China s Economy: Development Trends

China s Economy: Development Trends BRUSSELS INSTITUTE OF CONTEMPORARY CHINA STUDIES Duncan Freeman March 215 dfreeman@vub.ac.be

CHINA S NEW NORMAL PRC GDP Growth 1978-214 (%) 16. 14. 12. 1. 8. 6. 4. 2.. Although average growth of GDP has been high (about 1%), the actual rate has varied considerably from year to year. What has been normal? Stimulus sustained growth after crisis in US and EU through stimulus, but it has declined subsequently. In 214 GDP growth 7.4%. After arrival of Xi Jinping in power, has China arrived at a New Normal? China s growth rates have declined before, is there anything different this time?

CHINA S NEW NORMAL China s New Normal. What does it mean? Lower growth. Lower government targets. At NPC target for 215 set at about 7%. Generally forecasts predict lower growth in China. IMF forecast 7.1% in 215, declining to 6.3% in 219. Why lower growth? Government policy, but also long-term trends. Simple mathematics? Population structure? Declining labour inputs. Lewis turning point? No doubt that double-digit growth is highly unlikely to return. But also quality of growth preferred over quantity of growth. Need for new growth model. Shift from investment, exports, manufacturing focus.

199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 REBALANCING OF CHINA S ECONOMY 6 5 4 3 2 1 Share of GDP by Sector (%) 1 9 8 7 6 5 4 3 2 1 Contribution to GDP Growth (%) Primary Secondary Tertiary Primary Secondary Tertiary The structure of China s economy has changed since reform began. The previous emphasis on heavy industry has been replaced by a more diversified economy. Secondary industry (manufacturing) is very important. The role of primary industry (agriculture, fisheries, forestry, mining) has declined, while tertiary industry (services) have expanded. Services have been growing faster than other sectors. But still they are much smaller than in developed economies. Duncan Freeman BICCS

199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 REBALANCING OF CHINA S ECONOMY Share of GDP by Expenditure (%) Contribution of GDP Growth (%) 7 12 6 5 4 1 8 6 4 3 2 2 1-2 -4-6 -1-8 Final consumption Gross capital formation Final consumption Gross capital formation Net exports Net exports GDP growth has depended on investment in recent years. Recognized need to shift from investment dependence. There are signs that this is occurring. Rise in share of consumption in GDP. In 214 51.2%, compared to low of 48.2% in 21. Falling share of net exports in GDP.

REBALANCING OF CHINA S ECONOMY 8 7 6 5 4 3 2 1 Fixed Asset Investment Monthly Change y-o-y 23-214 In past growth rates depended on fixed asset investment. But fixed asset investment now growing at slowest rate in many years. Government under Xi Jinping has not returned to investment stimulus. 7 6 5 4 3 2 1 Fixed asset investment change y-o-y 3 per. Zw. Gem. (Fixed asset investment change y-o-y) Share of SOEs in Fixed Asset Investment (%) 23 24 25 26 27 28 29 21 211 212 213 214 Other aspects of changing structure include declining role in economy for state owned enterprises. Nonstate enterprises growing faster than SOEs.

Jan- Oct- Jul-1 Apr-2 Jan-3 Oct-3 Jul-4 Apr-5 Jan-6 Oct-6 Jul-7 Apr-8 Jan-9 Oct-9 Jul-1 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14 INDICATORS SUGGEST CONTRACTIONARY TREND 7 6 5 4 3 2 1-1 -2-3 35 3 25 2 15 1 5 China Real Interest Rates (%) 2 21 22 23 24 25 26 27 28 29 21 211 212 213 China Monthly Money Supply (M2) Growth Y-o-Y 2-214 14 12 1 8 6 4 2 China Real Effective Exchange Rate Index (21 = 1) 2 21 22 23 24 25 26 27 28 29 21 211 212 213 Indicators suggest that China has undergone a contractionary period. Rising real interest rates. Real exchange rate appreciation the biggest of any major economy. Money supply growth slowest for many years. Counterbalanced by some targeted policy measures, but no general stimulus like 29.

CHINA S GROWING IMPORTANCE 35 3 25 2 15 1 5 GDP based on PPP % of world Brazil China India Japan Russia US EU China has had a GDP growth rate higher than any other major economy over the past three decades. Share world GDP has increased. According to IMF, on PPP basis China is now largest economy in the world. Even at current slower growth rates, China contributes more growth to the global economy than any other major economy. Slower growth does not mean China is less important. Share of Global GDP Growth (PPP) 213/212 27-213 1991-2 China 37.3 38.9 17.9 Germany.1.7 2.7 Euro area -2.1-1.5 12.8 European Union.4 -.3 18. India 1.5 12.7 7.4 Japan 2.4.2 2.1 United States 11.8 5.3 24.6 Every year China s GDP added annually at current growth rates is roughly equivalent to half the UK annual GDP, or one third of Germany s annual GDP.

Miljarden CHINA S TRADE China Foreign Trade (US$ million) EU-China Trade (Euro bil) 25 4 2 3 15 2 1 1 5-1 24 25 26 27 28 29 21 211 212 213 214-2 24 25 26 27 28 29 21 211 212 213 214 Exports Imports Balance Imports Exports Balance Rebalancing has an impact on trade. Until the mid-2s China did not have large trade surpluses. For much of the earlier period it had trade deficits. The crisis impacted both exports and imports which are closely related. Short-term cyclical effects. Rebalancing will have long-term effects on China s trade. Trade growth slowing. In 214 exports grew by 6.1%, imports by.4%. Exports impacted by weak markets. Imports impacted by slower growth, especially in key commodity sectors, also falling prices of commodities. EU deficit with China has declined. Since crisis, strong export and weak import growth, result of economic conditions in EU and China.

EU-CHINA TRADE Share of Extra EU Imports (%) Share of Extra EU Exports (%) 25 3 2 United States 25 United States 15 China Russia Switzerland Norway 2 15 China Russia Switzerland Norway 1 Turkey Japan 1 Turkey Japan 5 South Korea Brazil 5 South Korea Brazil India India China has become the EU s largest source of imports. The importance of major developed economies like the US and Japan has declined. China has displaced imports from other economies, ie Japan (processing trade). Will China be displaced in turn? Share of EU imports not growing as before. Increasing importance as export market. Will it be sustained?

EU-CHINA TRADE Share of EU Exports to China 214 2% 2% 2% 6% 2% 3% 4% 5% 6% 1% 12% 46% GERMANY UK FRANCE ITALY NETHERLANDS BELGIUM SWEDEN SPAIN AUSTRIA DENMARK FINLAND Others Germany accounts for nearly half of EU exports to China. Germany has benefited from growth (stimulus in response to crisis in US and EU) in China in recent years. Slowing growth in China, less demand for German exports?

Miljarden Miljarden Miljarden Miljarden EU-CHINA UNEQUAL TRADE Germany-China Trade (Euro bil) France-China Trade (Euro bil) 8 6 4 2-2 -4 24 25 26 27 28 29 21 211 212 213 214 Imports Exports Balance 3 25 2 15 1 5-5 -1-15 24 25 26 27 28 29 21 211 212 213 214 Imports Exports Balance Italy-China Trade (Euro bil) Belgium-China Trade (Euro bil) 4 2 3 15 2 1 1-1 Imports Exports Balance 5-5 Imports Exports Balance -2-1 -3 24 25 26 27 28 29 21 211 212 213 214-15 24 25 26 27 28 29 21 211 212 213 214 Different patterns of trade with China in recent years. Germany in surplus reduced/slowed imports, rapid increase in exports Italy/southern Europe reduced deficit, imports reduced, slight increase in exports France reduced deficit, imports/exports increase/plateau.

EU-CHINA TRADE 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Structure of EU Imports from China 25 26 27 28 29 21 211 212 213 COMMODITIES AND TRANSACTIONS NOT CLASSIFIED ELSEWHERE IN THE SITC MISCELLANEOUS MANUFACTURED ARTICLES MACHINERY AND TRANSPORT EQUIPMENT MANUFACTURED GOODS CLASSIFIED CHIEFLY BY MATERIAL CHEMICALS AND RELATED PRODUCTS, N.E.S. ANIMAL AND VEGETABLE OILS, FATS AND WAXES MINERAL FUELS, LUBRICANTS AND RELATED MATERIALS CRUDE MATERIALS, INEDIBLE, EXCEPT FUELS BEVERAGES AND TOBACCO FOOD AND LIVE ANIMALS EU imports from China are increasingly accounted for by machinery, electronics and high-value added goods. The share of imports such as textiles and footwear has declined.

COMPOSITION OF EU EXPORTS TO CHINA 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Structure of EU Exports to China 25 26 27 28 29 21 211 212 213 COMMODITIES AND TRANSACTIONS NOT CLASSIFIED ELSEWHERE IN THE SITC MISCELLANEOUS MANUFACTURED ARTICLES MACHINERY AND TRANSPORT EQUIPMENT MANUFACTURED GOODS CLASSIFIED CHIEFLY BY MATERIAL CHEMICALS AND RELATED PRODUCTS, N.E.S. ANIMAL AND VEGETABLE OILS, FATS AND WAXES MINERAL FUELS, LUBRICANTS AND RELATED MATERIALS CRUDE MATERIALS, INEDIBLE, EXCEPT FUELS BEVERAGES AND TOBACCO FOOD AND LIVE ANIMALS EU exports to China are dominated by manufactured goods, including machinery and transport equipment, and some high-end materials such as chemicals.

US$ mi;ion US$ million CHINA TO BECOME NET OUTWARD INVESTOR? China Investment Flows MOFCOM 14 12 1 8 6 4 2 1982198419861988199199219941996199822224262821212 China Investment Flows SAFE 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 1982198419861988199199219941996199822224262821212 ODI IFDI ODI IFDI China for many years major destination of FDI. Over past decade there has been rapid growth of outward investment. Widely predicted that ODI will soon exceed IFDI. But balance of payments tell different story. (MOFCOM data exclude reinvested earnings) ODI growing but still remains relatively small. Duncan Freeman BICCS

CHINA-EU INVESTMENT FLOWS China FDI Flows to the EU (Euro mil) EU FDI Flows to China (Euro mil) 9 25 8 7 2 6 5 15 4 3 1 2 1 5-1 24 25 26 27 28 29 21 211 212 213 24 25 26 27 28 29 21 211 212 213 Investment between the EU and China has grown, but is volatile. Volatility results from conditions in EU, China and global economy. Flows from China to the EU are still small. But importance will grow. Increasing diversity of investment and locations. Latest data suggest Chinese ODI to EU increased in 214. Investment will increase but will remain relatively small.

NEW SILK ROAD - ONE BELT, ONE ROAD The New Silk Road (One Belt, One Road) idea was launched personally by Xi Jinping in 213. The policy is still in development, but is considered a major initiative by the Chinese government. Has domestic and international importance. Both land and sea routes reach all the way to Europe. Links already being created, but realization faces challenges, infrastructure, politics, institutions, security, etc. At NPC Foreign Minister Wang Yi stated that the Silk Road would be a main foreign policy priority in 215.

REFORM PROCESS 18 th Party Congress, 3 rd Plenum comprehensive reform outline covering many aspects for economic, government, society, etc. Since then, reforms have been initiated in many key areas. Reform in China is gradual and experimental, not big bang. On going progress in taxation, fiscal system.. Government administration. Removal or delegation of administrative approval requirements. Local government finances and systems. Hukou system. Land ownership system. Reforms for foreign trade and investment. Shanghai Free Trade Zone. Negative lists.

215 ECONOMIC POLICY Xi Jinping 215 a key year for reform. Focus on structural problems not short-term growth targets. At NPC targets announced - increase GDP by approximately 7%. Increase in CPI at around 3%. Increase imports and exports by around 6%. Fixed asset investment to grow by 15%. Continue to implement proactive fiscal policy and prudent monetary policy. M2 money supply to grow by around 12%, but actual supply may be slightly higher. Reforms to continue. Tax reductions, reforms. Financing costs and reforms. Accelerate price reform. Land reform. Encourage private investors in small and medium-sized banks and other financial institutions. Oversight of real estate, local government debt, shadow banking. Encourage consumption and domestic demand. RMB exchange rate at an appropriate and balanced level and allow it to float more freely Foreign investment reforms, eg halve the number of industries in which foreign investment is restricted. Move faster to strengthen infrastructure connectivity with neighboring countries. Reform of legal system, government approvals.