The PRC Economy:
Short-run and long-run challengesShort-run and long-run challenges
Changyong RheeChief Economist
Asian Development Bank
AsiaEurope Economic Forum
9–10 December 2011
The views expressed in this document are those of the author and do not necessarily
reflect the views and policies of the Asian Development Bank, or its Board of Governors,
or the governments they represent.1
Outline
• The PRC in the global economy
• Short-term issues
• Long-term challenges
2
The PRC in the global economy
3
The PRC has become a major global player
• Second largest economy in the world
• World’s largest current account surplus holder
• Biggest holder of foreign currency reserves
• World’s largest exporter• World’s largest exporter
• Second largest importer
• Important capital exporter
• Largest energy consumer
• Culture, Sports, Science
4
Short-term issues
5
Growth moderation
8.1
9.6 11.3
11.9
10.3
9.6
9.8
9.7
9.5
9.1
8
10
12
14
PRC Quarterly GDP Growth, Q1 2009 – Q3 2011 (%)
6
6.5
8.19.6
0
2
4
6
8
Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11
Source: National Bureau of Statistics.
Slowdown in export and import growth
60
80
100
Exports Imports
PRC Export and Import Growth, Oct 2009 – Sep 2011 (annual rate in %)
7
-20
0
20
40
60
Source: General Administration of Customs.
Real estate market
21,000
21,500
22,000
22,500
23,000
Real estate average sales
price, Beijing (RMB/sqm)
22,500
23,000
23,500
24,000
Real estate average sales
price, Shanghai (RMB/sqm)
17,500
18,000
18,500
19,000
19,500
20,000
20,500
21,000
Mar-11 May-11 Jul-11 Sep-11
8
20,000
20,500
21,000
21,500
22,000
22,500
Jan-11 Apr-11 Jul-11 Oct-11
Current situation in Asia
• India’s growth in Jul–Sep weakened on account of high inflation, rising interest rates, and uncertainties in global capital markets
• ASEAN economies showing resilience, except Thailand which was ravaged by severe flooding; Viet Nam’s inflation continues to be highThailand which was ravaged by severe flooding; Viet Nam’s inflation continues to be high
• Slower export growth in East Asian economies as global economy falters
• Oil exporters concerned about fall in commodity prices as global demand slows
9
Implications
• Current growth moderation manifest in Asia but not critical
– Unlike declines of 3.5–4.0 percentage points in 2008/09
– May be a good sign of sustainability and inclusive growth
• But Asia should not be complacent
– Global uncertainties are growing, and decisions by European leaders on Friday are critical
– If conditions worsen, Asia is unlikely to achieve a V-shaped recovery as it did in 2008/09 � magnitude of current shock may be smaller but its duration longer2008/09 � magnitude of current shock may be smaller but its duration longer
� Credit constraints could limit foreign funding
� Fiscal space is limited, so may not be able to provide same extent of stimulus
� Trade financing could be restricted
– Our analysis suggests that impact on Asia’s growth is likely to be smaller in 2012 than in 2008/09
� But growth is relatively slower now than in 2007 so the projected decline could be significant
• Time to check macroeconomic and financial conditions
10
Long-term challenges
11
1. Economic rebalancing
12
Growth has relied heavily on trade and
investment
5.1 4.4 3.1 2.7 3.0 2.9 3.2 2.6 3.5 4.0 3.1 3.5
1.4 1.71.3 1.5 1.0 0.7 0.9 1.8
1.6 1.61.2 0.8
3.4 3.95.3
4.2 4.4 6.4 5.6 4.55.7
6.2
4.8
9.0
-0.1 0.0
2.5
-0.3
3.3 0.5 0.64.5
4.64.3
2.7
-0.4
0.5
-1.4
0.2
-2.6-0.4 -0.1
-2.1 -2.7 -2.0 -2.3
2.0
0
5
10
15
20
-6.2-0.4
-1.4 -2.6 -2.1 -2.7 -2.0 -2.3
-10
-5
1981-
1990
1991-
2000
2001-
2007
2001 2002 2003 2004 2005 2006 2007 2008 2009
Private consumption Government consumption
Investment Net exports
Statistical discrepancy GDP
13
Source: Staff calculations from WB, World Development Indicators.
Rebalancing via investment
• Infrastructure investment used more as a rebalancing tool rather than consumption
– Investment ratio in 2012 projected at 54.2%, compared to 48.2% in 2010
• Productivity of these investments in the future is an issuean issue
– Competition across provinces causing concerns about inefficient infrastructure investment
– If investments are inefficient, it will raise the fiscal burden in the future
– Coordination of fiscal policy between central and provincial governments needs to be enhanced
14
Alternative sources of growth and
employment?
• As manufacturing productivity increases, labor
demand will decline; where can we find other
job opportunities?
• Services sector?
– Low productivity growth
– Often highly protected from competition
• How can we enhance productivity and job
opportunities in services?
15
2. Growing inequality
16
Inequality is rising…
20
25
30
35
40
Gini coefficient
17
0
5
10
15
20
1980 1985 1990 1995 2000 2005
India-Rural India-Urban PRC-Rural PRC-Urban
Source: PovCalNet Database, accessed 10 October 2011.
…partly due to rapid urbanization
25
30
35
40
45
50
Urban population (% of total)
0
5
10
15
20
25
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
India PRC
18
Source: World Bank, World Development Indicators, accessed 13 October 2011.
63.1
67.9
71.6
81.9
85.9
64.3
74.2
68.5
74.3
80.1
88.3
PRC
Pakistan
(1990-2008)
Indonesia
(1992-2008)
Nepal
(1991-2001)
India
(1991-2008)
Bangladesh
(1991-2005)
Percentage of Informal Workers to Total Employment
Co
un
try
(ye
ars
)
Informal employment remains large
10.0
10.7
21.9
24.8
43.5
54.2
58.9
8.1
10.2
31.4
32.6
53.1
70.3
64.3
0.0 25.0 50.0 75.0 100.0
Singapore
(1991-2008)
Hong Kong, China
(1990-2008)
Malaysia
(1990-2008)
Korea, Rep. of
(1990-2008)
Philippines
(1990-2008)
Thailand
(1990-2008)
PRC
(1995-2008)
Start EndSource: ILO LABORSTA
Co
un
try
(ye
ars
)
19
Change in poverty threshold
• Raised from 1,196 RMB to 2,300 RMB
• Significance:
– Additional 102 million rural poor qualify for social
welfare assistance
– Help boost domestic consumption
– New poverty threshold estimated to be higher
(based on rural PPP derived from PovCal Net data)
than the $1.25/day international poverty line
20
3. Industrial policy
21
Saudi Arabia
22
Source: Hausmann et al. (2011)
Libya
23
Source: Hausmann et al. (2011)
Republic of Korea
24
Source: Hausmann et al. (2011)
People’s Republic of China
25
Source: Hausmann et al. (2011)
Industrial upgrading
• How can we be sure that the effectiveness of industrial policy will continue as the economy develops further?
– choosing winners / fiscal burdens
• How can government recruit the best (or at • How can government recruit the best (or at least good) people in the face of growing opportunities in the private sector?
• How can governments avoid an imbalance between existing government-led economic structure and increasing market power?
26
Pros and cons of industrial policy
• Pros
– Encourage structural transformation
– Development is an increase not only in the quantity of goods and services produced, but also their complexity
(Hidalgo & Hausmann, 2009, “Building blocks of economic complexity” Felipe et al., 2012, “Product complexity and economic development”)
• ConsCons
– No guarantee that governments can select winners
– May not have capacities (knowledge/expertise)
– May encourage rent-seeking, corruption
– Firms may become dependent on support and not become competitive
– Unfair income distribution
– Trade conflicts
27
Indirect industrial policy
• How can government avoid trade frictions/
moral hazard and promote risk sharing?- Indirect Industrial Policy through capital market
* On-lending policies of EIF, KfW, etc.
28
KfW
Private BankCapital Markets
(AAA)SMEs
Private Bank
Non-banks
SMEs
SMEs
SMEs
SMEs
SMEsGovernment support
4. Financial market development
29
Asian financial markets weathered the
subprime crisis well• Visible impact through equity and offshore bond
markets in the short-run
– reversal in capital flows, esp. short-term, and increased volatility in currencies
• Yet, resilient banking sector• Yet, resilient banking sector
�Is this a commendable thing? May be due to Asia’s relatively backward & non-globalized financial markets
�“If you don’t know how to fly, you won’t have plane crashes”
30
Yet, the global financial crisis tainted
capital market development initiatives
• After subprime crisis, capital market
development was treated negatively
• Securitization, derivatives, and investment
banks became bad words
�New global regulatory framework from
market-based to bank-based systems
� Is this the right lesson for Asia where the
imperative of financial market development
remains an important issue?
31
But developing capital market is important for
middle-income countries in Asia
• Continuation of bank-dominated structure will
raise fiscal risks
– Even western markets confirmed that every
major bank has implicit government backingmajor bank has implicit government backing
• To avoid middle income trap, need to have an
efficient mechanism for risk allocation given
increasing complexity of economic structures
• Can government do the job? Effectiveness of
industrial policy in doubt
32
Capital market development is not easy
• Capital market is a network industry with
strong increasing returns to scale
– as late comer, hard to acquire market share
• Bottlenecks include lack of “track record” and • Bottlenecks include lack of “track record” and
“financial knowledge”
• Lack of capital market infrastructure &
regulatory experience is a severe bottleneck
33
Prospects for capital market development
in Asia are bright• Large savings pool provide opportunities for
financial institutions to support aging populations
• Privatization trend will provide opportunities for investment banks through corporate restructuring and M&Asrestructuring and M&As
• Asia’s rapidly growing overseas investment is providing huge business to international firms
���� How to adapt new global financial regulatory framework to Asian circumstances in order not to repeat the same mistakes but to maintain financial market development!
34
5. Internationalization
of the renminbiof the renminbi
35
RMB trade settlement scheme
PBoC HKMA
Onshore clearing bank Offshore clearing bankRMB
deposit
Individual
customers
[PRC] [HKG]currency
swap
RMB supply
settlement settlement
36
Onshore authorized
institutions
Offshore authorized
institutions
Export
companies
Import
companies
Import
companies
Export
companies
PRC Gov’t
QDII
QFII
deposit
market Designated business
customers
RMB-denominated
bond markets
settlement
settlement
RMB
goods and services
goods and services
RMB
RMB bond issuance
asset management
settlement
settlement
settlement
Use of RMB has rapidly increased
177.2
120
140
160
180
200
RMB bn
RMB-denominated bond issuance
300
450
600
750
3000
3500
4000
RMB bnHK$ bn
Outstanding deposits in Hong
Kong by currency
10.0 11.016.0
41.4
0
20
40
60
80
100
120
2007 2008 2009 2010 Nov-11
37
As of end-September, RMB deposits in Hong Kong totalled RMB 622.2bn,
which accounted for 20.5% of foreign currency deposits and 10.4% of
total deposits maintained with authorized institutions.
0
150
300
2000
2500
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
HK$ (left scale)
Other foreign currencies (left scale)
RMB (right scale)
Source: HKMA Monthly Statistical Bulletin.
Source: Bloomberg.
Lessons from the RMB trade settlement
scheme• Infrastructure can generate demand and liquidity!
– “Dynamic” not “static” comparative advantage
– Don’t blame high transaction costs. It is just an evidence that Asia has not invested on financial infrastructure yet.
• Full capital market liberalization or full financial market deregulation may not be a prerequisite for internationalizing currencies.
– Partial liberalization or deregulation could be a practical approach for reforming the international monetary system!
• Better to have payments and securities settlement system together to • Better to have payments and securities settlement system together to secure sufficient business.
– Benefiting from RTGS / CMU in Hong Kong
– Proliferation of “dim sum” bonds, RMB CDs, synthetic offshore bonds
* Q1: Can we introduce a regional trade settlement scheme in Asia which will significantly reduce dollar dependence?
* Q2: Is there a (market) failure? Why do we need the public sector to build financial infrastructure? (central bank involvement, 3rd Time Zone Problem)
38
Thank you
Economics and Research Department
Asian Development Bank
6 ADB Avenue, Mandaluyong City6 ADB Avenue, Mandaluyong City
1550 Philippines
www.adb.org
39
PRC as second largest economy
United States
20%
Share in world GDP, 2010
(in current PPP terms)
20%
PRC
14%
Japan
6%India
5%
Germany
4%Russia
3%
United Kingdom
3%
Brazil
3%
France
3%
Italy
2%
Rest of the world
37%
40Source: IMF, World Economic Outlook April 2011. back
PRC as top current account and foreign
exchange reserves holder
2,847
1,036
433
432
PRC
Japan
Russian Fed.
Saudi Arabia
Korea, Rep. of
Top 10 foreign exchange
reserves holders, 2010
306
195
176
75
PRC
Japan
Germany
Switzerland
Top 10 current account
surplus holders, 2010
41
287
281
269
268
224
217
0 2500 5000
Korea, Rep. of
Brazil
Hong Kong, China
India
Singapore
Switzerland
$ billion
75
71
56
53
49
42
41
0 100 200 300 400
Switzerland
Russian Fed.
Netherlands
Norway
Singapore
Kuwait
Taipei,China
$ billion
Source: IMF, WEO April 2011. Source: IMF, IFS.
back
PRC as major trader
1,968
1,394
1,054
694
595
United States
PRC
Germany
Japan
France
Top 10 importers, 2010
1,580
1,278
1,206
772
568
PRC
United States
Germany
Japan
Netherlands
Top 10 exporters, 2010
42
595
538
513
476
434
430
0 1000 2000
France
United Kingdom
Netherlands
Italy
Hong Kong, China
Canada
$ billion
568
510
462
441
431
403
0 500 1000 1500 2000
Netherlands
France
Korea, Rep. of
Italy
Russian Fed.
Belgium
$ billion
Source: IMF, Direction of Trade Statistics.
back
PRC as top energy consumer
8,333
6,145
1,707
1,700
PRC
US
India
Russian Fed.
Japan
Top 10 carbon dioxide
emitters, 2010
2,432
2,286
691
524
PRC
US
Russian Fed.
India
Top 10 energy consumers,
2010
43
1,308
828
716
605
562
558
0 5000 10000
Japan
Germany
Korea, Rep. of
Canada
Saudi Arabia
Iran
Million tonnes
524
501
319
317
255
254
252
0 1000 2000 3000
India
Japan
Germany
Canada
Korea, Rep. of
Brazil
France
Million tonnes oil equiv.
Source: BP, Statistical Review of World Energy 2011.
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