China’s New Economy

What is the difference between Mao’s and Deng’s economic strategy?

Why is China’s rapid growth considered as an “economic miracle”?

What are the economic problems confronting China?

Mao vs. Deng• Mao & Deng shared the goal of modernizing

China, but the two differed in approach.• Mao’s vision: put politics in command & carry

out a continuing revolution to build an egalitarian society.

• Deng’s approach: put economics in command & focus on improving the people’s living standards.

• Mao stressed ideological purity, Deng advocated pragmatism.

Economic Goals

Deng’s 3-step roadmap to achieve the “FourModernizations” and transform China into a“socialist market economy”

• 1980 to 2000 -- To quadruple GDP• 2001 to 2020 -- To quadruple GDP again &

attain initial stage of prosperity• 2021 to 2049 -- To attain higher stage of

prosperity with per capita income of medium-level developed economy

Rapid Growth in GDP

Average annual growth rate of 9.31% duringthe past three decades:

• 1980 $194 Billion• 1990 $357 Billion• 2000 $1.2 Trillion (world’s no. 6)• 2010 $5.9 Trillion (world’s no. 2)

(Source: World Bank, Chinese statistics)

Catching Up With the West

• 2000: Italy• 2005: France• 2006: UK• 2007: Germany• 2010: Japan

Rising Per Capita Income• 1980 $220• 1990 $330• 2000 $930• 2010 $4,260

(Source: World Bank, Chinese statistics)

Per Capita Income Growth• China has doubled its per capita income

every 9 yrs since 1978, the fastest growth rate in the world so far.

• In comparison, it took the UK 58 yrs & the US 47 yrs to double their per capita incomes during their industrial revolution, while it took Japan 34 yrs to do so.

(Source: The Chinese Economy, by Justin Lin et al.)

Reduction in Poverty• According to the World Bank, China reduced

its poverty rate from 85% in 1981 to 15% in 2009, using international standard of less than $1.25 per person per day.

• During this period, about 600 million people were lifted out of extreme poverty. But an estimated 150-200 million people remain below poverty line.

• Government’s goal is “to basically eliminate absolute poverty by 2020”

Global Economic Status• Forex reserves: $3.18 trillion, biggest in the

world• Largest holder of US government debt: $1.1

trillion• China’s GDP ($5.9 trillion) is world’s 2nd

biggest but it is 40% of US ($14.6 trillion), the world’s biggest GDP.

• China’s per capita income ($4,260) is less than 10% of US ($47,140).

Problems & Challenges• Increasing inequality: widening gap between

rich and poor, between urban and rural, between east and west.

• Corruption in government & business sectors• Environmental pollution• Growing social unrest• Economic overheating

Glaring Inequality• Income gap: Top 10% earned 7.3x bottom

10% in 1998, it widened to 23x in 2009• China has 272 billionaires, up from 130 in

2009. Only the US has more billionaires• Gini coefficient rose from 0.28 in 1981 to 0.47

in 2010. Inequality was even worse than the Philippines (Gini 0.44)

(Source: Chinese statistics, Forbes)

Widespread Corruption• Official surveys have consistently identified

corruption as one of the top public concerns.• Common forms of corruption: bribes,

kickbacks, abuse of public office, nepotism.• In 2009, 106,000 officials were found guilty of

corruption, an increase of 2.5% over the previous year.

• China ranked 78th in Transparency International’s corruption perceptions index. The Philippines had a worse ranking at 134th.

(Source: Chinese media, Transparency Int’l)

Environmental Pollution• Serious pollution: result of being the world’s

manufacturing workshop• According to a WB study, 16 of the 20 most

polluted cities are in China.• China surpassed the US in carbon dioxide

emissions in 2006 due to widespread use of coal in industry.

• China is reported to the dominant recipient of the world’s electronic waste (used computers, cell phone batteries, etc).

Growing Social Unrest• Rising number of riots & protests against

corruption, pollution, land disputes, ethnic conflict (Tibet, Xinjiang).

• Reported cases of “mass incidents” increased from 60,000 in 2006 to 90,000 in 2009.

• Government’s response: political & economic persuasion combined with tight security measures.

Economic Overheating• China’s huge stimulus spending during the

2008 global financial crisis kept the economy expanding but it led to inflation, with consumer price index at a three-year high of 6.1% and food prices up by 13%.

• Government seeks to slow down growth rate to 8 % (“soft landing”) without increasing unemployment.

• “Hard landing” -- if the growth rate goes down to way below 8 %, it would be a recession by China’s standards.

Looking for a Way Out

• The usual strategy will no longer work. Need to shift from export-led growth due to uncertain demand in US, EU & Japan.

• Government cannot afford to undertake more infrastructure investment without worsening the inflation.

• Challenge: to expand domestic demand by promoting domestic consumption.

Mao’s Hometown, 1971