Louis Kuijs, World Bank. China s economic prospects: outlook. and policy challenges. Beijing

Transcription

1 China s economic prospects: outlook and policy challenges Louis Kuijs, World Bank Beijing

2 Outline Short term outlook: gloomy global prospects but stimulus supports growth Medium term What is the impact of weaker export prospects? Spare capacity is emerging; what are implications? Weaker prospects for exports and employment increase importance of rebalancing is rebalancing happening? To what extent should we revise medium term potential GDP growth projections?

3 China s exports have been hit hard by the global crisis (i) US$ bn (2004 price) Exports of goods (sa) Imports of goods (sa) Source: China s s custom administration, staff estimates

4 China s exports have been hit hard by the global crisis (ii) External trade trends (percent change, yoy) Oct Nov Dec Jan Feb Mar Exports (US$) Volume Price (US$) Imports Volume Price (US$) Source: CEIC, World Bank staff estimates.

5 China s growth holding up relatively well R eal GD P gro wth (percent yo y) Q Q Q C hina US Japan Euro A rea A sia ex. CN/JP Source: CEIC, staff estimates

6 A forceful government response (i) (RMB billion) Total 2008q4- First 2 batches--central 2010 overall government financing financing First Second 4, Public housing Rural infrastructure (electricity, water, and roads) Transport (rail, airports, and roads) 1, Health and education (including building schools and hospitals) Energy and the environment (including water and sanitation, sewage, and restoration) Technological innovation Post earth quake reconstruction 1,000 Source: NDRC.

7 A forceful government response (ii) Gro wth (percent yo y) M 2 Lo ans Source: PBC, staff estimates

8 seems to show effects already R eal gro wth (percent yo y) G o vernm ent influenced FA I M arket based FA I FAI Source: CEIC, staff estimates

9 Consumption has remained robust Index R eal gro wth (percent yo y) C o nsum er co nfidence 5 R etail s ales o f large retailers (R H S ) 1/ Source: CEIC, staff estimates

10 Lower commodity prices are driving down headline prices C hange (percent yo y) CPI P P I Raw material price Source: CEIC, staff estimates

11 Looking ahead: the external picture is grim (percent change, unless otherwise indicated) (e) 2009(f) 2010(f) Nov-08 Feb-09 Nov-08 Feb-09 World GDP (real) (market exchange rates) World imports (volume) Commodity prices Oil ($/bbl) Non oil commodities (%) Source: World Bank (DEC, April 2009), staff estimates

12 We expect China s economy to hold up relatively well GD P gro wth in 2009 (P ercent yo y) M ar Consensus forecast 6 Consensus forecast mean Wo rld B ank fo recast 5 Jan-08 A pr-08 Jul-08 Oct-08 Jan-09 Source: Consensus economics, staff estimates

13 A differentiated investment outlook Weight Growth (share) (percent) Gross fixed capital formation Government influenced almost 1/ Market based 2/3-1.3 Impacted by export 1/6-6.0 Not impacted by export 1/2 0.0 real estate 1/6 0.0 other over 1/3 0.0 Source: NBS, staff estimates

14 Medium term issues What is the impact of weaker export prospects? Spare capacity is emerging; what are implications? Weaker prospects for exports and employment increase importance of rebalancing is rebalancing happening? To what extent should we revise medium term potential GDP growth projections?

15 Lower export growth is set to reduce growth prospects, even if growth will continue (illustrative) 1/ China's export growth (real) World trade (unweighted) World trade (weighted) 7.1 Market share (end period) Source: OEF, staff estimates 1/ Assuming China's export prices change in line with world export prices.

16 Spare capacity is emerging 16 (P ercent) P o tential GD P gro wth GDP growth Output gap (pro ductio n-based) Source: NBS, staff estimates

17 The implications of spare capacity Weaker market based investment; Less job growth and migration; Downward pressure on prices Downward pressure on profits; Incentives to redirect sales to the domestic market and do import substitution.

18 Rebalancing China s economy (i) How to make growth more balanced, equal, and environmentally sustainable? Key characteristics of China s growth Saving and investment are high Growth has been led by industry Industrial growth has been largely in the form of labor productivity growth The capital-intensive, industry-led growth is accentuated by policies

19 Rebalancing China s economy (ii) This pattern has served China well But there are also drawbacks: Not enough urban job creation Increasing share of income to firms and capital decreasing share to households and wages Intensive in energy, raw materials, and the environment Relies heavily on external demand Rebalancing = shift away from industry and investment to services and consumption

20 Policies for rebalancing a key role for fiscal policy (i) Shifting the composition of government spending Expanding the new dividend policy Eliminating underpricing of industrial inputs land, energy, water, natural resources, and the environment

21 Policies for rebalancing a key role for fiscal policy (ii) Removing remaining distortions in the tax system that stimulate manufacturing Including the service sector in the VAT base Reforming the VAT rebate system for local governments Introducing institutional reforms that give local governments stronger incentives and instruments to rebalance Reforming intergovernmental fiscal relations

22 Policies for rebalancing other areas Exchange rate Financial sector Removing restrictions on development services Labor market and migration

23 5YP measures in health, education, and social protection Percent of GDP Total expenditure ow: Education H ealth care C ultu re, sports & b ro adcasting S cience S ocial security Sou rce: Chin a Statistica l Ye arbook, C EIC, sta ff estima tes.

24 Other fiscal areas and summing up Eliminating agricultural taxation Unifying CIT (foreign, domestic) Establishing a dividend policy (low level) Pricing and taxing of energy not much Intergovernmental fiscal relations not much Overall: there is still a large fiscal agenda Underscored by lack of overall rebalancing

25 Revising potential output growth projections; growth accounting (i) factor percent pct per year share total (%) Contribution to GDP growth Total: GDP factors capital human capital TFP Source: NBS, staff estimates.

26 Growth accounting (ii) factor percent pct per year share total (%) Contribution to GDP growth Total: GDP factors capital human capital TFP Source: NBS, staff estimates.

27 Factors reducing potential output growth projection Subdued market based investment in coming years Lower capital stock Due to change in composition of investment, with a much larger share of government influenced investment Write off of export oriented capacity

28 Different composition of I As share of total Government influenced FCF market based FCF As share of GDP market based FCF of which: manufacturing of which: real estate Source: CEIC, staff estimates

29 Potential growth likely lower in medium term 12 Growth (percent) 10 8 P o t en t ial GD P gro wt h Source: NBS, staff estimates

30 Conclusions Short term outlook: gloomy global prospects but stimulus supports growth Medium term Weaker export prospects are set to affect overall growth significantly Spare capacity is emerging and has several consequences Some initial progress with rebalancing; need for a lot more Potential GDP growth is likely to be significantly lower in the coming 5 year than in the previous 5 year