued domestic currency → High trade surplus

And also asset

bubbles!

China’s Foreign Trade

-500

0

500

1,000

1,500

2,000

2,5001

97

91

98

01

98

11

98

21

98

31

98

41

98

51

98

61

98

71

98

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

92

01

02

01

12

01

2Bil

lio

n U

S D

oll

ars

Year

Export Import Balance of Payments

Source: China National Bureau of Statistics

China’s Foreign Exchange Reserves

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Trill

ions

China EU India Japan

Korea Russia U.S.

Source: International Monetary Fund

Values of RMB¥ in Terms of J¥, Euro and US$

0.8

0.9

1

1.1

1.2

1.3

1.4

12/1

998

9/19

99

6/20

00

3/20

01

12/2

001

9/20

02

6/20

03

3/20

04

12/2

004

9/20

05

6/20

06

3/20

07

12/2

007

9/20

08

6/20

09

3/20

10

12/2

010

9/20

11

6/20

12

J¥ Euro US$

The RMB¥ has risen in value by over 30% against

the US$ since 2005.

RMB¥ convertibility and capital market opening are 2 major financial reform tasks

for the future.

China’s Rebalancing: Retail Grows Faster than

GDP

0.000.020.040.060.080.100.120.140.160.180.20

3/20

02

10/2

002

5/20

03

12/2

003

7/20

04

2/20

05

9/20

05

4/20

06

11/2

006

6/20

07

1/20

08

8/20

08

3/20

09

10/2

009

5/20

10

12/2

010

7/20

11

2/20

12

9/20

12

Retail Sale Growth GDP Growth

Source: China National Bureau of Statistics

Measures Already Taken• Elimination of agricultural tax• Better protection of worker rights• Broadened healthcare coverage• Subsidized housing

in cities

New/Pending Measures• Freer migration from rural to urban areas• Financial reform to provide more capital

for entrepreneurs, esp. in service sector

But Strains on Current Economic, Political and Social Systems also

Becoming Severe Structural imbalance

Heavy dependence on export and investment

Low consumption Asset bubbles

Widening income inequality Gini coefficient rose from a

low level of 0.33 in 1980 to 0.47 in 2009

Compared to Sweden = 0.23 USA = 0.45 (2007) Brazil = 0.54

Poverty, Inequality and Literacy: An International Comparison

China

India

Brazil

Russia

USA

GNI per capita (PPP adjusted 2010)

$7,570

$3,560

$10,920

$19,190

$47,120

Population in multi-dimensional poverty 12.5%

53.7% 2.7% 1.3% -

- Severe poverty 4.5%28.6

% 0.2% 0.2% -

- Below $1.25/day 15.9%41.6

% 3.8% 0.0% -

Income inequality (2009) 47.4%

36.8% 53.9% 42.2% 45.0%

- Share of lowest 10% 3.5% 3.6% 1.2% 2.6% 2.0%

- Share of highest 10% 15.0%

31.1% 42.5% 33.5% 30.0%

Adult literacy (age > 15) 94.0%

62.8% 90.0% 99.6% 99.0%

Source: World Bank (per capita GNI), UNDP (poverty), CIA (income inequality), UNESCO (adult literacy).

Growth in China’s Labor Cost Compared to Other Countries

$0

$1

$5

$19

$77

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Hun

dred

s

United States

Brazil

China

Germany

India

Ireland

Japan

Korea

Mexico

Philippines

Poland

Singapore

Switzerland

Taiwan

United Kingdom

Source: U.S. Bureau of Labor Statistics and China National Bureau of Statistics

50

100

200

400

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Brazil ChinaIndia IndonesiaJapan KoreaRussia South AfricaUnited States

Brisk Rises in Labor Productivity

Source: International Labor Organization (2010)

Labor Productivity Index (1990 = 100)

China’s Labor Productivity Compared to More Industrialized Economies

Source: International Labor Organization

US$/person engaged (constant 1990 US$)

$0

$10

$20

$30

$40

$50

$60

$70

$8019

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

Thou

sand

s

China Japan

Korea Russia

United States

Source: International Labor Organization

US$/person engaged (constant 1990 US$)

China’s Labor Productivity Compared to Other Emerging Economies

$0

$2

$4

$6

$8

$10

$12

$14

$1619

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

Thou

sand

s

Brazil China India Indonesia South Africa

But Strains on Current Economic, Political and Social Systems also

Becoming Severe Structural imbalance

Heavy dependence on export and investment

Low consumption Asset bubbles

Widening income inequality Gini coefficient rose from a

low level of 0.33 in 1980 to 0.47 in 2009

Compared to Sweden = 0.23 USA = 0.45 (2007) Brazil = 0.54

Severe environmental damage Multifaceted problem

Toxic chemicals in air, rivers, lakes and ground water

Serious water shortage and falling ground water levels

High 2.5PM levels in cities Has 16 of the 20 most

polluted cities in the world

A Typical Hazy Day in Beijing

Institutional Roots of Failure to Control Pollution

• Promotion of officials based on ability to deliver GDP growth.

• Environmental agency has little enforcement power.

(Similar to London in the mid 1950s?)

A Rare “Blue-Sky” Day

After Heav

y Rain

Measures Taken or Under Consideration• More enforcement power for the

environmental protection agency• Government subsidies for investment

in clean energy technologies• Higher vehicle emission standards• Use “Green GDP” measure to

evaluate officials.

China’s Environmental Performance

Source: Yale University

30

35

40

45

50

55

60

65

70

75

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil

China

Germany

Indonesia

India

Japan

South Korea

Russia

Switzerland

South Africa

U.S.

But Strains on Current Economic, Political and Social Systems also

Becoming Severe Structural imbalance

Heavy dependence on export and investment

Low consumption Asset bubbles

Widening income inequality Gini coefficient rose from a

low level of 0.33 in 1980 to 0.47 in 2009

Compared to Sweden = 0.23 USA = 0.45 (2007) Brazil = 0.54

Severe environmental damage Multifaceted problem

Toxic chemicals in air, rivers, lakes and ground water

Serous water shortage and falling ground water levels

High 2.5PM levels in cities Has 16 of the 20 most

polluted cities in the world. Rampant corruption

Land seizures Crony capitalism 120,000 mass protests in 2012

Recent Wukan Protest

Corruption and Institutional Roots

Corruption Perception Index

Rank Country Score

1 Denmark 90

5 Singapore 87

17 Japan 74

19 USA 73

41 Poland 58

69 Brazil 43

80 China 39

94 India 36

133 Russia 28

174 Somalia 8Source: Transparency International

Lack of effective constraints on the power of party officials Top-down political system. Higher officials tend to protect their

protégés. Anti-corruption campaigns are easily

used to eliminate opponents. Remedies under consideration

Implement “constitutional rule” More concrete checks on power Specific rules to guarantee freedoms

Centralize appointment of judges Transparency in governance

Public hearings Publication of government

decisions on the web Limit media censorship

Can the Incoming Generation of Leaders Accomplish these

Tasks? The retiring president, Hu Jintao, was too cautious and timid to undertake deeper reforms.

Powerful interest groups have formed to protect the status quo. Corrupt/stasist officials Monopolistic SOEs Entrepreneurs who got rich

by colluding with officials Two anti-establishment factions

have also emerged. Liberals wanting deeper reforms Conservatives wanting to go

back to Maoist policies

The incoming president, Xi Jinping, appears to realize how perilous the status quo is.

But it is unclear whether he can effectively tackle the oppositions. Many of the “princelings” who

are considered part of his power base tend to be conservative.

Several of the Political Bureau members are wary of change.

He currently seems to be trying to build up his credibility by attacking corruption placing reformers in some key

positions and talking up reform.Signs point to gradually intensifying reforms in the next few years.

The Great Wall

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