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Unit 4 Macro: Growth and Development Challenges for China

Thursday, April 18, 2013
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Here are some notes taken from a talk given by Linda Yueh on the Chinese economy at the RSA in London on the 18th April, 2013

What has driven Chinese growth and will growth be different in the future? 

Linda Yueh's new work on China looks at micro data to understand where growth comes from - what people earn, what firms produce - and then link to the big picture

Average per capita incomes in China are only $8,000 - and the country remains ranked in bottom half of world per capita incomes. But extraordinary progress has been made in lifting people out of extreme poverty. (See "Developing world contributes to middle class boom")

The key goal for China over the next 30 years is overcoming the middle income country trap commonly thought to exist at or around $14,000 per capita. According to the OECD, only 17 countries have joined ranks of rich nations in  the post war period by breaking out of the middle income trap - this includes Greece and Portugal!

Chinese average income will reach the trap level in the next 5-10 years. Will growth of per capita incomes slow down?

Economic reforms always have long time lags to show through

Real GDP growth in China - 9.6% pa growth since 1979

  • 60-70% has come from increasing capital and labour inputs
  • 30-40% has come from rising total factor productivity growth

A lot of Chinese investment has been inefficient  but 50% of Chinese growth has come from adding capital, 10-20% from adding workers - the natural population growth rate is slowing and women already had high rates of labour force participation before the late 

1970s reforms. So less scope for feminisation of the labour force.

Productivity  Growth

  • 11-15% from human capital
  • 8-15% from improving allocative efficiency (e.g. moving from state-owned to private and from rural to urban)
  • 16-17% from the effects of innovation

Innovation and human capital are key to sustaining productivity growth - crucial for China in next decade. China has gone from 10 million state owned business twenty years ago to 200,000 now

Innovation gains

  • Up to 2/3rds from imitation
  • Relatively less from new technology

Five Key Rebalancing Challenges for China

  1. More reliance on their own market (especially services) and less on exports - services create jobs (more labour intensive)
  2. Raise domestic consumption, reduce inefficient savings. Consumption has fallen to less than 40% of GDP - greater share of income needs to go to workers, demand for broader welfare state.
  3. Grow the private sector, reduce distortions from state-owned sector. State sector still accounts for 30% of industrial output and a quarter of urban jobs. 
  4. Increase innovation as imitation limits are reached
  5. Continued the process of opening the Chinese economy into the global economic / financial system. This includes Chinese firms going global -foreign investment, notably in Africa but watch out for significant rise in Chinese investment in Europe.

Three decades of big changes coming up

  • 2020: Restructuring
  • 2030: Productivity and innovation as growth drivers
  • 2040: Strong and stable institutions

Video Resources

Financial Times, April 2013

Chinese property developer Dalian Wanda Group has said it will spend more than £1bn ($1.6bn) to buy a British yacht maker and develop a hotel in London

Migrant workers driving China's economy

The rise in spending power of China's 220m migrant workers is supporting the country's economy as manufacturing stalls. James Kynge, principal of China Confidential, explains how a labour shortage is inflating wages and what this mighty consumer cohort is buying

Demographic pressures facing China

The rise of the middle class in China

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Chinese property developer Dalian Wanda Group has said it will spend more than £1bn ($1.6bn) to buy a British yacht maker and develop a hotel in London - click here for news video

China is the world's biggest emitter of carbon dioxide, but the country is experimenting with ways to cut emissions - click here for news video

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