The Prospects for East Asian and Chinese Economies Lawrence J. Lau 刘遵义

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The Prospects for
East Asian and
Chinese Economies
Lawrence J. Lau 刘遵义
Ralph and Claire Landau Professor of Economics, The Chinese Univ. of Hong Kong
and
Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University
RIETI World KLEMS SYMPOSIUM
“GROWTH STRATEGY AFTER THE WORLD FINANCIAL CRISIS”
Tokyo, 20th May 2014
Tel: (852)3550-7070; Fax: (852)2104-6938
Email: [email protected]; WebPages: www.igef.cuhk.edu.hk/ljl
*All opinions expressed herein are the author’s own and do not necessarily reflect the views of
any of the organisations with which the author is affiliated.
Outline
 The
Shifting Centre of Gravity of the World Economy and
the “Partial De-Coupling Hypothesis”
 The Advantages and Disadvantages of East Asian
Economies
 The
 The
 The
 The
 The
 The
 The
high saving rate
human capital
low government budget deficit and public debt
rising middle class
low innovative capacity
relative ineffectiveness of governance
prospects for the Chinese economy
 Favourable economic fundamentals
 Demand-constrained rather than supply-constrained output
 Is a hard landing likely? (Problems of excess capacity, local
Lawrence
J. Lau
government debt and shadow
banking)
2
The Shifting Economic Centre of Gravity
 There
has been a gradual shift in the centre of gravity of the
World economy from the developed economies of North
America and Europe to the economies of East Asia over the
past three and a half decades.
 The East Asian economies have been steadily coming into
their own and becoming less dependent on the developed
economies, enabling a “partial de-coupling” of the East
Asian economies from the developed economies of the
West.
 The fact that the Chinese economy could continue to grow,
albeit at a somewhat lower rate, even as the U.S. and
European economies were mired in recession, lends
credence as well as empirical support to the “Partial De3
Coupling Hypothesis”. Lawrence J. Lau
The Shifting Economic Centre of Gravity:
GDP
 In
1970, the United States and Western Europe together
accounted for almost 60% of World GDP. By comparison,
East Asia (defined as the 10 Association of Southeast Asian
Nations (ASEAN)--Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore, Thailand, and
Vietnam--+ 3 (China, Japan and the Republic of Korea))
accounted for approximately 10% of World GDP.
 By 2012, the share of United States and Western Europe in
World GDP has declined to approximately 45% whereas the
share of East Asia has risen to 25%.
Lawrence J. Lau
4
The Distribution of World GDP, 1970 and
2012, US$
The Distribution of World GDP in 2012
The Distribution of World GDP in 1970
Mainland China
Cambodia
0.02%
Mainland China
3.2%
Cambodia
Hong Kong
0.1%
11.6%
0.0%
Hong Kong
Brunei
0.01%
Indonesia
0.3%
Korea
0.3%
Japan
7.2%
Malaysia
0.1%
Philippines
0.2%
Singapore
0.1%
Thailand
0.2%
Taiwan, China
0.2%
Other Economies
31.1%
0.4%
Brunei
Indonesia
1.2%
0.0%
Lao
Korea
0.01%
Macao
1.6%
0.1%
Malaysia
Japan
Other Economies
0.4%
Philippines
8.3%
0.3%
Singapore
35.5%
United States
35.4%
0.4%
Thailand
United States
Euro Zone
21.5%
0.5%
Vietnam
21.8%
Euro Zone
0.2%
17.0%
Taiwan, China
0.7%
5
The Shares of East Asia, China, Japan and
South Korea in World GDP, 1960-present
The Shares of East Asia, China, Japan and South Korea in World GDP, 1960-present
26
24
East Asian Economies
Mainland China
22
20
Japan
Korea
18
14
12
10
8
6
4
2
0
6
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Percent
16
The Shifting Economic Centre of Gravity:
International Trade
 In
1970, the United States and Western Europe together
accounted for over 75% of World trade. By comparison,
East Asia accounted for approximately 10% of World trade.
 By 2012, the share of United States and Western Europe in
World trade has declined to below 40% whereas the share
of East Asia has risen to almost 30%.
Lawrence J. Lau
7
The Distribution of Total International Trade in
Goods and Services, 1970 and 2012
The Distribution of Total International Trade in Goods and Services in 1970
Mainland China
0.6%
Cambodia
0.0%
Brunei
0.0%
Indonesia
Hong Kong SAR0.4%
0.9%
Korea
0.4%
Japan
5.4%
Euro Zone
43.3%
The Distribution of Total International Trade in Goods and Services in 2012
Lao Macao
0.0% 0.0%
Malaysia
0.4%
Philippines
0.4%
Singapore
0.7%
Thailand
0.3%
Vietnam
0.0%
Taiwan, China
0.0%
Euro Zone
24.3%
Hong Kong
Cambodia
SAR
0.0%
Mainland
China
2.6%
Brunei
9.5%
Korea
0.0%
2.8% Lao
0.0%
Indonesia
Macao
1.0%
0.2%
Japan
4.2%
Philippines
0.4%
Singapore
Thailand 2.3%
1.2%
Other Economies
14.9%
United States
11.0%
United States
32.3%
Malaysia
1.1%
Other Economies
37.3%
Vietnam
0.5%
Taiwan, China
1.5%
8
The Rising Share of East Asian Trade in
Total World Trade, 1960-present
The Rising Share of East Asian Trade in Total World Trade, 1960-present
30
25
Percent
20
15
Share of World Exports
10
Share of World Imports
Share of Total World Trade
5
Lawrence J. Lau
9
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
The Share of Chinese Trade in Total World
Trade, 1950-present
The Share of Chinese Trade in Total World Trade, 1950-present
13
12
The ratio of Chinese Exports to World Exports
11
The ratio of Chinese Imports to World Imports
10
The ratio of Chinese Total Trade to World Total Trade
9
8
Percent
7
6
5
4
3
2
1
Lawrence J. Lau
10
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
The Partial De-Coupling Hypothesis
A
particularly interesting development is the rise in intraEast Asian international trade. The share of East Asian
exports destined for East Asia has risen to over 50% in the
past decade. This is a sea-change compared to 30 years ago
when most of the East Asian exports was destined for either
the United States or Western Europe.
 Similarly, the share of East Asian imports originated from
East Asia has remained around 45%.
11
Jan-98
Apr-98
Jul-98
Oct-98
Jan-99
Apr-99
Jul-99
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
%
The Share of East Asian Exports
Destined for East Asia
55
The Share of East Asian Exports Destined for East Asia
53
51
49
47
45
43
41
39
12
Jan-98
Apr-98
Jul-98
Oct-98
Jan-99
Apr-99
Jul-99
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
%
The Share of East Asian Imports
Originated from East Asia
The Share of East Asian Imports Originated from East Asia
58
56
54
52
50
48
46
44
42
Lawrence J. Lau, The Chinese University of Hong Kong
13
The Partial De-Coupling Hypothesis
 Any
doubt that the Chinese economy can be partially decoupled from the World economy should be resolved by an
examination of the following three charts on the rates of
growth of exports, imports and real GDP of East Asian
economies. Even though Chinese exports and imports
fluctuate like those of all the other East Asian economies,
the rate of growth of real GDP of the Chinese economy has
been relatively stable compared to those of the other East
Asian economies.
14
Annualized Percent per annum
-10
-40
-50
-60
Q1 1997
Q2 1997
Q3 1997
Q4 1997
Q1 1998
Q2 1998
Q3 1998
Q4 1998
Q1 1999
Q2 1999
Q3 1999
Q4 1999
Q1 2000
Q2 2000
Q3 2000
Q4 2000
Q1 2001
Q2 2001
Q3 2001
Q4 2001
Q1 2002
Q2 2002
Q3 2002
Q4 2002
Q1 2003
Q2 2003
Q3 2003
Q4 2003
Q1 2004
Q2 2004
Q3 2004
Q4 2004
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Quarterly Rates of Growth of Exports of
Goods: Selected East Asian Economies
70
Year-over-Year Quarterly Rates of Growth of Exports of Goods in US$ (Percent)
60
50
40
30
20
10
0
-20
-30
China,P.R.:Hong Kong
Indonesia
Malaysia
Singapore
China,P.R.: Mainland
Taiwan Prov.of China
India
Korea
Philippines
Thailand
Japan
15
Annualized Percent per annum
-10
-40
-50
-60
Q1 1997
Q2 1997
Q3 1997
Q4 1997
Q1 1998
Q2 1998
Q3 1998
Q4 1998
Q1 1999
Q2 1999
Q3 1999
Q4 1999
Q1 2000
Q2 2000
Q3 2000
Q4 2000
Q1 2001
Q2 2001
Q3 2001
Q4 2001
Q1 2002
Q2 2002
Q3 2002
Q4 2002
Q1 2003
Q2 2003
Q3 2003
Q4 2003
Q1 2004
Q2 2004
Q3 2004
Q4 2004
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Quarterly Rates of Growth of Imports of
Goods: Selected East Asian Economies
90
Year-over-Year Quarterly Rates of Growth of Imports of Goods in US$ (Percent)
80
70
60
50
40
30
20
10
0
-20
-30
China,P.R.:Hong Kong
Indonesia
Malaysia
Singapore
China,P.R.: Mainland
Taiwan Prov.of China
India
Korea
Philippines
Thailand
Japan
16
Annualized Rates in Percent
-5
-15
-20
Q1 1994
Q2 1994
Q3 1994
Q4 1994
Q1 1995
Q2 1995
Q3 1995
Q4 1995
Q1 1996
Q2 1996
Q3 1996
Q4 1996
Q1 1997
Q2 1997
Q3 1997
Q4 1997
Q1 1998
Q2 1998
Q3 1998
Q4 1998
Q1 1999
Q2 1999
Q3 1999
Q4 1999
Q1 2000
Q2 2000
Q3 2000
Q4 2000
Q1 2001
Q2 2001
Q3 2001
Q4 2001
Q1 2002
Q2 2002
Q3 2002
Q4 2002
Q1 2003
Q2 2003
Q3 2003
Q4 2003
Q1 2004
Q2 2004
Q3 2004
Q4 2004
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Quarterly Rates of Growth of Real GDP,
Y-o-Y: Selected East Asian Economies
Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies
20
15
10
5
0
-10
China,P.R.:Hong Kong
Indonesia
Malaysia
Singapore
China,P.R.: Mainland
Taiwan Prov.of China
India
Korea
Philippines
Thailand
Japan
17
The East Asian Advantages and
Disadvantages: High Saving Rates
 Economic
growth in East Asia has been under-pinned by a
high domestic saving rate (see the following chart), with the
Philippines being a notable exception.
 A high domestic saving rate means, among other things, that
most of the East Asian economies can finance all of their
domestic investment needs from their own domestic savings
alone. Thus, they can achieve a high rate of growth of their
tangible capital stocks without having to depend on the
more fickle foreign capital inflows (including foreign
portfolio investment, foreign direct investment, foreign
loans or foreign aid).
18
50
0
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
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1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Percent
Savings Rates of Selected Asian
Economies (1952-present)
Savings Rates of Selected East Asian Economies
60
China, Mainland
India
Japan
Malaysia
Singapore
Thailand
Hong Kong
Indonesia
Korea
Philippines
Taiwan
40
30
20
10
Lawrence J. Lau
19
The East Asian Advantages and
Disadvantages: Human Capital
 The
principal sources of economic growth of East Asian
economies will gradually evolve from the growth of
tangible inputs such as tangible capital and labour, to the
growth of intangible inputs such as human capital, R&D
capital, and reputational capital (branding and goodwill).
This is true of the experience of developed economies such
as the U.S.
 The United States and Japan are the clear leaders in human
capital, measured in terms of the average number of years of
schooling per person in the working-age population. South
Korea has been catching up fast. Most of the other East
Asian economies also have quite rapidly increasing levels of
human capital.
20
15
14
13
12
1
1945
1946
1947
1948
1949
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1989
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1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Years
Average Years of Schooling of Selected
Economies (1945-present)
Average Years of Schooling of Selected Economies
USA
Hong Kong
Singapore
Indonesia
Philippines
Mainland China
Japan
Korea
Taiwan
Malaysia
Thailand
11
10
9
8
7
6
5
4
3
2
Lawrence J. Lau
21
The East Asian Advantages and
Disadvantages: R&D Investment
 However,
investment in R&D as a percent of GDP in East
Asian economies has generally remained relatively low
except for South Korea and Taiwan which have been
catching up fast.
22
R&D Expenditures as a Ratio of GDP: G-7
Countries, 4 East Asian NIES & China
R&D Expenditures as a Percentage of GDP: G-7 Countries, 4 East Asian NIEs and China
Japan
Germany
France
Italy
Singapore
China
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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1979
1980
1981
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1984
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1989
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2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Percent
U.S.
W. Germany
U.K.
Canada
South Korea
Taiwan
Hong Kong
The East Asian Disadvantages:
R&D Investment
One indicator of the potential for technical progress (national
innovative capacity) is the number of patents created each year.
In the following chart, the number of patents granted in the
United States each year to the nationals of different countries,
including the U.S. itself, over time is presented.
 The U.S. is the undisputed champion over the past forty years,
with 133,593 patents granted in 2013, followed by Japan, with
51,919. (Since these are patents granted in the U.S., the U.S.
may have a home advantage; however, for all the other countries
and regions, the comparison across them should be fair.)
 The number of patents granted to Chinese applicants each year
has increased from the single-digit levels prior to the mid-1980s
to 5,928 in 2013.
24

Patents Granted in the United States:
G-7 Countries, 4 East Asian NIEs & China
Patents Granted Annually in the United States: G7 Countries, 4 East Asian NIEs and China
1,000,000
100,000
1,000
100
10
US
Germany
France
Italy
South Korea
Taiwan
Japan
U.K.
Canada
Hong Kong
Singapore
China
1
1963
1964
1965
1966
1967
1968
1969
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1998
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2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Number of Patents
10,000
The Prospects for the Chinese Economy
 Between
1978 and 2013, Chinese real GDP grew more than
26 times, from US$356.5 billion to US$9.32 trillion (in
2013 prices), to become the second largest economy in the
World, after the U.S.
 By comparison, the U.S. GDP (approx. US$16.8 trillion)
was less than 2 times Chinese GDP in 2013.
 China has also become the second largest trading nation by
value of total trade in goods and services in the World, after
the United States.
 However, the Chinese economy alone is not large enough to
turn the World economy around. The idea of a G-2 group
of countries consisting of China and the United States
leading the World economy is premature.
Lawrence J. Lau
26
The Prospects for the Chinese Economy
 Despite
the rapid growth of the Chinese economy, in terms
of its real GDP per capita, China is still very much a
developing economy.
 Between 1978 and 2013, Chinese real GDP per capita grew
18.5 times, from US$370 to US$6,850.5 (in 2013 prices).
 By comparison, the U.S. GDP per capita of approximately
US$53,086 was 7.7 times Chinese GDP per capita in 2013.
27
The Prospects for the Chinese Economy:
The Economic Fundamentals
Chinese economic growth since 1978 has been underpinned by
three factors:
 (1) A high rate of investment, enabled by a consistently high
national saving rate on the order of 30% and above except for a
brief start-up period in the early 1950s. The saving rate has
stayed around 40% since the early 1990s and has at times
approached or even exceeded 50% in more recent years.
 This means, among other things, that the Chinese economy can
finance all of its domestic investment needs from its own
domestic savings alone, thus assuring a high rate of growth of
the tangible capital stock without having to depend on the more
fickle foreign capital inflows (including foreign portfolio
investment, foreign direct investment or foreign loans). This
will continue to be the case in the foreseeable future.
28

The Prospects for the Chinese Economy:
The Economic Fundamentals
 (2)
An unlimited supply of surplus labour—there is no
shortage of and no upward pressure on the real wage rate of
unskilled, entry-level labour.
 Surplus labour will continue to exist—In 2012, the
agricultural sector employs over 33.6% of the Chinese
labour force but produces only 10% of the Chinese GDP.
 There will not be a “real” labour shortage despite the
decline of the “working-age population”—the existing
retirement ages of 55 for women and 60 for men are too low
given the lengthened life expectancy of the Chinese
population. One ready solution is to raise the retirement age
to 65.
 The “one-child policy” is already in the process of being
29
modified.
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2008
2009
2010
2011
2012
2013
The Distribution of Chinese GDP
by Sector Since 1952
The Distribution of GDP by Sector
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Primary Sector
Lawrence
J. Lau Sector
Secondary
Tertiary Sector
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1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
The Distribution of Chinese Employment
by Sector Since 1952
The Distribution of Employment by Sector since 1952
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Primary Sector
Lawrence J. Lau
Secondary Sector
Tertiary Sector
31
The Prospects for the Chinese Economy:
The Economic Fundamentals
 (3)
A huge domestic market of 1.34 billion consumers with
pent-up demand for housing and transportation and other
consumer goods and services (e.g., education and health
care), enabling the realisation of significant economies of
scale in production and in investment in intangible capital,
including innovation and goodwill (e.g., brand building),
based entirely on the domestic market.
 Intangible capital (R&D capital, patents, other intellectual
property such as brand names) is highly productive in a
large economy because once the fixed cost of
invention/innovation/branding is amortised, the additional
revenue is almost all pure profit.
32
The Prospects for the Chinese Economy:
Demand-Constrained Output
 The
Chinese economy is not supply-constrained but
demand-constrained—there is excess capacity in almost all
of the manufacturing sectors—steel, cement, glass,
aluminium, etc., and as long as there is adequate aggregate
demand, the aggregate supply will be there to meet the
demand. The Chinese GDP is primarily determined by
aggregate demand.
 Continuing Chinese economic growth going forward will
depend mostly on the growth of internal demand and not on
exports.
 Chinese household consumption has actually been growing
quite rapidly since the first quarter of 2009. The rates of
growth of real retail sales have exceeded the rates of growth
Lawrence J. Lau
of real GDP and real household
income significantly. 33
The Prospects for the Chinese Economy:
Demand-Constrained Output
 However,
it will be a long time before Chinese household
consumption can become the major driver of Chinese
economic growth. The share of household income in
Chinese GDP is less than 50%. Even if the household
saving rate declines to zero, household consumption will not
exceed 50% of GDP, compared to between 65% and 70%
for developed economies.
 Thus, the sources of growth of internal demand will have to
continue to come from investment, especially public
infrastructural investment, and public consumption—
education, health care, and environment control,
preservation and restoration.
Lawrence J. Lau
34
The Prospects for the Chinese Economy:
Is a Hard Landing Likely?
 The
Chinese economy grew 9.2% in 2009, 10.4% in 2010,
9.3 % in 2011, 7.7% in 2012 and 2013 even as the European
and U.S. economies remained in recession. However, the
slowdown is unmistakable.
 In 2013Q3 and 2013Q4, the rates of growth of real GDP
were 7.8% and 7.7%, Y-o-Y, respectively. In 2014 Q1, the
rate of growth was 7.4%, Y-o-Y. All the economic
indicators suggest that the Chinese rate of growth has begun
to stabilise between 7% and 8%. The target growth rate of
the Chinese economy for 2014 is around 7.5%.
 The official target average growth rate for the Twelfth FiveYear Plan (2011-2015) period is a relatively modest 7%. A
real rate of growth of over 7% per annum is definitely
Lawrence J. Lau
35
achievable for 2014.
1983q1
1983q3
1984q1
1984q3
1985q1
1985q3
1986q1
1986q3
1987q1
1987q3
1988q1
1988q3
1989q1
1989q3
1990q1
1990q3
1991q1
1991q3
1992q1
1992q3
1993q1
1993q3
1994q1
1994q3
1995q1
1995q3
1996q1
1996q3
1997q1
1997q3
1998q1
1998q3
1999q1
1999q3
2000q1
2000q3
2001q1
2001q3
2002q1
2002q3
2003q1
2003q3
2004q1
2004q3
2005q1
2005q3
2006q1
2006q3
2007q1
2007q3
2008q1
2008q3
2009q1
2009q3
2010q1
2010q3
2011q1
2011q3
2012q1
2012q3
2013q1
2013q3
Percent per annum
Quarterly Rates of Growth of
Chinese Real GDP, Y-o-Y
25%
Quarterly Rates of Growth of Chinese Real GDP, Y-o-Y
20%
Lawrence J. Lau
-5%
GDPQ1
GDPQ2
GDPQ3
GDPQ4
15%
10%
5%
0%
36
1983q1
1983q3
1984q1
1984q3
1985q1
1985q3
1986q1
1986q3
1987q1
1987q3
1988q1
1988q3
1989q1
1989q3
1990q1
1990q3
1991q1
1991q3
1992q1
1992q3
1993q1
1993q3
1994q1
1994q3
1995q1
1995q3
1996q1
1996q3
1997q1
1997q3
1998q1
1998q3
1999q1
1999q3
2000q1
2000q3
2001q1
2001q3
2002q1
2002q3
2003q1
2003q3
2004q1
2004q3
2005q1
2005q3
2006q1
2006q3
2007q1
2007q3
2008q1
2008q3
2009q1
2009q3
2010q1
2010q3
2011q1
2011q3
2012q1
2012q3
2013q1
2013q3
15%
15%
Percent per annum
Quarterly Rates of Growth of Chinese Real
GDP, Y-o-Y and Seasonally Adjusted
Quarterly Rates of Growth of Chinese Real GDP, Y-o-Y and Seasonally Adjusted
25%
20%
-5%
GDPQ1
GDPQ2
GDPQ3
GDPQ4
GDP:seasonally adjusted
25%
Lawrence J. Lau
20%
10%
10%
5%
5%
0%
0%
37
-5%
Jan-95
Apr-95
Jul-95
Oct-95
Jan-96
Apr-96
Jul-96
Oct-96
Jan-97
Apr-97
Jul-97
Oct-97
Jan-98
Apr-98
Jul-98
Oct-98
Jan-99
Apr-99
Jul-99
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
%
Monthly Rates of Growth of Real Valueadded of the Industrial Sector, Y-o-Y
Monthly Rates of Growth of Real Value-Added of the Industrial Sector, Year-over-Year
25
20
15
10
5
0
Lawrence J. Lau
38
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Percent
Monthly Rates of Growth of Chinese
Fixed Assets Investment, Y-o-Y
60
Monthly Rates of Growth of Chinese Fixed Assets Investment since 2000, Year-over-Year
50
40
30
20
10
0
39
Annual Rates of Growth of Chinese Real
Fixed Assets Investment, Y-O-Y
Annually Rates of Growth of Chinese Real Fixed Assets Investment, Y-O-Y
35
30
Percent per annum
25
20
15
10
40
2013
2012
2011
2010
2009
2008
2007
2006
2005
2003
2002
2001
Lawrence J. Lau
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
2004
5
0
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Percent
Monthly Rates of Growth of Chinese
Real Retail Sales, Y-o-Y
Monthly Rates of Growth of Chinese Real Retail Sales since 2000, Year-over-Year
35
30
25
20
15
10
5
Lawrence J. Lau
41
The Prospects for the Chinese Economy:
Is a Hard Landing Likely?
 The
principal challenge facing the Chinese economic policy
planners is not so much the growth of real GDP but
employment.
 In 2013, 13 million new jobs were created. In 2014, the
target for new jobs is 10 million. This target is achievable
as the service sector (46% by GDP and 36% by
employment) is now larger and growing faster than the
manufacturing sector (44% by GDP and 30% by
employment). An expansion of service-sector GDP creates
30% more employment than an expansion of
manufacturing-sector GDP and requires much less fixed
investment.
Lawrence J. Lau
42
Is a Hard Landing Likely?
Local Government Debt
Total Chinese central government public debt may be estimated
at 9.8 trillion Yuan as of mid-2013, with another 2.5 trillion
Yuan of contingent liabilities of various kinds, including those
of the China Railway Corporation.
 Total local government debt may be estimated at 10.9 trillion
Yuan as of mid-2013, with another 7 trillion Yuan of contingent
liabilities of various kinds. Total local government debt has
increased significantly especially since 2008Q4.
 Private household debt may be estimated at 16 trillion Yuan and
enterprise debt at around 70 trillion Yuan.
 To put all of these figures into perspective, the Chinese GDP in
2013 was 57 trillion Yuan. Total central and local government
debt (including contingent liabilities) as a percentage of GDP
may therefore be approximately estimated as 53%.

Lawrence J. Lau
43
Is a Hard Landing Likely?
Local Government Debt
However, it is unlikely that all of the local government debt
would become non-performing. Even if half of the local
government debt eventually becomes non-performing, in which
case it is likely that part of the losses would be assumed by the
central government, which will still have a relatively low public
debt to GDP ratio of less than 40% compared to 150% for the
U.S. and 250% for Japan.
 In addition, China has a high national saving rate in the mid
forties. Its public debt is almost exclusively denominated in
Renminbi and held mostly by Chinese nationals. The
Government deficit is low and the rate of growth of government
revenue has been higher than the rate of growth of GDP. All of
this suggests that the debt problem
Lawrence J. Laushould be manageable.
44

Is a Hard Landing Likely?
Shadow Banking
“Shadow banking” has become more common in Mainland
China in the last few years. Shadow banking arises in response
to various restrictions on bank lending and other requirements
such as the total quota on the value of loans outstanding and its
rate of increase, capital requirements, leverage ratios, and
reserve requirements.
 The fundamental idea of “shadow banking” is to move both
“deposits” and “loans” off the bank’s balance sheet and hence
reduce the size of its total assets and liabilities through various
arrangements and devices, circumventing all kinds of
requirements and restrictions.
 Shadow banking appears to have advantages for everyone except
possibly for the shareholders of the bank and for the regulator.
The net result, however, is a significantly lower actual capital
ratio and a significantly higher actual leverage, increasing the
risks to the bank and to theLawrence
financial
sector as a whole.
J. Lau
45

Is a Hard Landing Likely?
Shadow Banking
The proportion of financing in China accounted for by
conventional bank loans was over 90 percent in 2002 but has
since fallen to below 50%. Shadow banking probably accounts
for 17-20 trillion Yuan worth of “loans”, approximately 30% of
GDP, still considerably lower than the comparable percentages
in other major developed economies. But the commercial banks
are involved in 60% of the shadow banking activities in China,
much more than the commercial banks in other countries and
regions.
 This means that the implicit hidden liabilities of the commercial
banks and hence their leverage ratios are much higher than are
represented on their balance sheets, posing significant risks to
the financial system because of the potential of over-leveraging.
Moreover, there is unlikely to be sufficient provision against
non-performing “shadow loans”.
 The Chinese regulators are aware of these problems and have
Lawrence J. Lau
46
been taking steps to control and restrict shadow banking.

Concluding Remarks
The centre of gravity of the global economy has been gradually
shifting to East Asia from North America and Europe. The
centre of gravity of the East Asian economy has been gradually
shifting to China from Japan.
 The Chinese and East Asian economies have been partially decoupled from the developed economies of North America and
Europe.
 On the basis of its strong economic fundamentals, China should
be able to continue to grow at an average annual rate of 7% for
the next decade or so, more or less independently of what
happens in the rest of the World.
 The growth of intangible capital (human capital and R&D
capital) will have to become a much more important source of
Chinese economic growth as it has already become in the more
developed East Asian economies such as Japan, South Korea,
Singapore and Taiwan.
47

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