China’s New Deal: How to Response to International Financial Crisis Hu Angang Center for China Studies and School of Public Policy & Management Tsinghua

China’s New Deal: How to Response to International Financial Crisis

Hu AngangCenter for China Studies and

School of Public Policy & ManagementTsinghua University

CEA annual conference, Oxford · July, 2010

http://[email protected]

Can China Save the World?• China won't see GDP rise more than 4% in

2009, and the country's economy may not grow at all. Time Magazine, 03/02/2009

• Not surprisingly, China has now become the focus of a world that is looking for a way out of the swamp. Time Magazine, 10/08/2009

• “The Chinese Worker - Person of the Year 2009” - We found some of the people who are leading the world to economic recovery: Chinese men and women, their struggles in the past, their thoughts on the present and their eyes on the future. Time Magazine, 16/12/2009


Growth rate of GDP and industrial value added over the same period last year (2008-2009)

% GDP Industrial Value Added Export Import

2008 Q1 10.6 21.3 29.0

2008 Q1-Q2 10.4 21.8 31.0

2008 Q1-Q3 9.9 22.3 29.0

2008 Q1-Q4 9.6 12.9 17.3 18.5

2009 Q1 6.1 5.1 -19.7 -30.9

2009 Q1-Q2 7.1 7.0 -21.7 -25.2

2009 Q1-Q3 7.7 8.7 -21.2 -20.3

2009 Q1-Q4 9.1 11.0 -15.9 -11.2

2010 Q1 11.9 19.6 28.7 64.7

Data Source: China Monthly Economic Indicators, 2010, issue 2.


Macroeconomic Indicators in G20 Countries

GDP growth

CPI growth Unemployment Fiscal

deficit/GDP GDP growth

CPI growth Unemployment Fiscal

deficit/GDP

US -2.5 -0.4 9.7 9.9 Brazil -0.3 4.9 6.8 3.4

UK -4.7 2.2 7.8 12.2 Argentina 0.7 6.3 8.4 0.6

Japan -5.3 -1.4 5.1 7.4 Mexico -6.8 5.3 4.8 2.3

France -2.2 0.1 10.0 7.9 Korea 0.5 2.7 4.8 4.0

Germany -4.9 0.4 8.2 3.2 Indonesia 4.6 4.8 8.1 1.4

Canada -2.5 0.3 8.3 3.1 India 6.5 10.7 10.7 8.0

Italy -4.8 0.8 7.8 5.0 Saudi Arabia 0.2 5.0 n.a. 3.2

Russia -8.0 11.7 8.2 7.2 South Africa -1.8 7.1 24.3 6.0

Austrilia 0.9 1.8 5.3 3.8 Turkey -5.9 6.3 13.0 5.4

China 9.1 -0.7 4.3 1.8 EU -3.9 0.3 10.0 6.3

Note: China’s unemployment data is cited from Work Report of Government (2010).Data Source: The Economist, Feb. 20th-26th 2010, pp. 89-90.


Questions to be Addressed

• What are the reactions of countries around world when facing financial crisis triggered in US?

• How does China deal with the crisis?• Why does China react so rapidly and successfully? • What are the implications drawing from China’s

actions?• How does China spur its transition of development

model in post-crisis era?


Agenda

• Chinese Way to Deal with International Financial Crisis

• Post-evaluation of International Financial Crisis• China’s Experiences of Cope with International

Financial Crisis• From Accelerating Development to Accelerating

Transition• Conclusion


Chinese Way to Response to International Financial Crisis

• China’s new deal: fighting with international financial crisis– Compare with 1998 Asia Financial Crisis

• Threat– Huge external shock: lower external demands

• Strength– GDP is 2.5 times of 1998 in 2008– Foreign reserve is 13 times of 1998 in 2008– Rate of return on sales of SOEs is 3 times of 1998 in 2008– NPL (non-performing loan) is only 2-3%, and profit rate of state

owned banks is 17% in 2008– Fiscal revenue is 6 times of 1998 in 2008



• China’s new deal: fighting with international financial crisis– 4 trillion fiscal stimulus package

• 5/11/2008, 10 policies to spur economic growth• 12/2008, Central Economic Work Conference - spur economic

growth, balance economic structure, expand domestic demand• 03/2009, NPC annual assembly - expand domestic demand,

keep growth, adjust structure, upgrade development level, focus on reform, more active, look on people’s livelihood and promote harmonious development (扩内需、保增长；调结构、上水平；抓改革、增活力；重民生、促和谐 )

• 03/2009, 11 industrial revitalization plans



• 4 trillion fiscal stimulus package• Four focuses

– Government investment: 4 trillion in two years, of which, 1.18 trillion is fiscal expenditure

– Industrial revitalization plans to upgrade technology and improve international competition capacity

– Improve innovation capacity– Promote social development: expand social security net, increase

employment

• Seven aspects– Improve macro-control, expand domestic demand, promote agriculture

development, change growth pattern, deepen openness reform, promote social development and improve government capacity



• 4 trillion fiscal stimulus package Investment (billion RMB) Proportion (%)

People's livelihood projects 400 10.00

Rural people's livelihood projects 370 9.25

Infrastructure 1500 37.50

Social sector 150 3.75

Energy conservation and environment projects 210 5.25

Structure adjustment and technology upgrade 370 9.25

Reconstruction after earthquake 1000 25.00

Total 4000 100Data Source: NDRC website.



Total Investment in Fixed Assets

(trillion)

Ratio of State budget

(%)

Ratio of Self-raising and Other Funds (%)

9th Five-year 13.9 4.7 68.1 10th Five year 29.6 5.3 75.7

2006 11.0 4.4 81.5 2007 13.7 4.2 84.8 2008 17.2 4.6 82.9 2009 22.5 5.6 86.0

2010 (predicted) 27-28 2009-2010 49.5-50.5

(7.3-7.4 trillion USD)

Funds for Investment in Fixed Assets and its Structure in the Whole Country

Data Source: China Statistical Yearbook (2009), and IMF.

Fiscal stimulus has spurred non-state investment


Post-evaluation of International Financial Crisis

• Keep robust economic growth during the crisis• Maintain high employment rate• Increase household income• Keep CPI stable• Improve the situation of international balance

of payment



• China has kept its robust economic growth during and after the crisis– Several suspects about China’s performance

• V-shape• U-shape• L-shape• W-shape

– The real case that the economy is only SLOW DOWN in China



• China has contributed over 50% of the world economic growth in 2009

Data Source: China Statistical Yearbook (2009), and IMF.

2003 2004 2005 2006 2007 2008 2009-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

10.0 10.1 11.3

12.7

14.2

9.6 9.1

3.6 4.9 4.5

5.1 5.2

3.0

-0.8

China World



• China has created many job positions– World unemployment rate has reached 6.6% in 2009, of

which, youth unemployment rate is 13.4% (ILO, 2010)– Absorb new labors, and the first time employment rate (初次就业率 ) of college graduates is 74% in 2009, and has achieved 84% at the end of 2009

– Urban employment number has rebounded, only slightly declining at Q4 of 2008. 1.46 million unemployed workers has been reemployed during January to November, 2009

– Solve unemployment of migrant workers, only 4.6% of 20 million migrant workers are unemployed at the end of 2009



• Urban employment number has rebounded

2003 2004 2005 2006 2007 2008 20090

2

4

6

8

10

12

14

8.59 9.80 9.70

11.84 12.04 11.13 11.02

Annual newly employed person (million)

Data Source: China Statistical Yearbook (2009), and Work Report of Government (2010).



• Household income has kept increased– Annual per capita disposable income of urban

households and annual per capita net income of rural households has increased 9.8% and 8.5% respectively, and higher than GDP growth rate 8.1%

– International financial crisis has increased 17 million poverty population in east Asia and Pacific region, and about 4 million population will drop into 1.25 consumption dollar per day to increase total poverty population into 21 million in 2010 (ADB, 2009)



• Keep CPI stable– China’s CPI is -0.7% in 2009, of which, 0.9% in

urban areas and -0.3% in rural areas– Base on the definition of The Economists, China

was in the deflation stage– China is likely to have moderate inflation in 2010,

the primary task is to prevent the deflation and over-production which has happened during 1998-2002



• Improve the situation of international balance of payment– The proportion of the trade balance to the total

GDP has decreased from 7.6% in 2007, to 6.6% in 2008, then to 4% in 2009

– Three major influences of financial crisis to country’s economy are (1) uncertainty of liquidity, (2) decline of international capital and (3) decline of international trade, among them, only the third factor has influenced Chinese economy



• China’s global economic position has been strengthened during the crisis– China has been the second largest economy (exceed

Japan) in exchange term in the worldExchange rate (%) 2006 2007 2008 2009

China 2.66 3.38 4.33 4.70

US 13.13 13.75 14.20 13.85

US/China 4.94 4.07 3.28 2.95

Japan 4.38 4.38 4.91 4.65

Japan/China 1.65 1.30 1.14 0.99 Data Source: 2006-2008 data is from WDI 2009, 2009 data is from The Economist, Feb. 20th-26th 2010. Data Source: Maddison, 2010.



• China’s global economic position has been strengthened during the crisis– China has been the largest economy (exceed US) in PPP

term in the worldPPP, billion 1990 US Dollar 2005 2006 2007 2008 2009

China 7268.73 7928.48 8306.66 8908.89 9594.88

US 9009.77 9253.03 9447.35 9485.14 9248.01

US/China (time) 1.24 1.17 1.14 1.07 0.96

EU (12 countries) 6985.55 7185.19 7360.32 7402.91 7114.20

EU (12 countries)/China (time) 0.96 0.91 0.89 0.83 0.74

Data Source: Maddison, 2010.



• China’s global economic position has been strengthened during the crisis– China has been the second largest manufacturer in the world (%)

Data source: United Nation Industrial Development Organization, Statistical Country Briefs; UNIDO, International Yearbook of Industrial Statistics 2010, 18 March 2010; 2009 data is from Zhongyu Wang (2010) 。

% of world total 2000 2005 2007 2008 2009Manufacture value addedChina 6.64 9.79 11.24 13.28 15.60India 1.13 1.38 1.65Japan 17.85 16.69 16.50 16.42 15.40US 26.63 25.47 23.85 20.50 19.00Germany 6.80 6.37 6.35 6.45UK 3.94 3.36 2.71Russia 0.88 1.01 1.16Manufacture exportChina 4.48 8.76 11.28India 0.70 1.04 1.32Japan 8.70 6.66 5.89US 13.40 9.56 9.12Germany 9.26 10.71 10.62UK 5.78 5.24 4.24Russia 0.88 1.14 1.54



• China’s global economic position has been strengthened during the crisis– China has been the largest exporter and second largest importer in the

world

Rank Export ImportCountry Export (billion USD) % of world Country Import (billion USD) % of world

1 China 1202 9.6 US 1604 12.7 2 Germany 1121 9.0 China 1006 8.0 3 US 1057 8.5 Germany 931 7.4 4 Japan 581 4.7 France 551 4.4 5 Netherland 499 4.0 Japan 551 4.4

Top 5 merchandise trader (2009)

Rank Export Export (billion USD) % of world Country Import (billion USD) % of world1 US 470 14.2 US 331 10.62 UK 240 7.2 Germany 255 8.23 Germany 215 6.5 UK 180 5.14 France 140 4.2 China 158 5.15 China 129 3.9 Japan 146 4.7

Top 5 service trader (2009)

Data source: WTO, International Trade Statistics 2010, 26 March 2010



• China’s global economic position has been strengthened during the crisis– China has been the forth largest sourcing country of patent application

2003 2004 2005 2006 2007 2008 2015Ratio of R&D expenditrue to the world (%) 2.5 2.9 3.5 4 4.9 13Rank of R&D expenditure 6 6 6 6 4 3 2Ratio of patent applications to the world (%) 6.3 8.3 8.8 8 9.6Rank of patent applications 4 3 4 4 4 3Ratio of SCI\EI\ISTP indexing papers to the world (%) 5.1 6.3 6.9 8.4 9.8 11.5Ratio of SCI indexing papers to the world (%) 4.5 5.9 7.5 9.8Rank of SCI\EI\ISTP indexing papers 5 5 4 2 2 1Rank of EI indexing papers 3 2 2 2 1 1Rank of SCI indexing papers 5 5 5 3 2 2

Rank and Ratio of China’s Selected R&D indicators in the World

Source: Center for China Studies, Report on overall thoughts and targets of twelfth five-year plan, 2009.9.


China’s Experiences of Cope with International Financial Crisis

• Accumulations of 30 years’ reform• China’s learning, adoption and competition capacity• China’s specific state capacity

– Capacity of distinguishing and dealing with potential crisis– Decision capacity– Political mobilization capacity– Fiscal capacity– Social governance capacity

• Two hands: balance of invisible hand (market) and visible hand (governemnt)

• Initiative coming from both central and local sources


From Accelerating Development to Accelerating Transition

• Crisis has pushed China to spur its transition– Improve industrial structure

• Industry (secondary sector) is the main driver of economic growth

• Service (tertiary sector) should be improved in coming years

• Social service expenditure, especially education expenditure needs to increased, at least to 4% of GDP

– Promote energy conservation


4. From Accelerating Development to Accelerating Transition

• Challenges on carbon emission and environmental protection

Note: * is estimated data, and energy consumption is calculated in 2005 instant price, brackets present data from bulletin on first national pollution census.

Data source: China Statistical yearbook (2009) and Bulletin on First National Pollution Census (2010).

2000 2005 2006 2007 2008 2009 2010*Energy consumption (billion TCE) 1.386 2.360 2.587 2.805 2.914 3.07GDP (GDP, trillion, 2005 price) 18.49 20.45 20.10 25.30 27.55Energy consumption per unit GDP (ton TCE/10000 Yuan) 1.12 1.276 1.265 1.372 1.152 1.113 1.022

Electricity (billion kwh) 1355.6 2500.3 2865.7 3281.6 3495.8 3714.7Electricity consumption per unit GDP (billion kwh/10000Yuan) 1059 1108 1170 1200 1212

Sulfur dioxide emissions (thousand tons) 19951 25494 25888 24681 23213 23200 22940

Chemical oxygen demand (COD, million tons) 14.45 14.14 14.28 13.82

(30.29) 13.21 1273



• Over-industrialization, over-heavy-industrialization, over-dependent on export, over-investment and over-extensive growing

2009 2008 2009 Growth rate (%)Energy Consumption (billion TCE) 2.91 3.07 6.3Coal production (billion tons) 2.77 2.97 9.2Crude oil consumption (billion tons) 3.5 3.8 7.1Natural gas (billion cubic metres) 80.63 88.7 9.1Electricity (TWh) 3495.76 3714.65 6.2Steel consumption (billion tons) 0.54 0.69 22.4Refined copper (billion tons) 45.41 75.3 39.7Electrolytic aluminium consumption (billion tons) 123.18 143.9 14.4Ethene (billion tons) 98.07 106.6 8.0Cement (billion tons) 1.35 1.63 17.0

Note: TCE refers to Tonne Oil Equivalent.Data source: Bulletin of Economic and Social Statistics (2009).



• Challenges of climate change

2005 2010 2015 2020 2030

CO2 (billion tons) 5.1 6.7 8.35 10 12.8

% of world 19.2 22.2 24.5 22.4 30.5

Carbon Emission in China (2005-2030)

Data source: IEA, 2007.


Conclusion

• Crisis is external pressure of China’s transition and development

• China needs to continue its reform and transition– Balanced development among urban and rural, different

regions, income gaps, investment and consumption– Innovative development: from factor driving to innovation

driving– Green development: from black development into green

development– Sharing development: from let somebody rich first to all

people rich together


Conclusion

• China: a new engine of growth– Emerging and developing countries contribute to an

increasingly large share of global growth– As the crisis has unfolded, global growth has relied primarily

on the emerging and developing economies, with nearly half coming from China alone

– Indeed, China has become a global growth engine that should be treated as an additional driving force behind the recent growth performance in converging countries

– China also has more power to influence global factor and goods prices than any other converging country (OECD, 2010)

Thank you!

Documents

China’s New Deal: How to Response to International Financial Crisis Hu Angang Center for China Studies and School of Public Policy & Management Tsinghua