China s Future Challenges Tony Saich Director, Ash Center for Democratic Governance and Innovation Director, Institute for Asia Harvard Kennedy School Presentation for FE-UI August 30, 2010 1
Outline of Talk Premier Wen Jiabao to CCTV reporter after the 2010 NPC meeting (March 14, 2010): I have previously said that if there is inflation, added to the inequitable distribution of income and corruption, it would be enough to threaten social stability and the consolidation of political power. Four parts: Recent economic policy trends Long-term economic strategy Socio-economic challenges Implications for the region 2
Short-term Policy Fundamental challenge is to tighten liquidity and reduce inflationary pressures while honoring the huge economic and political commitments already made to investment projects Monetary policy should reduce excess liquidity but not shift to a sharply contracted stance Thus, attempts at selective tightening Reserve requirements raised three times Fiscal spending reduce Deflate the asset bubble in the housing market 3
Lending growth A conflict between central and local priorities Lending growth back to 18 per cent, the average of recent years and down from the 35 per cent in 2009 Lending to be reduced from 7.5 trillion Rmb from 9 trillion in 2009 with a more even spread BUT there remains a vast commitment of resources for government-led projects 2010 1 st ¼ around 28 trillion of projects under construction with 3 trillion committed for new projects (34.5 per cent up on 2009) 150,000 projects under construction Politically difficult for the center to clamp down too strongly 4
Housing Policy New measures meet the political objective of tackling inequality Policy is geared to ending high end speculation; keeping the middle class on board; and providing affordable housing Again central-local differences as local governments are dependent on land revenues April 17, 2010 3 main policy strands announced 1. Measures to restrict speculative demand for housing 2. Increase supply of housing, especially affordable housing 3. Experimentation with the tax system to introduce a property Caused a 50/60 per cent drop in transactions and 70 price index cooled to around 11 per cent growth 5
Short-term Policy Slow-down in housing construction will impact on steel and other commodities Fixed asset investment growth has slowed from 35 to 25 per cent, copper prices dropping as well as iron ore and copper 2 nd ¼ GDP growth was 10.3 per cent down from 11.9 per cent in the 1 st ¼. Industrial production for June at 13.7 per cent down from 16.5 per cent in May Premier Wen might finally get his desire for 8 per cent economic growth! Essentially, macroeconomic policy still moderately expansionary and urbanization to drive rapid investment 6
Long Term Economic Stategy Hu Jintao and Wen Jiabao policy intention Not reject growth oriented policies but seek to supplement them Improve access to healthcare and education for those in rural areas and migrants Improve and extend social security system Moderate environmental impact of development Reduce energy demand Stimulate domestic innovation Promote domestic brands Create world-leading companies 7
Long-term Development 12 th five year program will see commitment to realize the original objectives for the economy set out by Hu-Wen in 2003-04, none of which have been realized Reduce dependency on the two main drivers of growth: investment and export demand Domestic demand is 80% of aggregate demand but most is government investment Longer-term goal to increase domestic consumption and domestic productivity growth Road map for accelerating changes in the mode of economic growth Shift to consumption will over time further slow growth Investment in infrastructure and industry will remain important but little capacity for investment/gdp ratio to rise much further Same limited capacity for exports to expand much more Problem of savings rate with respect to boosting domestic consumption 8
Components of Growth 9
Growth Comparisons Adapted from D. Perkins Country Year rapid growth started GDP per capita (PPP) Year rapid growth ended GDP per capita (PPP) Japan 1950 $2,741 1971 $13,800 South Korea 1963 $1,925 1992 $13,370 Taiwan 1960 $1,585 1990 $13,370 10
Socio-economic Challenges Five major challenges that are relevant to business 1. Aging Population 2. Gender Imbalances 3. Growth of the Middle-Class and the New Rich 4. Inequality 5. Resource Constraints 11
An Aging Society Negative effect of higher dependency ratios and greater expenditures on elderly care By 2050, China will age on average 13.8 years (US 3.6) Will be the first society to grow old before it grows rich 2040 peak population of 1.54 billion Already officially an aging state with over 10 per cent of the population over 60 4-2 1 family structure Consequences Significant pension obligation to deal with Significant increase in medical costs Lower fertility rate = lower domestic savings rate but a higher return to labor 12
Gender Imbalance Sex ratios (2000 Census) males to females 106.74:100 Means over 41 million more men At birth ratio is 119.92:100 and by four = 120.17:100 Chinese researchers suggest by 2020 there will be 100 million Chinese bachelors Consequences: Distortion of family structures Strain on capacity to care for elderly Increase in dowry Rise in commercial sex work and risk of STDs 13
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New Middle Class and the Super Rich CASS predicts a middle class of 35 per cent by 2020 McKinsey by 2011 lower middle-class (earning 25-40000) = 290 million; upper middle class by 2025 (40-100000) = 520 million 2009, China 2nd largest consumer of luxury goods, bought 25% of world s luxury goods ($9.4 billion) 825,000 individuals worth over 10 m. yuan; 51,000 worth over 100 m. (Hurun report) 70% are male; 66% are aged 31 to 45; 23% made money in real estate Forbes: After US the highest number of billionaires, 64 in 2009 A high percentage are party members, family members of leaders past and present have carved out business domains People s Daily poll 90% of people think that the new rich gained wealth through networking with government officials 69% thought badly of the new rich One study (criticized) suggested that 90% of China s wealth held by 0.4% of the population 15 15
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Inequality-Rural-Urban Gap 18
Inequality Causes Urban-Rural Household Income Ratio 1978 2.57 1990 2.20 2003 3.23 1980 2.50 1992 2.59 2005 3.20 1982 1.95 1994 2.86 2009 3.33 1984 1.83 1996 2.51 1986 2.12 1998 2.51 1988 2.17 2000 2.79 19 19
Regional Disparities in China (2008) Source: China Statistical Yearbook, 2009 (Beijing: China Statistics Press) and http://www.stats.gov.cn/tjs/ndsj/2008/indexeh.htm Per capita annual income (Rmb)-- 2007 Ownership per 100 urban households Eastern Central Western Northeastern 18,544 12,392 12,130 12,306 Automobiles 14.35 4.08 6.06 3.76 Computers 74.86 48.24 48.31 45.70 Mobile phones 187.43 153.84 168.57 159.98 Washing machines 95.73 94.94 94.10 91.12 Ownership per 100 rural households Motorcycles 68.88 49.16 43.81 53.11 Computers 12.15 2.65 1.45 3.77 Mobile phones 129.87 102.78 91.29 109.11 Washing machines 68.09 46.88 43.92 73.61 20 20
Regional Energy Order Overturned (from E. Cunningham) Primary Energy Production Europe Middle East Source: EIA Russia/FSU data in revision by EIA 21
Resource Constraints International Energy Agency-2009 China use of energy sources at 2.26 bln tonnes oil equivalent overtook the US China now the largest energy market BUT China provides over 90% of the primary energy demand domestically, thus one of the world s most energy self-sufficient economies However, heavily reliant on coal 22
Primary Energy Consumption, 2009 Electricity Generation 2008 23
Energy as Choice vs. Constraint Domestic Pressures Env.: Extensive environmental degradation limits growth and growth potential, and adds to social instability. but domestic development challenges make it critical for China to maintain high economic growth to finance needed social development. International Pressures Env.: China is industrializing and urbanizing at a time when climate change mitigation has been put at the top of the global agenda, yet such industrialization has relied on energy-intensive sector output and largely coal-based input. but committing to a climate deal implies massive structural transformation for China, not only of its energy mix but also of its energy-intensive sectors such as transport and building. and China s historical alignment with the G77 view that climate change is predominantly an OECD-world problem is becoming contradictory as China has recently become the world s largest carbon emitter 24
Global Impacts of China s Development Six main impacts of economic development 1. China s export competitiveness and the volume of exports will severely affect trade prospects of other countries. Strong competitive pressures in consumer goods future engineering products and services 2. Attraction of FDI will force other countries to develop more hospitable environments 3. Major impact on import of commodities, intermediate components, machinery and energy 4. Setting up of China Investment Corporation can have a major impact on the global investment world 5. Emission of carbon dioxide and other greenhouse gases will affect climate change 6. Other environmental impacts 25
Impacts for Global Business 1. If shift to domestic consumption is successful will reduce CCP interest in export trade and FDI more emphasis on rural/inland development and a shift to higher quality FDI. 2. More economic nationalism and pro-china competition policies 3. But will still be crucial needs and wants Energy and raw materials security Advanced technology Help develop global brands 4. Opportunities to serve new secondary markets, inland cities and new markets created by urbanization and improved infrastructure and logistics 26
Terima Kasih The Indonesia Program of the Harvard Kennedy School (HKS) is made possible through the generous support of the. www.ash.harvard.edu/indonesia 27