RECENT MACROECONOMICS OF CHINA
APPENDICES TO LECTURES 10 & 16
i. Is China’s current slowdown a new trend?
If so, is it a middle-income growth trap?
ii. Countercyclical use of macro-prudential policies
by China & some other Asian countries.
iii. Did China’s GDP surpass the US in 2014?
Appendix (i): Transition to slower growth path
• Growth in 2014-15 is slowing down to about 7% (officially)
– Convergence (K/L ratio, urban migration, technical catch-up, …)
– Middle-income trap? e.g., Eichengreen, Park & Shin (2012)
– Regression to the mean: Pritchett & Summers (2014)
• Transition with hard-landing or soft-landing?
– Debt
• Leverage becomes unsustainable when growth slows.
• Bad loans in the shadow banking system.
– Some needed reforms & the Third Plenum of 2013
• Rural land rights and hukou system
• Market orientation
• Environment
– The need to shift composition of GDP
• From Investment and Net Exports, to Consumption
• From Manufacturing to Services
“Is there a middle-income growth trap?”
“Avoiding middle-income
growth traps,” Pierre-Richard
Agénor, Otaviano Canuto,
Michael Jelenic ,VoxEU,
21 December 2012
Eichengreen, B, D Park and K Sh
(2011), “When Fast Economies
Slow Down: International
Evidence and Implications for
China”, NBER WP 16919
“Formal evidence on growth slowdowns and middle-income traps has suggested that at per capita
incomes of about US$16,700 in 2005 constant international prices, the growth rate of per capita GDP
typically slows from 5.6 to 2.1%.
Using regression and standard growth accounting techniques, recent analysis (Eichengreen, Park, and
Shin 2011) suggests that growth slowdowns are essentially productivity growth slowdowns
Pritchett & Summers (2014): Regression to the
mean fits the data better than middle-income trap
“Asiaphoria Meets Regression to the Mean,” NBER WP No. 20573, Lant Pritchett and Lawrence Summers
Appendix (ii):
Macro-prudential policies in Asia
Specific examples of macro-prudential policies
• Banks: reserve requirements
– E.g., higher on fx liabilities than domestic.
• Stock market: Margin requirements
• Housing market:
• Maximum Loan/value ratio
• Maximum Debt service/income ratio
• Prohibition on foreign-currency mortgages
• A surprising possible conclusion –
Emerging Market countries are successfully applying these
tools in a counter-cyclical manner more than are the US and
other advanced countries.
Federico, Végh & Vuletin (2014) find that developing
countries use reserve requirements counter-cyclically
far more than advanced countries do.
Pablo Federico, Carlos Végh, and Guillermo Vuletin, "Reserve Requirement Policy over the Business Cycle," NBER Working Paper No. 20612,
October 2014, and "Effects and Role of Macroprudential Policy: Evidence from Reserve Requirements Based on a Narrative Approach,"
presented at 2014 Central Bank of the Republic of Turkey-NBER Conference on Monetary Policy and Financial Stability in Emerging Economies
Asia-Pacific & other EM countries take macro-prudential actions
more often than advanced countries do -- Kuttner & Shim (2015)
Kenneth Kuttner & Ilhyock Shim, “Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies,” NBER WP 19723, 2013.
Kuttner & Shim (2015): Ceilings on ratios of Debt Service
to Income significantly affect housing credit.
Interest rate and credit policies in Korea
Interest rate and credit policies in China
Kenneth Kuttner & Ilhyock Shim, “Can non-interest rate policies stabilize housing markets?
Evidence from a panel of 57 economies,” NBER WP 19723. Revised, 2015.
Chinese housing prices came down in 2012,
but had yet another cycle in 2013-14.
“China's Real Estate Market Entering a Correction Phase: Housing bubble close to bursting” 6/4/14.
Note: Price Indices of Newly Constructed Residential Buildings until December 2010. Price Indices of Newly Constructed Commercial Residential Buildings from January 2011. 70 large
and medium-sized cities is the simple average. Data Source: Compiled by the author based on the CEIC Database (Original data from the National Bureau of Statistics of China)
Appendix (iii):
Has China’s GDP surpassed the US?
Headlines, December 2014:
China surpasses U.S. to become
largest world economy
FoxNews.com 12/6
…based on the latest 6-year update from the
World Bank’s International Comparison Program.
10
The facts
• On the one hand, China’s economic miracle is genuine:
– Growth ≈ 10% p.a. for 3 decades is historic.
– It took the UK 58 years to double income, starting from 1780
• US:
47 years, from 1839
• Japan: 35 years, from 1885
• Korea: 11 years, from 1966
– But it took China only around 8 years, from 1987 !
• On the other hand, China is still poor as of 2014:
– It ranks only midway among 190 countries (85th , just above Peru).
• The claim to rival US in size comes from multiplying
a middle income-per-capita times 1.3 billion people.
11
35 years of strong Chinese growth
China was the world’s largest economy two
centuries ago, and appears headed for #1 again.
PPP basis
The global contribution by major economies from 1 AD to 2008 AD according to estimates by
Angus Maddison(2007), Contours of the World Economy I-2030AD, (Oxford University Press).
Measuring GDP
The dragon takes wing
New data suggest the Chinese economy is bigger
than previously thought
May 3rd 2014 |
Korea
http://www.economist.com/news/finance-and-economics/21601568-new-data-suggest-chinese-economy-bigger-previously-thought-dragon
14
China’s GDP reportedly passed the US in 2014.
But that is a mis-application of the PPP numbers
from the World Bank’s ICP project.
15
Use PPP rates to
compare income per
capita
• e.g., to judge if:
Use actual exchange rates
to compare GDP
• e.g., to judge:
– governments have
successfully raised
living standards;
– How big is the market,
from the view of
multinational companies?
– a country is rich
enough to cut
pollution;
– How big should a country’s
quota be in the IMF?
– the currency is
“undervalued,”
given its income.
– How many ships
can its navy buy?
– How big is the global role
for its currency?
16
Measuring GDP
Using actual exchange rates gives a different answer:
The US is still 83% bigger than China.
2014 with IMF WEO forecast
17 Yu
Thanks to Qing
China GDP reached US in 2014
only if measured in PPP terms.
China has not yet overtaken the US.
Author’s
calculations.
(Thanks to Qing Yu.)
The cross-over won’t come before the 2020s.
In 2021, even under aggressive projections: real growth differential = 5%; real appreciation = 3%.