China as a Leader of the World Economy
Gregory C Chow
Princeton University
March 2011
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Outline
• 1. How did China manage to grow so rapidly
• 2. China’s Economic Strength
• 3. Comparing China's market institutions with
US institutions
• 4. China's short-term economic policies
• 5. China’s long-term economic policies
• 6. Role of China as a leader in the world
economy
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1. How did China manage to grow
so rapidly
• Three fundamental factors contributing to rapid
economic growth: high-quality human capital;
functioning market institutions; early stage of
development that enables China to catch up.
• Government policy of gradualism for reform correct,
part of human capital.
• Today it is entrepreneurship that propels China
economic changes and innovations.
• Growth will continue as long as the three
fundamental factors remain, given political stability,
also part of human capital.
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2. China's economic strength
• GDP to exceed US in the current decade
• In 2010 China's GDP equaled to .692 of the US
GDP in purchasing power parity as IMF and
World Bank estimated.
• From 2011 assume US real GDP to grow as
much as 3.5 percent per year, and China's GDP
to grow at 8 percent per year. By 2019 China’s
GDP will exceed the US GDP.
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Other signs of China’s economic
strength
• In technology it has the fastest supercomputer. In
2011 China will file more patents than the US. In the
production of alternative energy, it is the world's
largest producer of wind energy, nuclear energy and
solar panels. Consumer goods produced by China
flood the world market. Chinese tourists are seen
travelling all over the world and making expensive
purchases.
• From mostly receiving foreign investment China has
increased its investment abroad rapidly.
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3. China's market institutions as
compared with the US institutions
• US institutional weaknesses as shown by the housing
bubble and economic downturn.
• US financial institutions allowed to take too much risk
in the trading of derivatives and in packaging home
mortgages as securities for sale.
• US consumers allowed to take too much risk in the
purchase of houses and the use of credit cards.
• China does not have the above institutional
weaknesses because the government’s reform of
financial institutions has been gradual and cautious.
Chinese consumers are more thrifty.
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Institutional differences reflect
cultural differences
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Eager to spend v. thrift being virtuous
Individualism v. collectivism
Government as problem v. government as solution
US entrepreneurs avoid the government. Chinese entrepreneurs
cooperate with the government
Respect for law v. respect for authority; rule by law v. rule by people
US risk taking causing financial crisis is all legal
Chinese illegal behavior hurts many people but does not affect system.
Corruption rampant in China.
Because of cultural differences “China model” might not fit other
countries, as “Washington consensus” may not.
Of course some of China’s experience in economic development is useful.
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Some advantages of the Chinese
government
• Strong government v. democratic government
of the US. In the US democratic government
decisions on economic policies are slow and
often motivated by need to be re-elected.
• US also hindered by the strategy of declaring
war on terrorism. Wastes of human and nonhuman resources.
• Under a one-party system the Chinese
government makes economic policy efficiently
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4. China's short-term economic policies
• Should revaluate the RMB to in order to
control inflation as inflation is caused by rapid
increase in money supply due to trade surplus.
• Should spend some of the accumulated
foreign exchange reserves to increase imports
from the US for consumption and capital
formation as specified by the 12th Five-Year
Plan. This policy will benefit both China and
the US.
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5. China's long-term policies
• China has been extending influences in Asia, Europe, South
America, Africa and even the US.
• Strategies succeed in winning friends by pursuing mutual
interest rather than asking friends to promote its own
objectives (war on terrorism for the US).
• China has increased its investment abroad. Investing
abroad is advantageous for China as Chinese capital seeks a
higher rate of return and China is able to secure control of
basic mineral and energy resources abroad.
• It is also advantageous to the host countries as it promotes
their economic development through the inflow of Chinese
human, financial and physical capital, technology and
development knowhow.
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6. China’s role as a leader in the world
economy
• The Chinese government has cooperated with Chinese
entrepreneurs in investing abroad. It allows competition
among Chinese investors, making the investment process
more efficient.
• In investing overseas and providing foreign aid China can help
developing countries better than the US because it has gained
recent experience in its own economic development while
the US experience is outdated.
• China and the United States are both playing important roles
as leaders. Both have benefited other countries and have
been criticized.
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China’s role as a leader - continued
• China may be asserting its influences too aggressively.
• Its relation with Japan deteriorated in 2010 in the incident of
a Chinese fishing boat colliding with a Japanese navy patrol
boat in territorial water claimed by both countries. Even after
the Japanese government released the captured Chinese
fisherman, the Chinese government demanded an apology
from the Japanese Premier. At about the same time, China
was claiming territorial rights in South China sea against
objections of Vietnam and some other neighbors.
• No matter which parties in such disputes had legitimate
claims, we can observe the more aggressive stand in China's
foreign policies than before.
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China’s role as a leader - continued
• As another sign of its possible aggression China is
building up its military power. China's military
buildup includes jet fighters, aircraft carriers and
anti-ship ballistic missile, called a “carrier-killer” for
its potential to strike the big carriers. Such buildup
will challenge the American military presence in the
Western Pacific.
• US Defense Secretary Robert M. Gates said the
Pentagon was investing in more weapons and
technology in response to China's military presence.
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China’s role as a leader - continued
• Before World War II the US was peace loving and not
expansionary. After World War II, its economic power
increased and US military forces are stationed all
over the world. It has waged wars in Korea, Vietnam
and in recent years in Iraq and Afghanistan.
• In the future, China’s military posture is uncertain.
• As economic power can corrupt any government we
hope that the Chinese government will maintain a
peaceful posture in the future according to its
announced doctrine of peaceful rise.
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Possible topics for Q&A in
Interpreting China’s Economy
Chinese edition 中国经济随笔
Part 1 Economic Development
Entrepreneurship Propelling Economic Changes in China
1. China’s Economic Reform: Retrospect and Prospect
2. Review of Economic Development of China in twenty years
since 1989
3. In what way has the Chinese government changed since the
1980s.
4. Why China’s Economy has grown so rapidly
5. China’s History and its human capital
6. China’s GDP will exceed the US in 2020: a re-estimation of
the result
7. From receiving foreign investment to investing overseas
8. From learning in scientific research and education to
innovations.
9. How will the Chinese society continue to improve.
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Part 2. Economic Analysis
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10. A first lesson in micro-economics: demand for education in China
11.Supply and demand for healthcare in China
12. Is the price of urban housing in China determined by market forces?
13. A lesson in macroeconomics: the determination of consumption and
investment
14. Exchange rate, money supply and the overheating of the Chinese macroeconomy
15. Using Friedman’s theory to explain inflation and overheating of the Chinese
macro-economy
16 . Should China revalue its RMB: email exchanges between Gregory Chow and
Ronald McKinnon
17. How are prices of stocks in China determined?
18. How are the movements of prices of stocks in the Shanghai and New
York Stock Exchanges related?
19. Misunderstanding of China in the Western Press
20. Are Chinese official statistics reliable?
21. Will China have serious inflation?
22. How to put “seek truth from facts” into practice.
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Part 3 Economic Policy
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23. From economic research to social change
24. Has China solved its population problem?
25. The problem of rural poverty in China
26. Why is healthcare in China so expensive?
27. How to solve the problem of income inequality
28. Can we understand corruption using tools of economics?
29. How to improve the regulation of pollution in China
30. Two Successful experiences in solving energy and
environment problems in China
• 31. A Proposal to limit the emission of CO2 through the UN
• Part 4 About the US Economy
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Thank you
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China as a Leader of the World Economy