China s Current Economic Situation and Policy Implications Xuesong Li Professor of Economics, xsli@cass.org.cn Deputy Director of Institute of Quantitative & Technical Economics Chinese Academy of Social Sciences (CASS) September, 2014
Outlines 1. China s current economic situation 2. China s slowdown stems mainly from structural reasons 3. Policy implications and economic forecasts for 2014-2015
1. China s current economic situation
The quarterly year-on-year growth rate of GDP is stable 8.5 8.1 8.0 7.5 7.6 7.4 7.9 7.7 7.5 7.8 7.7 7.4 7.5 7.0 6.5 6.0 2012 Q1 Q2 Q3 Q4 2013 Q1 Q2 Q3 Q4 2014 Q1 Q2
Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 The growth rate of above scale industrial added value declined in August due to both overseas and domestic factors 14 12.5 12 10 8 9.6 8.9 6.6 10.5 8.6 9.7 The monthly year-on-year growth rate of above scale industrial added value 10.9 11.1 11.4 11.0 10.7 9.9 9.8 9.9 9.8 10.0 9.3 10.4 10.2 10.3 10.0 7.6 9.7 9.2 6.9 9.0 8.8 8.7 8.8 8.0 6 4 2 5.8 5.5 5.8 4.9 4.3 Whole industry Mining industry 5.6 6.0 5.4 5.4 2.9 3.4 4.5 4.6 4.3 7.9 4.7 6.2 1.9 6.9 4.2 0 Manufacturing industry Manufacturing industry of electricity, gas and water -0.6-2
Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 The investment in infrastructure construction increased fast because of the micro-stimulus from government, to offset remarkable drop of investment in real estate development. 30 28 FAI Investment in real estate development Investment in manufacturing Investment in infrastructure construction 26 24 22 26.1 23.2 25.6 24.1 24.0 24.1 24.4 23.6 23.7 22.9 23.9 22.5 24.7 24.2 23.1 23.2 21.2 20.9 20.9 23.0 22.8 22.6 21.6 20 18 16 21.2 17.0 20.9 18.7 20.6 18.4 20.4 17.8 20.1 20.1 17.1 17.1 21.3 21.0 20.3 20.2 20.5 20.1 19.1 18.5 17.9 20.2 20.3 19.9 19.6 18.6 18.5 18.8 19.1 17.9 17.6 16.3 17.3 17.2 17.3 17.0 16.5 14 Monthly year-on-year growth rate of investment 15.1 15.2 15.2 15.4 14.8 14.6 14.2 14.1 14.0 14.1 12 13.2
Chinese various investment proportion in 2013 21.4% 25.5% Investment in manufacturing 19.3% Investment in real estate development Investment in infrastructure construction 33.8% The other investment
Investment effect declined in recent years 0.8 0.7 0.6 0.5 Coefficient of investment efficiency the ratio of increase of GDP to total FAI 0.4 0.3 0.2 0.1 0.0 1981 1985 1990 1995 2000 2005 2010 2013
2006Q1 Q2 Q3 Q4 2007Q1 Q2 Q3 Q4 2008Q1 Q2 Q3 Q4 2009Q1 Q2 Q3 Q4 2010Q1 Q2 Q3 Q4 2011Q1 Q2 Q3 Q4 2012Q1 Q2 Q3 Q4 2013Q1 Q2 Q3 Most of the investment goods industry is facing further overcapacity situation 90 The capacity utilization rate 85 80 81.2 81.2 80.2 80.5 81.9 82.8 83.0 83.2 80.4 82.5 80.6 78.6 80.7 82.9 82.3 82.5 82.5 82.2 82.3 82.7 79.8 78.8 78.4 80.1 78.2 78.6 79.6 75 74.0 75.6 75.6 71.5 70 65
Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 The growth of consumption in communication equipment is strong, but those related to real estate such as furniture, household appliances and audio-visual equipment declined. 25 total consumption Food Household appliances and audio-visual equipment Furniture Car Communication equipment The monthly year-on-year growth rate of consumption 20 15 10 5
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 The export is recovering but the import is still weak 30 20 The monthly year-on-year growth rate of trade Trade Export Import 10 0-10 -20
Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Housing prices decreased, the result of market adjustment 30 The year-on-year growth rate of hundred cities housing prices 20 10 the hundred cities the first tier cities the second tier cities the third tier cities 0-10
Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Housing prices decreased, the result of market adjustment 3.0 2.5 2.0 1.5 1.0 The month-on-month growth rate of housing prices the hundred cities the first tier cities the second tier cities the third tier cities 0.5 0.0-0.5-1.0-1.5
The real economy sectors are facing high cost of financing Invalid financing needs of soft budget constraint sectors is the direct cause of high cost of financing the real economy. Rapid growth of shadow banking is an important factor to push the cost higher of financing entity economy. The obstructed transmission mechanism of monetary policy system leads to the difficulty and expensive of financing. Key financial support to the real economy should goes more to those private enterprises with lower leverage ratio, but the state-owned enterprises especially overcapacity sectors with high leverage will continue to occupy more financial resources.
Guizhou Chongqin Shaanxi Inner Mongolia Tibet Gansu Yunnan Qinghai Ningxia Sichuan Xinjiang Guangxi Jilin Heilongjia Shanxi Hunan Hubei Jiangxi Henan Anhui Hainan Tianjin Fujian Liaoning Jiangsu Shandong Hebei Guangdong Zhejiang Beijing Shanghai China 12 provinces lowered their target growth rates in 2013, and 21 provinces cut their targets in 2014. 15 13 14 14 13.5 13 13 West Provinces Central Provinces 13 targets in 2012 targets in 2013 targets in 2014 12.5 12.5 12 12 12 12 12 12 12 12 12 12 11 9 12 11 11 12 12 12 12 12 12 11 11 10.5 10 9 11 11 11 11 11 10 9 12 8 11 8.5 11 10 10 10 10 10 10 10 10 10 10 10 9.5 9 9 12 11 11 11 11 10.5 9.5 10 10 9.5 9.5 9 9 9 East Provinces 9 9 8 8.5 8.5 8.5 8 8 8 8 8 7.5 7 7.5 7.5 7.5
Guizhou Tibet Chongqin Xinjiang Shaanxi Gansu Yunnan Qinghai Ningxia Sichuan Inner Mongolia Jiangxi Hubei Hunan Guangxi Anhui Henan Shanxi Heilongjia Jilin Tianjin Fujian Hainan Shandong Jiangsu Liaoning Guangdong Zhejiang Hebei Beijing Shanghai China The contrast of achieved GDP growth rates in the first half of 2014 and their annual targets for various provinces, no provinces achieved their high targets. 13 11 12.5 12 West Provinces 11 11 11 11 11 10.5 Central Provinces 11 10.5 East Provinces 9 7 10.8 10.7 10.9 10 9.7 8.4 8.4 10.2 10 7.4 9 9 8.5 7.6 10 10 10 10 9.5 9.5 9.3 8.5 9.5 9.3 9 9 8.8 8.5 8 6.8 10.3 9.7 10 8 9 9 9 8.8 8.5 7.2 8.5 7.5 8 8 7.2 7.5 7.5 7.5 7.2 7.1 7.4 5 annual targets 6.1 5.8 achieved in the first half of 2014 4.8 3
2. China s slowdown stems mainly from structural reasons
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F China s economic growth has slowed down since 2011 25 20 24.1 GDP growth rate CPI 15 10 14.2 14.0 13.1 14.7 17.1 10.9 10.0 9.3 7.8 7.6 8.4 8.3 9.1 10.0 10.1 11.3 12.7 14.2 9.6 9.2 10.4 9.3 7.7 7.7 7.3 7.1 8.3 5 0 6.4 2.8-0.8-1.4 0.4 0.7-0.8 1.2 3.9 1.8 1.5 4.8 5.9-0.7 3.3 5.4 2.6 2.6 2.2 2.1-5
The demographic dividend is weakening: China s working age population (age 15~59) appeared inflection point in 2011 China s working age population (unit: one billion people) 0.95 0.94 0.93961 0.94072 0.93727 0.93483 0.93 0.92 0.91647 0.92097 0.91129 0.91 0.90586 0.90 2006 2007 2008 2009 2010 2011 2012 2013
2001.3 2001.6 2001.9 2001.12 2002.3 2002.6 2002.9 2002.12 2003.3 2003.6 2003.9 2003.12 2004.3 2004.6 2004.9 2004.12 2005.3 2005.6 2005.9 2005.12 2006.3 2006.6 2006.9 2006.12 2007.3 2007.6 2007.9 2007.12 2008.3 2008.6 2008.9 2008.12 2009.3 2009.6 2009.9 2009.12 2010.3 2010.6 2010.9 2010.12 2011.3 2011.6 2011.9 2011.12 2012.3 2012.6 2012.9 2012.12 2013.3 2013.6 2013.9 2013.12 2014.3 2014.6 Since 2011, the ratio of job vacancies to job seekers has been increasing 1.2 1.1 the ratio of job vacancies to job seekers 1.0 0.9 0.8 0.7 0.6
2001.3 2001.6 2001.9 2001.12 2002.3 2002.6 2002.9 2002.12 2003.3 2003.6 2003.9 2003.12 2004.3 2004.6 2004.9 2004.12 2005.3 2005.6 2005.9 2005.12 2006.3 2006.6 2006.9 2006.12 2007.3 2007.6 2007.9 2007.12 2008.3 2008.6 2008.9 2008.12 2009.3 2009.6 2009.9 2009.12 2010.3 2010.6 2010.9 2010.12 2011.3 2011.6 2011.9 2011.12 2012.3 2012.6 2012.9 2012.12 2013.3 2013.6 2013.9 2013.12 2014.3 The ratio of job vacancies to job seekers has appeared differentiation for different education levels since 2008 1.6 1.4 1.2 Junior high school and below High school Vocational, technical and technical secondary school Junior College University 1.0 0.8 0.6 The ratio of job vacancies to job seekers 0.4
The ratio of tertiary industry value added to GDP first exceeded that of secondary industry in 2013, considering the labor productivity of Chinese tertiary industry is lower than that of secondary industry, so the potential growth rate of GDP decreases, and the employment situation is stable. 60 50 40 48.2 42.9 41.3 47.2 45.9 39.0 47.4 40.5 46.7 46.6 43.2 43.4 45.3 44.6 46.1 43.9 30 30.2 21.6 28.7 28.4 31.6 27.1 32.9 Ratio of primary industry value added to GDP Ratio of secondary industry value added to GDP 20 20.0 Ratio of tertiary industry value added to GDP 10 15.1 12.1 10.1 10.0 10.1 10.0 0 1980 1985 1990 1995 2000 2005 2010 2011 2012 2013
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Considering Chinese national savings rate is still on the high level, and the potential growth in central and west provinces are still high, so China s slowdown just from 10% to 7%, instead of 5%. 0.6 0.5 Corporate savings rate Government savings rate Household savings rate National savings rate 0.4 0.3 0.2 0.1 0.0
3. Policy implications and economic forecasts for 2014-2015
China should strengthen structure reform and turn to innovation drive Micro stimulus is still needed: macro-control policies in the management of aggregate demand should be prudent and flexible, directional loose such as PSL, to reduce the cost of financing the real economy, to maintain economic growth above 7%, for the security of employment. The core task is to strengthen structure reform and turn to innovation drive: macroeconomic policy should improve the quality and efficiency of economic growth, to deepen domestic structure reform, to strengthen the role of market, to improve total factor productivity and enhance the long-term development potential.
Economic forecasts of China s economy in 2014-2015 2014 2015 Growth rate of GDP 7.3 7.1 Nominal growth rate of FAI 16.1 15.2 Nominal growth rate of retail sales of consumer goods 12.2 11.5 Growth rate of exports 4.9 6.1 Growth rate of imports 2.2 4.6 Growth rate of CPI 2.2 2.1
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