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Chinese Economy at a
Crossroads
Spring 2007
华东师范大学（上海）
Washington & Lee University
Michael Smitka
华李大学经济教授
© Michael Smitka 2007
Preamble
• Starvation in living memory
– Staggering economic mismanagement under Mao
• Extreme decentralization
• Extreme politicization
– Reforms 1978- Deng Xiaoping, who brought
stability (lots of details of what / when / how)
• Now only shards of the old system
• SOEs (state owned enterprises)
• Rural China (esp. land rights)
• China is now a fully modern economy
• With lots of problems on the appropriate govt role
© Michael Smitka 2007
General indicators
•
– Population (in billions)
1990
2001
1.1
1.3
40% urban
– Gross national income (US$ trillion)
0.4
1.1
320
900
78.3
2.1
68.9
68
85.8
1.9
70.5
300+
• now 1.4
– GNI per capita (US$)
• now $1,100 before price corrections
–
–
–
–
Adult literacy rate (% ≥ age 15)
Total fertility rate (births per woman)
Life expectancy at birth (years)
Cell phones per 1,000 (2000 vs 2005)
© Michael Smitka 2007
The modern China
• Shenzhen golden skyscrapers
© Michael Smitka 2007
Shopping
• Walmart sign
© Michael Smitka 2007
The Fast Life
• KFC and McDonald's in Shenzhen
© Michael Smitka 2007
What does the future hold for her?
• Little girl on outing with McDonald's kids
meal (Xiamen)
The urban girl
© Michael Smitka 2007
On her way to an outing
• View of downtown Xiamen
© Michael Smitka 2007
Xiamen, Fujian 福建省厦门市
Or leisurely dining
• Family eating at outdoor plaza,
Kunming
© Michael Smitka 2007
In an outdoor plaza
• Outdoor plaza, kunming
© Michael Smitka 2007
Or the backbreaking work of
peasant life
• Woman lugging fertilizer, Baisha Village
(Lijiang), Yunnan
© Michael Smitka 2007
at least for women…
With makeshift recreation
• Playing mahjong, Baisha, Lijiang,
Yunnan
© Michael Smitka 2007
And lonely vegetable sellers
• Vegetable sellers, mud street, Baisha,
Lijiang, Yunnan
© Michael Smitka 2007
But even sleepy mountain
towns
• Tibetan men squatting on street corner,
Shangrila, Yunnan
© Michael Smitka 2007
With one street
• Main street (only street!), Shangrila
© Michael Smitka 2007
• Vegetable market
• Shangrila, yunnan
© Michael Smitka 2007
may have
a decent
market
• ditto
© Michael Smitka 2007
With treats for kids
• Kids eating treats on skewers, ditto
© Michael Smitka 2007
Though some peasants make
out OK and can afford a foyer
• Peasant mansion, Lin Village, Xiamen
© Michael Smitka 2007
So what is china's place in the
world?
• Geography
– You just saw geography-based contrasts
• Trade
• Economy
– What does 11% growth mean?
• For a formerly "socialist" society?
© Michael Smitka 2007
If China is the
place to watch
in the 21st century
Who are its
neighbors?
© Michael Smitka 2007
China in Asia Factoids
• Chinese tourism to Japan and Korea will
surpass 1 million visitors in CY2007
– Over 1 mil for Singapore and Thailand in CY2006
• We represent a flow in the opposite direction
– Overseas tourism to an economist is an import of
services; we're adding to the US trade deficit
– But China runs a net trade deficit in goods and
services with much of Asia
• US-China trade is not representative!
© Michael Smitka 2007
Japan's #1 trading partner
FY2006 (April 2006-March 2007)
Exports
Imports
Total
Net
Auto parts
China-Japan
US-Japan
Y11.3 tril
Y14.1 tril
Y25.4 tril
-2.8 tril
Y17.1 tril
Y 8.0 tril
Y25.1 tril
+9.1 tril
X 0.4 tril
X 1.0 tril
M 0.1 tril
M <0.1 tril
China is #1 foreign source of Japanese auto parts, with values
rising rapidly. However, what will happen to exports as local
assembly in China by Toyota, Honda and Nissan rise?
© Michael Smitka 2007
Yen vs Yuan: a 20+% appreciation
© Michael Smitka 2007
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© Michael Smitka 2007
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Economic overview
• GDP
===>
– Growth
– composition
• Inflation
– Consumers
– Farm prices (good for farmers!)
• Consumption
– Goods and services
– Savings
© Michael Smitka 2007
"Rule of 72"
A single number (GDP) captures only part of the story
But it's still a useful reference point
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© Michael Smitka 2007
QuickTime™ and a
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© Michael Smitka 2007
QuickTime™ and a
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© Michael Smitka 2007
QuickTime™ and a
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© Michael Smitka 2007
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Issues (2)
• Macroeconomic control
– Immature financial system
– Local government - bank ties
• Regionalization: national market
– Legacy of extreme decentralization
• Compounded by sheer size
– Blatant local protection ended
• No more toll barriers at provincial borders
– Transport infrastructure and sheer distance
© Michael Smitka 2007
Issues (2)
• Externalities
– Negative
• Water use
• Pollution
– Positive
• Urbanization
• Education
• Health care
© Michael Smitka 2007
Issues (3)
• Urban political economy
– Government has "delivered the goods"
• Links between politics, other areas still muddy
– Results in inefficiency
• But political careers competitive
– Increased rule of law
• Irregularities but can no longer be blatant
• Land plays require that development works
© Michael Smitka 2007
Issues (4)
• Rural political economy
– Poor / spotty delivery of the fruits of growth
– Poorly enforced property rights
• In many places no political voice
• Muddy rules for landholding exacerbate
• Inequality
– Huge regional differences
– Growing interregional differences
• Good locations vs bad
• migrants vs locals
© Michael Smitka 2007
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Long-run prospectus
supply side
• Demographics still favorable
– Working age population will stop growing by 2015
• But plenty of rural would-be migrants
• Universal literacy among the young
• Investment chaotic
– But high with high savings
• At 10% pa growth, can tolerate inefficiency
– Real darwinian process of corporate selection
• Technology improving rapidly
– Lots of engineers, unlike US and Japan
– Lots of entrepreneurs, too
© Michael Smitka 2007
Long-run prospects
demand side
• Trying to "rebalance"
– Less trade more consumption
– Less investment more consumption
– But strong incentives to save
• Uncertainties about pensions, health care
• Can no longer rely on children
• How will government role evolve?
– Underfunded public services, esp rural
– Underfunded social welfare
• How to provide for farmers? Price supports & protection
everywhere else (Korea, Japan, US, EU)
© Michael Smitka 2007
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Long-run prospects
factor markets
• Labor markets fluid
– But can migrants & peasants accumulate skills?
• Will their children have access to the urban elite system?
– The US does that poorly
• Capital markets too fluid
– Weak systems amidst huge shifts in economy
• Need credit analysis in banks, accounting in firms
– Stock market may be of modest importance
• Caveat emptor - firms need banks, but what's wrong with
fleecing shareholders, esp for "state owned enterprises"?
– US execs do it all the time, why shouldn't Chinese!
© Michael Smitka 2007
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Risks
•
•
•
•
Political transition
Inflation
Environmental collapse esp agriculture
Financial crises of some sort likely
• As economy matures imbalances between
savings and investment will worsen
• Compounded by structural shifts in industries
and firms that grow and those that don't
© Michael Smitka 2007
Not the end
But a glimpse at the future
© Michael Smitka 2007
Addenda: Time Permitting
• Geopolitics
– Competition for oil supplies
• Also aluminum, steel scrap, iron ore….
– Chinese companies active in these fields
• With apparent central government support
– Perception in US that need to control
Persian Gulf
© Michael Smitka 2007
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Arguments are flawed
• Neither logic nor empirical foundation
– Previous embargoes failed
– Price fixing failed
• Nor operationally possible
– Over the centuried the following have all tried and
failed to control the Persian Gulf:
• Greeks, Iranians, Turks, British, Russians and Americans
• Why should China be different?
• For example:
© Michael Smitka 2007
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US-Canada: +3,570,000 b/d
If there is a villain, why look at China?
© Michael Smitka 2007
China: +3,064,000 b/d
Trade
• Protectionism in the US
– But until recently, Japan ran a trade surplus with
China
• Korea still does
• As does the rest of Asia
– More issues on the US side than China's
• And where do my turtlenecks come from?
– Cambodia!!
– China is now priced out of key markets
• So demagoguery -- hitting China won't help US trade
© Michael Smitka 2007
Rural Reforms
• In 2007, rural tuition free for compulsory
education (= 150 million children!)
• Rural co-operative health care experiment
– Test in 2007 in about half of China
– Extend thereafter
• But starting expenditures only Y20 per person
• Minimum land sale prices & usage fees
– Try to limit confiscatory policies & abuses
© Michael Smitka 2007
SOE, other reforms
• SOEs must now pay dividends
– Better macro control and less waste
• Lots of environmental reforms
– "full cost pricing" for coal (2007 in one province)
– Electric power plants
• Problems remain with local government
– Electric power good, central can control & monitor
– Sewage treatment bad, local emissions not…yet?
© Michael Smitka 2007
China: Millennium Development
Goals
• 2015 target = halve 1990 $1 a day poverty and
malnutrition rates
• 2005 target = education ratio to 100%
• 2015 target = reduce 1990 under 5 mortality by 66%
• 2015 target = reduce 1990 maternal mortality by 75%
• 2015 target = begin to reverse AIDS, other diseases
• various others
© Michael Smitka 2007
1 Eradicate extreme poverty and hunger
1990
•
•
•
•
•
2001
Population below US$1 a day
33.0 16.1
Poverty gap at US$1 a day
8.9
3.9
Share of poorest 20 percent
...
4.7
Prevalence of child malnutrition
17.4 10.0
Share of population below minimum level of dietary
energy consumption
16.0 9.0
© Michael Smitka 2007
2 Achieve universal primary education 2015
target = net enrollment to 100%
1990
2001
• Net primary enrollment ratio (% of relevant age
group)
97.4 93.2
• % of cohort reaching grade 5
86.0 (93.8)
• Youth literacy rate (ages 15-24)
95.3 97.9
© Michael Smitka 2007
3 Promote gender equality
•
1990
2001
• Ratio of girls to boys in primary and secondary
education
87.0 97.6
• Ratio of young literate females to males (ages 15-24)
95.5 98.1
• Share of women employed in the nonagricultural
sector
37.7 39.2
• Proportion of seats held by women in national
parliament
21.0 22.0
© Michael Smitka 2007
4 Reduce child mortality
•
1990
2001
• Under 5 mortality rate (per 1,000)
• Infant mortality rate
(per 1,000 live births)
• Immunization, measles
49.0
39.0
38.0
98.0
31.0
84.0
© Michael Smitka 2007
5 Improve maternal health
1990
• Births attended by health staff
2001
50.3% ... 70.0
• Now 97%
• Contraceptive prevalence
(women ages15-49)
84.6
87.0
• Maternal mortality ratio (per 100,000 live births)
• no current data, at 60 in 1995 (almost 0 in US)
© Michael Smitka 2007
6 Combat HIV/AIDS, malaria, other diseases
1990
•
•
•
•
2001
Prevalence of HIV, female (ages15-24) est 0.1%??
Number orphaned by HIV/AIDS
76000
Tuberculosis (per 100,000 people)
116.5 104.4
Tuberculosis cases detected under DOTS
14.9 now 42.9
© Michael Smitka 2007
7 Ensure environmental sustainability
•
•
•
•
•
•
•
•
Forest area (% of total land area)
Nationally protected areas (% of total land area)
GDP per unit of energy (PPP $/kg oil equivalent)
CO2 emissions (metric tons per capita)
Access to an improved water (% of population)
Access to improved sanitation (% of population)
1990
15.6
6.4
1.7
2.1
70.0
23.0
2001
17.0
7.8
4.7
2.3
75.0
38.0
Halve, by 2015, the proportion of people without sustainable access to
safe drinking water. By 2020, to have achieved a significant
improvement in the lives of at least 100 million slum dwellers.
© Michael Smitka 2007
8 Develop a Global Partnership for Development
1990
2001
• Youth unemployment (15-24)
2.5
3.1
• Fixed and mobile telephones
(per 1,000 people)
5.9
247.7
now over 500
• Personal computers
(per 1,000 people)
0.4
19.0
now double
© Michael Smitka 2007