The Imbalance of the Chinese
Economy and the Stability of the
Global Economy
Xiaopeng Luo
Zhejiang University
Presented at
November, 2009
Outline
• The imbalance of the Chinese economy was a
major contributor to the last global financial
crisis;
• The mechanism of the imbalance;
• Why adjusting the exchange rate would not
work;
• Why there is no quick fix for the imbalance?
• How China can help the world and how the
world can help the China?
How China contributed the global
financial crisis
• The model of Chimerica by Naill Ferguson
• By transferring significant size of savings to the
US, China created an environment of low
interest rate for the global economy.
• Under the environment, the cost for capital was
low, while the return to the capital was
increasing.
• The expansion of financial market went out the
boundary of existing doctrine and monitoring
capacity.
Why China can not consume
more?
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Was the imbalance a plot?
Did China manipulate the value of RMB?
What could China gain from it?
Why China can not consume more?
Understanding the Chinese
Economic System
• Rent-sharing through hierarchy-an economic
model to understand the Chinese economy.
• The relationship between the status rights and
asset right is profoundly different from the West
as China is an imperial state system rather than
a nation state.
• The political centralization is maintained through
control of status rights, the assets rights were
secondary to the status rights.
• The two kinds of rights were tradable, while the
status rights dominated the asset rights.
Rent-Sharing through Hierarchy
before the reforms
• The Communist revolution created a
collective rights system while keeping the
tradition in the relationship between the
status rights and asset rights.
• The collectives with higher ranking in the
unified social hierarchy entitled both
greater status rights and assets rights
while the collectives in low status entitled
both low status rights and asset rights.
Rent-Sharing through Hierarchy
before the reforms
• However, the lower ranking units were entitled to
greater economic rights (Barzel, 2002) to
achieve greater self-sufficiency, so more rent
can be extracted by the state.
• If the low ranking units got too productive and
create sizable assets, they should be promoted
to higher ranking, and their economic rights be
restricted to maintain the stability of the
hierarchy.
Rent-Sharing through hierarchy
after the reforms
• The reforms decentralized, de-collectivized and
monetized the rent-sharing through hierarchy to
enhance economic rights.
• Keeping low status rights, the lower ranking
units were allowed to keep more assets as long
as the state and the higher ranking units can
keep larger share in the total rent.
• The lower ranking units can trade for higher
status rights with their assets.
The Challenge of Peasant
economic rights to the System
• At the bottom of the society, the Chinese
peasants have too little asset rights. The
de-collectivization give them economic
freedom, but there was not much nonfarming job opportunity for them.
• The rapid development of rural
industrialization had created many new
jobs for the peasants, while threatening
the status rights of the urban population.
How FDI helped China to resolve
the dilemma
• The FDI, especially those oversea capital
invested in the costal area for expert
manufacture industry created new job
opportunities for peasant without
threatening the privilege of the state
sector. In stead, it created new source of
rent to the state. The system of rentsharing through hierarchy increasingly
depending on export expansion.
Why China can not consume
more?
• Chinese consumption rate has kept
dropping since 1985, from more than 50%
to 33% in early 2009, the lowest in the
world.
• The transfer of purchasing power to the
developed countries could be equivalent to
the total wages of the migrant workers.
• Why China can not let their own people
consume more?
Why China can not consume
more?
• Interest conflict: the groups in power
understand by intuition that it is not in their
interest to empower the groups at the
bottom. (theory by Barzel)
• Knowledge gap: the policymakers don’t
know how to make change without
destabilize the system. (labor contract law)
Why there is no quick fix?
• What China need is to transform the state
of rent extracting for GDP growth into a
state that is capable to provide justice and
fair welfare to all citizens.
• The nation state model does not fit China
because it is not possible to have equal
status rights for 1.4 billion people. ( the
dilemma for free domestic immigration)
How China can help the world and
how the world can help China?
• As the Chinese economy will continue to
stay imbalanced, what would be the best
way to invest its savings?
• A Chinese Marshall Plan to Africa?
• Some major Infrastructure projects to deal
with global warming?
• The world should find a financial
arrangement that to payback China.
How the world can helps China?
• China will go through a difficult
transformation and the stake of its failure
is too high not only for China but also for
the world. The only way to reduce the
costs and risks for China in this great
transformation is to have a successful
communication revolution. ( Giddens )