CHINA’S LONG WAY TO ECONOMIC REBALANCING
Françoise Lemoine (CEPII)
GATE-IAO Seminar , November 29, 2012
I-External rebalancing
1.1. How China has reduced its foreign trade surplus
1.2. The impact on the rest of the world
II- Toward a more balanced and slower economic growth
2.1. A long way to a balanced domestic economy
2.2 Toward a slower growth
Source: China statistical yearbook and Customs statistics.
I-External rebalancing.
1.1. How China has reduced its trade surplus, from 7% of GDP in 2007 to 2% in 2011.
-5 -4
-1 -2 -1
2 2
1
-2 1
2 1
4 4
3
2 2 2 2 2
5 7
7 7
4 3
2
-5 -3 -1 1 3 5 7 9
85 87 89 91 93 95 97 99 01 03 05 07 09 11
Total trade
Ordinary trade
Processing trade
others Trade balance in percent of GDP -Surge of trade
surplus from 2005 to 2007 (both to processing and ordinary trade)
-Since 2007, processing trade surplus fell, ordinary trade returned to deficit
The shock of the global crisis: processing trade collapsed due to international demand
Source: China statistical yearbooks and Customs statistics
Processing exports and imports
dropped. In 2011 their share in GDP has returned ten
years backward. 11
6
3 5 7 9 11 13 15 17 19
92 94 96 98 00 02 04 06 08 10
Processing exports
Imports for
processing China’s processing trade as percent of GDP
Source: China Statistical yearbooks and Customs statistics
Ordinary trade in percent of GDP -Ordinary imports reached 14% of GDP in 2011 (over the pre- crisis level)
-Ordinary trade
switched from surplus to deficit
14 13
3 5 7 9 11 13 15 17 19
92 94 96 98 00 02 04 06 08 10 Ordinary imports
Ordinary exports
Ordinary trade: imports have rebounded since 2010
due to strong domestic demand (stimulus plan)
The deterioration of terms of trade (TOT) has helped rebalancing
Evolution of China’s export and import prices, terms of trade (index 2004=1)
From 2007 to 2011, export prices
increased by 15%, import prices by 30%
0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6
2004 2006 2008 2010
Import prices
Export prices
TOT
Source: PBOC
1.2. Impact on the rest of the world.
China has become a major source of international demand
Source:China Customs statistics and WTO
Share in world trade (percent, excluding intra- EU trade)
16 16
12 9
0 5 10 15 20 25
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 China’s imports excl. processing
China, total imports
US imports
EU imports
China’s demand for primary goods as well as manufactured products has picked up.
Source: China Customs statistics and WTO
China’s share in world imports
(in percent, excluding intra-EU trade)
13.8
9.2
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0
90 92 94 96 98 00 02 04 06 08 10
Primary products Manufactured products
Source: Chinaʼs customs statistics:.
China’s trade balance by region, US$ bn
-Deficits with Asia, Africa and Middle-East
deepened
-Surpluses with the US and the EU increased
Bilateral imbalances have remained large.
-125 -75 -25 25 75 125 175 225 275
2007 2008 2009 2010 2011
Asia-Océania
Africa & Middle-East EU
US World
Share of primary products in
Chinaʼs imports (percent)
Who has benefited the most from China’s demand? 1) Producers of primary products
Source: CEPII, CHELEM database
11 9 7
4
7 9 8 8 7
6 6 6 6 6 6 6 6 6 7 7 7 1 2
2
1 2 2 2 2 2 2 3 3 3 3 4 6 7
8 9 9 10 5 5
4
5 3
3 5 7
4 6
10 8
7 7 9
11
13 12 17
14 15
0 5 10 15 20 25 30
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Fuels Minerals
Agricultural products
China’s demand of energy and raw materials has driven resource-rich countries growth.
Source: CEPII, CHELEM-database.
26
22
13
9 7
25
6
18
14 12
0 5 10 15 20 25 30 35 40
Share of China in country total exports (%)
2010 2000
Source: CEPII, CHELEM-database.
2) Asian economies’reliance on China’s market has considerably increased.
36
19
28
11
15
22
9
22
11
0 10 20 30 40
Taiwan Malaysia South Korea Singapore Thaïland Philippines Viet Nam Japan Indonesia Share of China in country total exports (%)
2010 2000
Source: CEPII, CHELEM-database.
China’s demand of manufactured products has driven Asian growth and strengthened regional economic
integration
23
17
13
9 9
7 6
3 3
0 10 20 30
Exports to China in percent of the country GDP
2010 2000
By contrast, exports to China represent about 0.6% of GDP in the US and most European economies.
Germany is an exception (2%)
To sum up:
China has successfully overcome the global crisis: maintained a strong growth, reinforced its position in international trade, stimulated growth in Asia and many emerging economies
Slower growth in China in 2012 has an adverse impact on the
economies which benefited from its demand in the previous
years.
16
II. Toward a more balanced and slower growth
2.1. A long way to a balanced domestic economy
2.2 Toward a slower growth : cyclical and structural factors
.
Source: China Statistical yearbook
2.1. The long way to a balanced domestic economy:
Since 2000, economic growth has been driven mainly by exports and investment
5.5 4.2 4.0 3.6 4.0 4.4 5.1 5.6
4.2 4.6 4.5 5.2 1.9 4.1 4.4 6.3 5.5 4.3
5.5 6.0
4.5
8.1
5.5 4.5 1.0 0.0 0.7 0.1 0.6 2.6
2.1
2.6
0.9
-3.5
0.4
-0.4
-6 -4 -2 0 2 4 6 8 10 12 14 16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Contribution to GDP growth (in percentage point)
External demand Capital formation Consumption
Source: China Statistical yearbook
Household consumption has been the weak link: a record low level in 2010
China’s GDP by expenditures (in percent)
-The stimulus plan (2009) has aggravated the domestic
imbalances
-Still no strong sign of rebalancing in 2011
35 35
49 48
46
35
14 16
14
0 10 20 30 40 50 60
1990 1994 1998 2002 2006 2010
Capital Formation
Household consumption
Government consumption
19
What is holding back household consumption ?
Demographic and institutional factors[Guonan Ma, 2010;
N.Lardy, 2012 ]:
• The share of household income in GDP shrunk (large supply of labor due to demography and rural migrations)
• The saving rate is very high
Demography (low dependency rate) Precaution savings
Hukou system [Ming Lu]
Income distribution increasingly biased toward high- income categories.
• Are national account data reliable? figures underestimate household income and consumption expenditures (by 2 or 3 percentage points), and overestimate investment.
Imports of consumer goods have been driven by the demand of the most affluent households.
Source: CEPII, CHELEM database
42 44
33
26
9 13
0 5 10 15 20 25 30 35 40 45 50
Intermediate goods
Equipment goods
Consumption goods
NEC
Breakdown of China’s
manufactured
imports by end-use (in percent)
-Consumption
goods make up the fastest growing import category
2.2. Toward a slower economic growth: cyclical and structural factors.
GDP growth decelerates in 2012 (7.7% in the first 9 months against 9.2% in 2011) due to cyclical factors:
-Domestic side: the burst of the property bubble.
(impact on upstream sectors : building materials, metals) -The sluggish international demand affected
industrial production
China is still dependent on advanced economy markets, where demand is sluggish
Source: CEPII, CHELEM database
The BRIC exports to the BIG 3
in 2010:
More than half of Chinaʼs exports and 14% of GDP
US Japan EU-27 BIG 3
Brazil 12 4 20 36
Russia 6 4 49 59
India 12 2 19 34
China 21 9 22 53
Brazil 1 0 2 3
Russia 2 1 13 16
India 2 0 2 4
China 6 2 6 14
in percent of each BRIC exports
in percent of each BRIC GDP
China’s export growth affected by weak external demand in first half of 2012 . Exports account for about 24% of industrial output.
Export slowdown in the first half 2012.
-Exports to the EU fell by -0.8%.
Source: China Customs statistics
25
22
8
13 33
23
7 8
0 5 10 15 20 25 30 35
Q1 2011 Q2 2011 Q1 2012 Q2 2012
Changes in China's exports and imports (in percent of the same period preceding
year)
Total exports Total imports
But structural factors will make economic growth slower than in the past
-China’s world market share
-The demographic turning point
The contribution of external demand will be smaller than in the past. China’s world market share : is there still room for increase?
Source: CEPII, CHELEM database
Leading exporters of manufactured goods, 1967-2010 in percent of world trade
16 18
11 17
8 15
7
0 2 4 6 8 10 12 14 16 18
67 70 73 76 79 82 85 88 91 94 97 00 03 06 09
China
Japan Germany US
A
demographic turning point: the working age population has stopped growing since 2010 and is going to diminish.
Source:ONU .
88
79
43 50
63
36
4
-6
-17
-46 -48
-26
-60 -40 -20 0 20 40 60 80 100
1980-85 1985-90 1990-95 1990-00 2000-05 2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40
China: changes in the working age population from 1980 to 2040 (million)
Age: 15-60 Age: 15-24
27
Consequences of the demographic shift:
1) Less pressure than in the past to create jobs through strong growth. Long term scenarios for China predict a pace of around 7.5% per year from 2010 to 2030. [CEPII, World Bank, Subramanian, Goldman Sachs]
2) Rising wages. The question is debated: has China
reached the Lewis turning point? CAI Fang (the supply of labor is no more unlimited)/ YAO Yang (local shortages
caused by institutional factors, restrictions on labor mobility).
3) Implications for the growth strategy: external vs
domestic sources of growth; comparative advantages: price competitiveness vs industrial
upgrading.
.
- .
“China 2030”: a joint report by the World Bank and the DRC), endorsed by Li Keqiang (next prime minister), proposes a new growth pattern, with emphasis on services, domestic
consumption, cleaner growth.
Obstacles to changing the growth pattern: industries, provinces, interest groups which benefited from the past growth regime; a success trap [Godement]?
Strong political will necessary to propel a new growth model:
-Adjust the relative prices in order to change the incentives, as price distortions of production factors have contributed to imbalances [Yiping Huang]
- Increase public spending in social services (education, health, social housing, safety net) in order to enhance
consumption.
-Urbanization will raise income and consumption,
provided the migrants are integrated into the urban system.
30
Conclusion
A debate in China about the next stage of development.
Different views among Chinese economists [Leonard, 2012:
“China 3.0”]:
1)China is backward enough to continue the traditional model
2) China has to escape the “affluent trap” (“middle income trap”), needs to reform its growth pattern. Two views:
• Liberal economics (supply side): privatization, liberalization
• “New left” thinkers (demand side): reduce inequality, boost wages, social security; strategic planning.
Both approaches run into vested interests. Stability trap?
References
CAI Fang. (2012), The Coming Demographic Impact on China’s Growth: The Age Factor in the Middle-Income Trap”, Asian Economic Papers, Volume 11 Number 1, 2012.
CEPII: “The Great Shift: Macroeconomic projections for the world economy at the 2050 horizon”, CEPII Working Paper, N
°2012-03, February 2012
Goldman Sachs “The BRICs 10 Years On: Halfway Through The Great Transformation”, Economic Paper N° 208, 2011.
Ma, Guonan and Wang Yi. 2010. China’s High Saving Rate: Myth And Reality. BIS Working Paper 312, June.
Huang Yiping, 2010: “Dissecting the China Puzzle: “Asymmetric Liberalization and Cost Distortion”. China Center for Economic Research, Beijing University, Working Paper 2010-03.
Lardy, Nicholas. 2012. Sustaining China’s Economic growth After the Global Financial Crisis. Peterson Institute for International Economics, Washington D.C.
Lemoine & Ünal, 2012:”Scanning the ups and downs of China’s trade imbalances”, CEPII Working Paper N°14, June.
Leonard, Mark, editor (2012): “China 3.0” (http://ecfr.eu/content/entry/china_3.0)
Subramanian, Arvind: “ECLIPSE. Living in the Shadow of China’s Economic Dominance”. Peterson Institute for International Economics, Washington DC, September 2011.
The World Bank. China 2030. Building a Modern, Harmonious, and Creative High-Income Society”, The World Bank, 2012.
YAO Yang. (2011), “The Relationship between Chinas Export-led Growth and Its Double Transition of Demographic Change and Industrialization”, Asian Economic Papers, 10 (2): 52-76.
