Structural Changes after the Global Financial Crisis Chinas

Structural Changes after the Global Financial Crisis： China's Perspective Fan He IWEP, CASS 9/17/2020

Structural imbalances before 2007 • Weak consumption vs. Strong investment Ø From 2000 -2007, the share of private consumption to GDP decreased 46. 4% to 36. 0%, the share of Investment to GDP increased from 35. 2% to 41. 7% • Why? Ø (1) The labor income share GDP dropped from 51. 4% to 39. 7%. Ø (2) Weak social security leads to precautionary saving of households. Ø (3) High saving rate for the enterprises. Ø (4) Inequality in distribution of wealth Ø (5) Financial repression. 9/17/2020 <2> CASS Fan He

Structural imbalances before 2007 • Underdeveloped service sector vs. very competitive manufacturing Ø The share of service sector in China’s GDP just increased from 39. 0% to about 42% during 2000 -2007 Ø China’s value added (% of GDP) in manufacturing is much higher than other emerging countries, which is 32. 9% in 2007 (Brazil: 15. 4%, India: 16. 0%, Russia: 17. 6%) • Ø Ø Ø Why？ (1)Globalization and trade liberalization. (2)Free entry in the manufacturing sector but tight control on service sectors. (3) No incentives for the local government to encourage the development of service sector. Ø (4)Price distortion. 9/17/2020 <3> CASS Fan He

Structural imbalances before 2007 • Heavy reliance on foreign demand Ø The share of exports in GDP increased from 20. 8% to 35. 2% from 2000 to 2007, and the share of net exports reached 8. 8% • Ø Ø Then? (1) Trade surplus. (2) More than 3 trillion USD foreign exchange (3) Environment pollution. (4) Energy security. 9/17/2020 <4> CASS Fan He

Stimulus Policy after Crisis • 2008 -11 -18 “ 4 trillion yuan plan”. 1%, Health, Education and so on 4%, Industrial Innovation 7%, Indemnificatory Housing 8. 75%, Environment 9. 25%, Rural Welfare 25%, Reconstruction 45%, Infrastructure Figure 1 Destination of “ 4 trillion yuan plan” Ø Destination of funds 9/17/2020 <5> CASS Fan He

Stimulus Policy after Crisis • It’s rather a monetary stimulus than a fiscal one • Other sources include: (1) Local government bonds Ø the scale of local government remains small, about 200 billion yuan per year Other sources: 2. 88 trillion (2) Local government-backed investment platform Ø its money is mainly from bank credit. Central government budget: 1. 18 trillion Figure 2 Source of “ 4 trillion yuan plan” 9/17/2020 <6> CASS Fan He

Economic Performance after 2008 Figure 3 China’s Economic Growth from 2008 to present (Quarterly, Yo. Y, %) 14. 00 12. 00 10. 00 8. 00 6. 00 4. 00 Financial Crisis 2. 00 A new round of slowdown “ 4 trillion plan” 0. 00 2008 2009 2010 2011 2012 -03 -06 -09 -12 -03 -06 9/17/2020 <7> CASS Fan He

Deterioration of Structural imbalances • Deterioration in internal imbalance • (1)Investment explodes Ø The share of investment in GDP increased by another 8 percentage in 4 years between 2008 and 2011 • (2)Too much investment in infrastructure building Ø It counts nearly half of the “ 4 trillion policy” Ø Mainly “Rail way, high way and other infrastructure” • (3)State-owned sector resurges Ø Growth rate of investment in state-owned sector increase(18% to 21%) in 20092011, while private sector drops (48% to 38% )compared to 2005 -2008 9/17/2020 <8> CASS Fan He

Deterioration of Structural imbalances • (3)Heavy reliance on local government and bank credit Ø 2010, China published the only data of local government’s debt, which is 10, 717 billion yuan, more than 200% of local government’s revenue in 2011 35, 000 30, 000 25, 000 20, 000 15, 000 10, 000 5, 000 0 20 20 20 20 20 20 01/ 02/ 03/ 04/ 05/ 06/ 07/ 08/ 09/ 10/ 11/ 12/ 3 9 3 9 3 9 3 Figure 4 Credit expansion in RMB, SA , 100 million yuan 9/17/2020 <9> CASS Fan He

Hard landing or soft landing? • China is faced with a new round of slow down after 2011, with growth rate’s graduate declining to below 8% Yo. Y growth in 2012 Q 2 14. 00 12. 00 10. 00 8. 00 6. 00 4. 00 2. 00 0. 00 2009 - 2010 - 2011 - 2012 - 201203 06 09 12 03 06 Figure 5 Growth rate after 2009, Yo. Y, % 9/17/2020 <10> CASS Fan He

Hard landing or soft landing? • How does slowdown happen? • Macro-Policy is the main reason • In 2012 H 1, policy tightening explains 52% of the decrease in investment , most significant are investment in real estate sector (27%) and infrastructure sector (25%). • Policy tightening: Ø (1) end of the stimulus policy Ø (2) to suppress the housing price Ø (3) to control the inflationary pressure after the stimulus (CPI reached 6. 5% in July, 2011, and is above 4% in 2011) 9/17/2020 <11> CASS Fan He

Silent revolution in 2012 • Consumption becomes strong • Growth rate of consumption per capita is 9. 3% in 2012 Q 2, which is higher than 6. 1% in 2010 Q 2 and 8. 4% in 2011 Q 2, and is also above the average rate between 2003 and 2012 11. 00% 10. 00% 9. 00% 8. 00% 7. 00% 6. 00% 5. 00% 4. 00% 2007 - 2008 - 2009 - 2010 - 2011 - 201203 09 03 09 03 Figure 6 Growth in consumption per resident(after moved average), Yo. Y, % 9/17/2020 <12> CASS Fan He

Silent revolution in 2012 • Structure of investment is improving in 2012 H 1 Ø Investment growth rate increases in service sectors science & technology (46% v. s 25%) ICT (43% v. s 3%), finance(130% v. s 28%) 0% 20% 40% 60% 80% 2004 -2011 100% 120% 140% 2012 H 1 14% ØThe increase of investment in private sector outpaced that in the public sector. SOE private 55% East West Øthe growth rate of investment in west and mid China outsized that of east China in 2012 H 1 Mid 0% 9/17/2020 10% 20% 30% <13> CASS Fan He

Silent revolution in 2012 Ø Industrial structure is changing Ø There is a divergence in manufacturing PMI and non-manufacturing PMI after April, 2012 60. 0 54. 0 59. 0 53. 0 52. 0 58. 0 51. 0 57. 0 50. 0 56. 0 49. 0 55. 0 48. 0 54. 0 47. 0 53. 0 2011 -03 46. 0 2011 -06 2011 -09 2011 -12 Non-manufacturing PMI 2012 -03 2012 -06 Manufacturing PMI Figure 7 Manufacturing PMI and non manufacturing PMI, SA 9/17/2020 <14> CASS Fan He

Why structural change? Ø Can not be credited to the government. Thanks to the market forces. (1) Consumption rise because of fundamental changes, especially the change of demographic profile, causing a lower saving rate 75 74. 50 74. 40 2011 74 73 72. 00 72 71 72. 30 72. 50 72. 70 73. 00 70. 90 70. 30 70. 40 2002 2003 70 69 68 2004 2005 2006 2007 2008 2009 Figure 8 Share of population aged between 15 -64, % 9/17/2020 <15> CASS Fan He

Why structural change? (2) exports sector is adjusting because of increasing labor cost 1, 000 900 800 700 600 500 400 300 200 100 0 2005 2006 2007 2008 East Mid 2009 2010 2011 2012 West Figure 8 Average minimum wage in different region of China, Yuan 9/17/2020 <16> CASS Fan He

Why structural change? (3) Investment redistribution in sectors is the result of mixed events: Ø Slumped foreign demand, and thus there is no motive to invest more in export sector Ø Weak internal demand in steel and other industries, plus increasing cost in energy and labor Ø Improvement in financial repression 9/17/2020 <17> CASS Fan He

Implication • (1)Growth drops in the short run, but there is a positive structural change • (2)trade surplus will be back to a reasonable level, and China’s ODI will expand, both for market seeking and resource seeking, thus external imbalances will diminish gradually • (3)there also short run factors which may cause these changes: Ø Slowing invest make consumption “seems ” strong and structure “seems” change Ø Policy support on ICT and other technology intensive industries 9/17/2020 <18> CASS Fan He

Australia’s opportunity and challenge Ø Bilateral trade is increasing fast, but it’s mainly a mining story. Ø More opportunities for high-quality agricultural produces, high-end manufactured products. Ø A ready market for Australian service sector. Ø Is Australia ready? 9/17/2020 <19> CASS Fan He

Thank you Fan He IWEP, CASS LOGO