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3 Supernormal Growth Downloaded from SUPERNORMAL GROWTH China s Economy World Century

4 Published by World Century Publishing Corporation 27 Warren Street, Suite , Hackensack, NJ Supernormal Growth Downloaded from Library of Congress Cataloging-in-Publication Data Shi, Zhengfu, 1954 [Chao chang zeng zhang. English] Supernormal growth : China s economy / by Jeffrey Shi Zhengfu (Fudan University, Shanghai, China). pages cm Translation of the author's Chao chang zeng zhang. Includes bibliographical references and index. ISBN China--Economic conditions China--Economic policy China--Economic conditions Economic forecasting--china. 5. China--Economic policy I. Title. HC S dc British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Originally published in Chinese Copyright Shanghai People s Publishing House, 2013 Copyright 2015 by World Century Publishing Corporation Published by arrangement with SCPG Publishing Corporation and Shanghai People s Publishing House. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. In-house Editors: Dipasri Sardar/Philly Lim Typeset by Stallion Press enquiries@stallionpress.com Printed in Singapore

5 Supernormal Growth Downloaded from Dedicated to Zhai Li my wife, my best friend and my partner.

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7 Supernormal Growth Downloaded from The Tao begot one. One begot two. Two begot three. And three begot the ten thousand things. Laozi, Tao Te Ching, Chapter 42* The defect of the feudal system is that power exercised arbitrarily by local authorities, while the defect of the centralized imperial system is that all power concentrated at the top. If a sage king arises who can apply feudal principle to the imperial system he will then bring peace to all under Heaven. Gu Yanwu, The Complete Works of Gu Yanwu The Collected Poems of Tinglin Volume 1 A Discourse on the Imperial System ** * Laozi, Tao Te Ching, Trans. Jane English, Feng Gia-fu, Vintage Books, ** Shanghai Guji Chubanshe, 2011.

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9 Contents Supernormal Growth Downloaded from Preface About the Author xi xvii Chapter 1 China s Unconventional Economic Growth 1 1. Supernormal Growth 6 2. Super-low Economic Volatility Fast-paced Consumption Growth and Increased Efficiency The Periodic Crises of Market Economy How China Overcame Periodic Crises 28 Chapter 2 China s Special Market Economy and Supernormal Investment Competitive Local Governments and the Three-dimensional Market System Local Investment Incentives and Levels of Investment Long-term Returns of Local Investment Incentives 53 ix

10 x Contents Chapter 3 The US Federal Reserve and International Supernormal Purchasing Power 59 Supernormal Growth Downloaded from 1. The Emergence and Growth of International Purchasing Power Asset Bubbles and Deficit Spending Industries Relocate Overseas and the Trade Deficit Fiscal Deficit and Excessive Issuance of US Dollars The Limits and Crisis of Supernormal Purchasing Power 73 Chapter 4 A New Historical Phase for China s Economic Growth Upgrading Consumption and Industry Urbanization Ecology and Environment Energy and Resources Human Capital and Technological Innovation National Defense Construction Accumulation, Investment and Consumption 112 Chapter 5 A New Phase for Supernormal Growth The Prospects for Growth Toward In Search of Endogenous Supernormal Purchasing Power Investment Areas for Supernormal Purchasing Power Creating the National Strategic Development Fund 143 Appendix 149 References 161 Postscript 165 Index 169

11 Preface Supernormal Growth Downloaded from In the past 30 years or more, the Chinese supernormal growth has created an unprecedented China Miracle. Reflecting on this marvel of growth throughout the human history, was it just a flash in the pan? Or was this China s contribution of oriental wisdom to the history of human development? Looking to the future, can such a supernormal growth be sustained and, if so, how? Wise men have said, How we interpret the history will determine how we choose the future. Therefore, the key to answer the questions raised above lies in firstly finding out how this China Miracle came about. Some said that it can be attributed to the curbing of consumption. In the past 34 years, consumer spending accounted for about 59% of China s gross domestic product, while investment was 38%. Compared with conventional market economies, this percentage of consumer spending was low and investment relatively high. However, the growth of China s consumption scale or consumption level has been astounding. During the same period, if we take 2011 as the base year for constant prices, total consumer spending rose from more than RMB1.3 trillion in 1979 to about RMB24 trillion by 2011 the average annual growth rate reached 9.12%; in terms of per capita spending, average growth was about 8.05%, taking the top place among medium(or above)-sized economies. xi

12 xii Preface Supernormal Growth Downloaded from Others argued that it is due to a reliance on excessive investment. As shown above, it is true that the investment rate in China was significantly higher than in developed Western countries as well as in other East Asian economies with comparatively high savings ratio. However, it might not be the case when perceived from the capital output ratio, a more comprehensive indicator the reading stayed at 3.38 in the first decade of the reform and opening up and 4.10 in the last decade, these readings are not higher than some developed countries. For example, between 1965 and 2010, the capital output ratio in the US was 5.29, and between 2005 and 2009, when affected by the financial crisis, it hit In Japan, the rate was between 1980 and 2010, soaring to between 2000 and Historically speaking, although China s ratio climbed, it was not due to overinvestment, but rather a reflection of the objective economic laws behind the historical process of industrialization and mass-scale urbanization. As this process deepens and the tertiary industries expand, the capital output ratio will stabilize or even decline slightly. Another argument is that China s achievement is a result of its demographic dividend. Certainly, the sheer number of population in China ensured an effective supply of workforce and the demographic dividend contributed greatly to China s economic growth. However, when observing other Asian countries such as Japan, South Korea, Singapore, Malaysia, Indonesia, the Philippines and Vietnam which have also benefitted from the demographic dividend one after another, it is not difficult to notice that there are huge differences of economic development level among these economies. This means that a demographic dividend does not necessarily lead to economic growth. So what is the underlying reason for China s supernormal economic expansion? The answer is: the socialist market economy with Chinese characteristics. The socialist market economy with Chinese characteristics is a three-dimensional market structure that consists of strategic central government, competitive local governments and competitive enterprises. It is a ground-breaking economic system

13 Preface xiii Supernormal Growth Downloaded from that dynamically combines the strategic leadership of the central government, local governments impetus for development and the innovative vitality of enterprises. The formation and evolution of this institutional arrangement under China s socialist market economy marks that China has initially established a new type of economic system which is systematically different from those conventional Western-style market economies. In this three-dimensional structure, the competitive enterprises, focusing on innovation and development, is the micro body for resource allocation; the competitive local governments construct a sustainable investment incentive system, lowering the investment costs for new ventures and thus increasing the equilibrium level of investment. They also provide business services, similar to what corporate headquarters do, and assist enterprises to break through ministry bureaucracy, creating a super vigorous driving force for the investment in Chinese economy; the central government, based on its fundamental role to make long-term plan for national economic growth, considers all-around and ensures a balance between development and stability on the one hand. And on the other, by seizing the opportunity of globalization, it managed to assess the timing and decisively made the whole nation integrate into the world s division of labor system, effectively absorb the supernormal international purchasing power provided by US s deficits in consumption, fiscal budget and trade. This has created additional market opportunities to accommodate China s high investment, high growth rate economy. It is the supernormal investment force and supernormal international purchasing power generated by such a socialist market economy that prevent China from the periodic economic crises which are inevitable in conventional market economies, and thus have created a miracle of co-existence of supernormal growth and super-low economic fluctuation during the two decades of highspeed growth since Of course, the more than 30 years of China s development has been very complicated and multifaceted. Behind the brilliant accomplishments, there have been many problems that needed resolving, such as the absence of owners of the SOEs and monopolies, the overly

14 xiv Preface Supernormal Growth Downloaded from large income gap and the unfair distribution of wealth, an excessively large government, disorder in the market, official corruption, environmental pollution, etc. These problems are either the phenomena associated with the development in China at current stage or endogenous outcomes resulting from the operation of the market economy. These deficiencies could only be solved via governmental reform instead of further marketization of the economy. If we said the theme of the first 30 years of reform began with a deconstruction of the planned economy and then creation of markets, then the second round would be the organizational transformation and administrative process reengineering. As the reform moves on, the socialist market system with Chinese characteristics will continue to operate effectively as the institutional foundation of China s supernormal growth. However, the international purchasing power will eventually disappear as the global financial crisis spreads. From a long-term perspective, consumption upgrading, industrial upgrading, urbanization, informationalization and agricultural modernization herald a huge market demand and room for development in the future. But this demand is a normal function of the market economy and correspondingly, conventional economic growth. To realize supernormal growth, demand must come from some third-party beyond the market system. Previously, this was international purchasing power based on excessive issuance of US dollars. In the future, what kind of a similar long-term purchasing power could replace it? The answer has actually been indicated in the question. On the one hand, it is inevitable for China to accumulate an large scale of savings under conventional market. On the other hand, there are a number of constrains on the supply side that will impact on future growth. From energy security and ecological construction to human capital accumulation and high-tech innovation, all require long-term and large amounts of capital investment. In relative to Western developed countries where the natural environments are well preserved, this investment should be regarded as the necessary extra investment in order to form the nation s basic assets. In relative to the objective of achieving the future well-being of the people and the

15 Preface xv Supernormal Growth Downloaded from long-term stability of the nation, this should be taken as the required fundamental work for the constructing of a harmonious society. Therefore, the key to the realization of supernormal growth in the future is to find a suitable mechanism which is capable of pairing the excessive savings with the extra investment so as to resolve the difficulties of both sides at the same time. To this end, one option would be to establish a comprehensive national strategic development fund, which can be operated for longterm investment in ecological assets and strategic resources. In this process, a new type of supernormal purchasing power will be created and injected into the conventional market economy, and meanwhile, the national fundamental assets of strategically significance can be established and operated perpetually. This is the pivotal point of this book. We could say that investments in strategic bottleneck factors, such as ecological assets, land redevelopment, clean energy resources and human capital, which emerge as a sequel of the supernormal purchasing power, are not dispensable public projects. Instead, they are fundamental projects of strategic significance which are essential to the long-term development of the nation and the well-being of the people. And if they are carried out properly, they can offer desirable returns over the long-term. We can fully expect that by the centenary of the founding of the People s Republic of China, the country will be among the leading nations in terms of GDP and per capita GDP. At the same time, the socialist market economy will demonstrate its great systemic competitive advantages in the institutional competition globally; as a development path differed from those classic Western ones, while serving as the most critical basis for the great rejuvenation of the Chinese nation, it also offers an alternative institutional option for human civilization and, therefore, contributes China s wisdom to the diversified evolution of human society and civilization. With confidence in this course, this theory and this system, China s road ahead will surely be stable and exceptional.

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17 About the Author Supernormal Growth Downloaded from Jeffrey Shi Zhengfu was admitted to Fudan University s department of economics in 1977, earning a bachelor s degree in economics in 1982, a master s in 1984 and then staying on to teach. In 1985, Shi traveled to the US to pursue his studies, earning a doctorate of economics at the American University and a doctoral candidacy at the University of Maryland s Department of Sociology. During his time in the US, Shi also worked as a contract researcher at the US Department of Labor s Division of Economic and Labor Research. After returning to China in 1995, Shi entered into business and founded Shanghai Comway Capital Group, where he has been serving as chairman since then. In 2003, Shi was invited to serve as the director of Fudan University s Center for New Political Economy. Shi also concurrently serves as director-general of Jiao Tong University s Research Center for Global Finance in Shanghai and adjunct professor at Nanjing University, and a member of the academic committees at Tsinghua University s Center for Political Economy and the Boyuan Foundation. Shi has authored the following books: Structure and Management of Modern Enterprises ; Labor and Value in Modern Enterprises a Modern Expansion on Marx s Labor Theory of Value ; The Revolution in Property Rights in Modern Enterprises ; Rationality and Path Dependence in Agricultural Reform: The Origin of China s Pattern of Reform Governance. Shi has also co-authored An xvii

18 Supernormal Growth Downloaded from xviii About the Author Analysis of Socialist Macroeconomics and A Textbook for Political Economics among dozens of other Chinese and English-language academic papers. Shi has been a recipient of many academic honors including the Sun Zhifang Economic Science Prize Award and the China National Book Award.