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Section 4 Chinese economy: High growth but at a slower pace 1. Overview (1) Increased Chinese presence
China is increasing its presence in the world economy. China decided to pursue economic reform and an open-door policy and it became a WTO member at the end of 2001 in order to continue a high growth rate of 10% per year in the 2000s (see Figure 1-4-1-1). China continued to expand its economy even under the circumstance where the growth of the European and the U.S. economies remained low after the failure of Lehman Brothers, and developed into the world’s second-largest economy behind the U.S. in 2010, exceeding the Japanese economy. In addition to comparison with advanced economies, China largely surpasses other emerging economies with a high growth rate, such as India in the same Asian region, in terms of economic size. Figure 1-4-1-1 GDP of major countries (dollar basis)
0
5
10
15
20
25
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
U.S. (1st)China (2nd)Japan (3rd)Germany(4th)France (5th)India (11th)
(Trillion $)
Note: Rankings as of 2011 are shown in parentheses. The values after 2012 are the outlook by the IMF.Source: IMF “World Economic Outlook Database, Apr. 2012”.
Outlook
U.S.
GermanyJapan
China
France
Asian currency crisis(1997)
Failure of Lehman Brothers(2008)
China became a WTO member(2001)
India
(Year)
China is composed of 31 direct-controlled municipalities, provinces and autonomous regions, and one province solely has the economic size equivalent to those of neighboring nations. For example, Guangdong Province, which is the China’s largest in terms of gross regional product, has an economic size equivalent to Indonesia, which is the ASEAN’s largest in terms of GDP (see Figure 1-4-1-2).
Furthermore, in terms of trade, China became first in the world for export and the second in the world for import. China had the world’s largest amount of foreign currency reserves of about 3,180 billion dollars at the end of 2011 as well as the world’s largest amount (about 1,150 billion dollars) of government holdings of U.S. bonds (Japan had the second largest amount of about 1,060 billion dollars), and so China is increasing its influence in international society.
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Figure 1-4-1-2 Total production of China’ provinces and cities and Asian major countries/regions (2011)
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600
800
1,000
1,200
1,400
South
Korea
Indon
esia
Guangd
ong Prov
ince
Jiang
suProv
ince
Shand
ong Pro
vince
Zhejian
g Provinc
e
Taiwan
Henan
Provin
ce
Hebei P
rovinc
e
Thailan
d
Liaonin
g Provinc
e
Sichu
anPro
vince
Hubei
Provinc
e
Hunan
Provinc
e
Shan
ghai
Malaysi
a
Fujia
n Provinc
e
Singap
ore
Beijing
Hong Kon
g
(Billion $)
Indonesia:the ASEAN’s largest in terms of GDP
Guangdong Province:the China’s largest (in 31 provinces and cities) in terms of gross regional product
Note: The figure displays the China’s top to Beijing in terms of gross regional product, in 31 Chinese provinces and cities.Source: IMF “WEO Database, Apr. 2012”, National Bureau of Statistics of China, CEIC Database.
(2) Overview of the Chinese economy In 2011, inflation control was a top priority issue of economic policies and therefore a tight
monetary policy was adopted. Meanwhile, exports bound for Europe began to slow down since the middle of the year due to the European debt crisis, and economic growth decelerated mainly in the coastal area that heavily relied on exports. (GDP)
Real GDP growth rate has been slightly slowing despite solid growth of 9.2% throughout 2011 (see Figure 1-4-1-3). Quarterly transition shows five consecutive quarters of decline in real GDP growth rate until the first quarter of 2012.
By category of demand, in the whole of 2011, the contribution of external demand fell into the negative from the previous year (from 1.0% in 2010 to -0.5% in 2011), while internal demand remained strong. Investment maintained the large contribution despite its slight slowdown (similarly from 5.6% to 5.0%), and consumption also increased (similarly from 3.8% to 4.8%). Below, we examine the indicators related to each category of demand. (Consumption)
In 2011, the total amount of retail sales of social consumer goods remained strong. By item, the consumption of automobiles and home electronics appliances has been sluggish after ending of provision of purchase subsidies, while the consumption of food and clothing remained brisk but has been recently declining (see Figure 1-4-1-4).
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Figure 1-4-1-3 China’s real GDP growth rate (ratio to the same period of the previous year)
-6
-4
-2
0
2
4
6
8
10
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16
18
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Note：The figure displays only growth rate because the quarterly-based breakdown according to the demand for item has not been reported.Source：National Bureau of Statistics of China, CEIC database.
(Annually basis) (Quarterly basis)
Net export
Gross capital formation
Final consumption
GDP growth rateFailure of Lehman Brothers
(September, 2008)
Economic stimulating measure determinationof 4 trillion yuan (November, 2008)
(%)
Contribution 2010 2011GDP 10.4% → 9.2%Consumption 3.8% → 4.8%Investment 5.6% → 5.0%Foreign demand 1.0% → -0.5%
10.49.2
Q1 Q2 Q3 Q4 Q19.7% → 9.5% → 9.1% → 8.9% → 8.1%
Figure 1-4-1-4 Growth rate of retail sales of social consumer goods (ratio to the same month of the previous year)
-10
0
10
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60
70
1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4
2008 2009 2010 2011 2012
Retail sales of social consumer goodsFoodClothingHome electronics appliances/Image and audio equipmentAutomobile
Notes: 1. Total amount of retail sales includes small companies. However, the breakdown according to the type of business is aggregated within companies with over 5 million yuan of annual sales.
2. As for January-February, the growth rates of both months are averaged to avoid an influence by Chun Jie.Source: National Bureau of Statistics of China, CEIC database.
(%)
Automobile
Retail sales of social consumer goods
Home electronics appliances
Food Clothing
According to the trends in income which supports consumption, per-capita income has been rising in both urban and rural areas, and especially the income growth rate in rural areas has risen each year, exceeding that in urban areas after 2010 (see Figure 1-4-1-5). Looking at the sources of income, in rural areas, income from wages and salaries (cash income including money transferred due to working away from home), which accounts for more than about 40% of the composition of income, has increased substantially to record the growth exceeding the real GDP (9.2%): per-capita net income in rural areas is 17.9% on a nominal basis and 11.4% on a real basis (see Table 1-4-1-6). On the other hand, in urban areas, income from wages and salaries accounts for two-thirds of the composition of income, and per-capita disposal income has increased by 14.1% on a nominal basis and 8.4% on a real basis (see Table 1-4-1-7).
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Figure 1-4-1-5 Income growth rate in urban/rural areas
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2
4
6
8
10
12
14
16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Rural area
Urban area
Source: China Statistical Yearbook (National Bureau of Statistics of China) and the Web site.
Per-capita disposal income growth rate in urban areas
Per-capita net income growth rate in rural areas
(%)
Table 1-4-1-6 Per-capita net income in rural areas
(Unit: Yuan, %)
2010 2011 Growth rate Compositionratio
Income from wages and salaries 2,431 2,963 21.9 42.5Net business income 2,833 3,222 13.7 46.2
Primary industry 2,231 2,520 12.9 36.1Secondary/Tertiary industry 602 702 16.7 10.1
Income from properties 202 229 13.0 3.3Income from transfers 453 563 24.4 8.1Net income 5,919 6,977 17.9* 100.0Notes: 1. The price-adjusted real growth rate is 11.4%. 2. Income from wages and salaries includes cash income including money transferred by migrant workers.Source: China Statistical Yearbook (National Bureau of Statistics of China) and
the Web site.
Table 1-4-1-7 Per-capita disposal income in urban areas
(Unit: Yuan, %)
2010 2011 Growth rate Compositionratio
Income from wages and salaries 13,708 15,412 12.4 64.3Net business income 1,714 2,210 29.0 9.2Income from properties 520 649 24.7 2.7Income from transfers 5,092 5,709 12.1 23.8Total income 21,033 23,979 14.0 100.0Disposal income 19,109 21,810 14.1* -Note: The price-adjusted disposal income real growth rate is 8.4%.Source: China Statistical Yearbook (National Bureau of Statistics of China) and
the Web site.
(Investment) The growth rate of China’s investment in fixed assets remains high, but has been slightly slowing
down. By industry, the contribution of infrastructure investment such as roads and railways, which was
encouraged by the economic stimulus measure of 4 trillion yuan taken in 2009, has declined, and, in particular, railway investment has rapidly declined following the high-speed railway accident that occurred in Zhejiang Province in July 2011 (see Figure 1-4-1-8). In contrast, the contribution of manufacturing investment has expanded, and strong real estate investment caused souring housing prices, a so-called “housing bubble,” to create a social issue.
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Figure 1-4-1-8 The growth rate of China’s investment in fixed assets (accumulated amount from the beginning of the year, ratio to the same quarter of the previous year)
-5
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40
1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3
2008 2009 2010 2011 2012
Others
Real estate
Road/railway
Construction
Electricity/gas/water supplyManufacturing
Primary industry
Investment in fixedassets
Notes: 1. The accumulated amount from January is reported for investment in fixed assets. Therefore, the value for December represents the yearly-averagedgrowth rate (compared to the previous year), and the value for January-February represents the averaged growth rate of two months to generate gaps.
2. Excluding investments by rural households.Source: National Bureau of Statistics of China, CEIC database.
(%) Infrastructure investment such as roadsand railways raises the whole amount,which is encouraged by the economicstimulating measure of 4 trillion yuan. The contribution of infrastructure
investment such as roads and railways isdeclining. The contribution ofmanufacturing investment is expanding. Growth rate remains high,
but is slightly slowing down.
However, the overall growth rate has been slightly slowing down since the latter half of 2011. In particular, at the beginning of 2012, infrastructure investment such as roads and railways decreased from the previous year. (External demand)
In 2011, both exports and imports expanded and the trade balance remained in surplus (see Figure 1-4-1-9). However, the monthly export growth rate shows that exports mainly bound for the EU have been slowing down since the middle of 2011 due to the European debt crisis (see Figure 1-4-1-10(a)). In response to a slowdown in exports, imports have been similarly slowing down since the middle of 2011 (see Figure 1-4-1-10(b)). Imports from Japan have been sluggish since March 2011. This may reflect a decline in imports from Japan of intermediary goods and mechanical equipment due to a slowdown in exports in China in addition to the impact of the Great East Japan Earthquake. Figure 1-4-1-9 China’s trade amount
-50
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1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4
2008 2009 2010 2011 2012Note: All values are calculated as FOB for exports, CIF for import, and “Trade balance = Export – Import”. The ratio to the same month
of the previous year is shown in parentheses.Source: General Administration of Customs of the People’s Republic of China, CEIC Database.
(Billion $)
Import
Export
Trade balance
(Month, year)
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Figure 1-4-1-10(a) China’s export growth rate (ratio to the same month of the previous year)
-40
-20
0
20
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1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4
2008 2009 2010 2011 2012
Total exportsJapanU.S.EUASEAN
Note: The growth rate of January-February is calculated on aggregate to avoid an influence of annual change in Chun Jie.Source: General administration of Customs of the People's Republic of China, CEIC Database.
(%)
ASEANJapan
EU
To the world
U.S.
Slowdown in export growth rateIn particular, remarkable slowdown inexports bound for EU
(Month, year)
Figure 1-4-1-10(b) China’s import growth rate (ratio to the same month of the previous year)
-40
-20
0
20
40
60
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100
1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4 5 6 7 8 9 10 11 12 1-2 3 4
2008 2009 2010 2011 2012
Total exportsJapanU.S.EUASEAN
(%)
ASEAN
EU
To the world
Japan
U.S.
Note: The growth rate of January-February is calculated on aggregate to avoid an influence of annual change in Chun Jie.Source: General administration of Customs of the People's Republic of China, CEIC Database.
(Month, year)
Similar slowdown in import growth rate
(Balance of payments) China ran a current account surplus, and its high growth rate attracted foreign investment to
maintain an excess inflow in the capital balance. Not only such factors, but also intervention in the foreign exchange market to suppress the rise in the Chinese yuan resulted in the previous increase in foreign currency reserves. However, in 2011, the current account surplus declined, and the capital balance showed a decrease in net inflows from the previous quarter in the third quarter and showed an excess outflow in the fourth quarter. Such factors resulted in a decrease in foreign currency reserves (see Figure 1-4-1-11). (Consumer price and monetary policy)
The consumer price index, which fell in 2009 compared to the same quarter of the previous year, rose throughout 2010 exceeding the deposit rate, and rose to the level exceeding an inflation target of 4% in early 2011 (see Figure 1-4-1-12). In particular, food prices, which have a great impact on people’s lives, rose remarkably. The Chinese government implemented a tight monetary policy by citing price controls as a top priority issue of 2011. The policy interest rate was raised for five consecutive months from the end of 2010 (a total of 125bp) and the deposit reserve ratio was raised for consecutive nine months (a total of 450bp) (see Figure 1-4-1-13 and Figure 1-4-1-14).
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Figure 1-4-1-11 China’s balance of payments
-100
0
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2005 2006 2007 2008 2009 2010 2010 2011
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Note: Foreign currency reserves are end-of-period values.Source: People’s Bank of China, State Administration of Foreign Exchange, CEIC Database.
Capital balance
Foreign currency reserves (right axis)
Errors and omissions
Current account
(Billion $) (Billion $)
Figure 1-4-1-12 Growth rate of China’s consumer price (ratio to the same month of the previous year)
-5
0
5
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1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4
2007 2008 2009 2010 2011 2012
Source: National Bureau of Statistics of China, CEIC database.
(%)
Core (except food and energy)2.4%
Peak of the growth rate(July, 2011)
Food 14.8%
General 6.5%7.0%
3.4%
1.4%
Figure 1-4-1-13 China’s policy interest rate
-4
-2
0
2
4
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12
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4
2007 2008 2009 2010 2011 2012
Consumer price index (General)
Bank lending rate (For one year)
Deposit rate (For one year)
Source: People’s Bank of China, National Bureau of Statistics of China, CEIC Database.
(%)
Consumer price index (General)
Deposit rate
Bank lending rate
Deposit rateApril: 3.50%
Bank lending rateApril: 6.56%
Consumer price indexApril: 3.4%
The deposit rate falls below the consumer price index.� “Negative interest” for depositors
186
Figure 1-4-1-14 China’s deposit reserve ratio
10
12
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16
18
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22
24
26
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 1011 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5
2008 2009 2010 2011 2012
Deposit reserve ratio (Major bank)
Deposit reserve ratio (Minor bank)
Note: The deposit reserve ratio until the middle of 2008 is the entire deposit reserve ratio.Source: People’s Bank of China, CEIC Database.
(%)
4.5% up in total by raising the deposit reserve ratioby 0.5% for consecutive nine months fromNovember 16, 2010 to June 20, 2011
1.5% down in total by reducing thedeposit reserve ratio by 0.5% inDecember 5, February 24 and May 18
0.5% up in the deposit reserve ratio respectivelyin January, February and May 2010
As a result of these measures, the growth rate of consumer prices has been declining after peaking in July 2011. In contrast, there has been increased demand for monetary easing arising from a concern over the deceleration in economic growth due to a slowdown in exports stemming from the European debt crisis. Under such circumstances, the People’s Bank of China launched reduction of the deposit reserve ratio in December 2011 and implemented such reduction also in February and May in 2012.
The transition of China’s money supply shows that the growth rate of money supply declined from the end of 2010 following the tight monetary policy and, in response to this, the growth rate of outstanding bank lending also declined gradually (see Figure 1-4-1-15). The growth rate of money supply showed signs of a rebound in December 2011 when reduction of the deposit reserve ratio was launched, and money supply and the growth rate of outstanding bank lending as well as new bank lending have been increasing in 2012. Figure 1-4-1-15 China’s money supply and bank lending
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1,800
2,000
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4
2008 2009 2010 2011 2012
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New bank lendingYear-on-year outstanding bank lending (right axis)Year-on-year money supply (right axis)
(Billion yuan)
Source: People’s Bank of China, CEIC Database.
(%)
Reduction in the deposit reserve ratio inDecember 2011, andFebruary and May 2012
(Chinese yuan) Though the Chinese yuan in effect returned to dollar pegging after the failure of Lehman brothers,
the yuan’s value was made more flexible in June 2010 and afterwards has been rising moderately showing slight fluctuations against the U.S. dollar (see Figure 1-4-1-16). Recently, however, it sometimes happens that the yuan’s exchange rate continues to fall along with a slowdown in the Chinese economy to reduce the strong anticipation of a high exchange rate. Under such circumstances,
187
in April 2012, the People’s Bank of China expanded the fluctuation band of the yuan’s exchange rate from 0.5% to 1% (with upper and lower limit) per day. Furthermore, it was decided to allow nationwide companies qualified for trade to implement trade settlement in yuan which had been introduced on a trial basis in April 2009 (August 2011). Figure 1-4-1-16 Chinese yuan to dollar exchange rate
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
2008
/01/02
2008
/02/02
2008
/03/02
2008
/04/02
2008
/05/02
2008
/06/02
2008
/07/02
2008
/08/02
2008
/09/02
2008
/10/02
2008
/11/02
2008
/12/02
2009
/01/02
2009
/02/02
2009
/03/02
2009
/04/02
2009
/05/02
2009
/06/02
2009
/07/02
2009
/08/02
2009
/09/02
2009
/10/02
2009
/11/02
2009
/12/02
2010
/01/02
2010
/02/02
2010
/03/02
2010
/04/02
2010
/05/02
2010
/06/02
2010
/07/02
2010
/08/02
2010
/09/02
2010
/10/02
2010
/11/02
2010
/12/02
2011
/01/02
2011
/02/02
2011
/03/02
2011
/04/02
2011
/05/02
2011
/06/02
2011
/07/02
2011
/08/02
2011
/09/02
2011
/10/02
2011
/11/02
2011
/12/02
2012
/01/02
2012
/02/02
2012
/03/02
2012
/04/02
2012
/05/02
Source: China Foreign Exchange Trading Center, CEIC Database.
(1$ = yuan)
In July 2008,Chinese yuan in effect returned todollar pegging due to a globalfinancial crisis.
In June 2010,the yuan’s value was made more flexible again.
In April 2012,the fluctuation band of the yuan’s exchange rate was expandedfrom 0.5% to 1% (with upper and lower limit) per day.
Appreciation ofthe yuan
Depreciation ofthe yuan
(Foreign direct investment) Foreign direct investments in China increased in 2010 and 2011 following a decrease in 2009 (see
Figure 1-4-1-17). In addition to an increase in the money amount, there have been a wide variety of industries and areas of investments by degrees. With respect to industries invested in, investment in manufacturing industries has remained high, but recently investment in non-manufacturing industries including real estate, wholesale and retail trade, and business service has been expanding. With respect to areas of investments, the share of the coastal area (such as Jiangsu and Guangdong Provinces), the central area (such as Henan Province), the western area (such as Sichuan Province and Chongging) and the northeastern area (such as Liaoning Province) has been increasing (see Figure 1-4-1-18). With respect to investing countries, Hong Kong has been a major investor, and Japan and Singapore increased their investments in 2011 (see Figure 1-4-1-19). Figure 1-4-1-17 Foreign direct investments in China
0
20
40
60
80
100
120
140
2005 2006 2007 2008 2009 2010 2011
OthersResearchInformation and communications/Data processingTransport and postal activitiesLeasing/Business serviceWholesale/retailReal estateManufacturingTotal amount
(Billion $)
Source: Ministry of Commerce of the People's Republic of China, CEIC Database.
188
Figure 1-4-1-18 Areas of investments for foreign direct investments in China
0
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30
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60
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80
90
100
2005 2006 2007 2008 2009 2010Note: The east area includes Beijing, Tianjin, Shanghai, Hebei Province, Jiangsu Province, Zhejiang Province, Fujian Province, Shandong Province,
Guangdong Province, and Hainan Province. The central area includes Shanxi Province, Anhui Province, Jiangxi Province, Henan Province, Hubei Province, and Hunan Province. The western area includes Chongqing, Sichuan Province, Inner Mongolia, Guangxi province, Guizhou Province, Yunnan Province, the Tibetan Autonomous Region, Shaanxi Province, Gansu Province, Qinghai Province, the Ningxia Hui Autonomous Region, and the Shinjang Uyghur Autonomous Region. The northeastern area includes Liaoning Province, Jilin Province, and Heilongjiang Province. The ratio is calculated to the total amount.Source: Ministry of Commerce of the People's Republic of China, CEIC Database.
Northeasternarea
East area
Central area
Western area
(%)
Figure 1-4-1-19 Investing countries/regions for foreign direct investments in China
(Unit: 100 million $) 2008 2009 2010 2011
Hong Kong 410 461 606 705Virgin Islands 160 113 104 97Japan 37 41 41 63Singapore 44 36 54 61South Korea 31 27 27 26U.S. 29 26 30 24Cayman Islands 31 26 25 22Taiwan 19 19 25 22Western Samoa 25 20 18 21Germany 9 12 9 11France 6 7 12 8Netherlands 9 7 9 8Total of the world 1,083 941 1,057 1,160Source: Ministry of Commerce of the People's Republic of China, CEIC Database.
(Outward foreign direct investment) The Chinese government has advocated Chinese enterprises’ aggressive overseas expansion (“Go
Global”) since the early 2000s, and under this policy, outward foreign direct investments have shown rapid expansion with support of the government (see Figure 1-4-1-20). With respect to industries of investments, the major portion of investments is in the leasing and business service seectors, followed by the finance and by wholesale and retail trade sectors. With respect to investee economies, large investments have been made through Hong Kong, the Virgin Islands and the Cayman Islands (see Figure 1-4-1-21). The purposes of direct investments may be the sale of Chinese products, acquisition of technology, and others. Some sources point out that recently large investments for the purpose of resource development have been made.
189
Figure 1-4-1-20 China’s outward foreign direct investments
0
10
20
30
40
50
60
70
80
2005 2006 2007 2008 2009 2010
OthersReal estateConstructionManufacturingTransport and postal activitiesMiningWholesale/retailFinanceLeasing/Business serviceTotal amount
(Billion $)
Note: Net basis.Source: Ministry of Commerce of the People's Republic of China, CEIC Database.
Leasing/Business service
Finance
ManufacturingTransport andpostal activitiesMining
Wholesale/retail
Real estateConstruction
Others
Figure 1-4-1-21 Investee economies of China’s outward foreign direct investments (2010)
Investing countries Direct investment(100 million $)
Composition ratio(%)
1 Hong Kong 385 56.02 Virgin Islands 61 8.93 Cayman Islands 35 5.14 Australia 17 2.55 U.S. 13 1.96 Canada 11 1.77 Singapore 11 1.68 Thailand 7 1.09 Russia 6 0.8
10 Germany 4 0.611 South Africa 4 0.612 Japan 3 0.513 UK 3 0.514 Vietnam 3 0.415 India 2 0.316 Algeria 2 0.317 Nigeria 2 0.318 Macau 1 0.120 New Zealand 1 0.1- Others 117 17.0- Total amount 688 100.0Note: Net basis.
Source: China Statistical Yearbook (National Bureau of Statistics of China).
Hong Kong
Cayman Islands
Virgin Islands
Others
Canada
U.S.Australia
Singapore
(3) 2012 management policy of the Chinese economy In December, 2011, the Central Economic Work Conference, which reviews basic economic policies,
was held and decided the policies to handle in a balanced manner the relations between (i) stable and relatively fast economic growth, (ii) economic restructuring, and (iii) managing inflation expectations. This marks a shift from “inflation control” to “stable growth.” In response to that, in March 2012, the management policy of 2012 was announced at the National People’s Congress (corresponding to the Diet in Japan; hereinafter abbreviated as “NPC”).
In observing the key points, the government’s major duties included “more speedy development with economic stability” cited as a top priority to emphasize the domestic demand, especially the
190
expansion of demand for consumption (see Table 1-4-1-22). A stable price level was also cited as a priority issue to propose the policies regarding the enhancement of cost reduction by activating distribution as well as the increase in the production, in particular, of food.
According to 2012 major economic targets announced concurrently, GDP growth rate was reduced from 8% (target in 2011) to 7.5% (see Table 1-4-1-23). It is explained that this is because the transformation of China’s economic development pattern and the enhancement of quality and performance of economic growth lead to long-lasting development. Consumer price remains around 4%. As for financial and fiscal policies, “proactive fiscal policy” and “moderate financial policy” were cited to maintain a fiscal deficit and the amount of government bonds to a moderate level, and the money supply (M2) growth rate was set at 14% (13.6%: result in 2011) to suggest the intention to support stable growth. Concurrently, the policy to make micro adjustments properly and on a timely basis according to the changes in circumstances was also proposed. As for the Chinese yuan, the policy to enhance the flexibility of a managed float system was proposed to suggest the expansion of the fluctuation band with upper and lower limit which would be implemented later. Table 1-4-1-22 FY2012 major duties ---- from the 11th National People's Congress 5th conference (reports on government activities)
1. Promote more speedy development with economic stability2. Keep overall price levels basically stable3. Encourage stable development of agriculture and sustained increase in income of farmers 4. Accelerate transformation of the economic development pattern 5. Implement human resource development as well as science and education 6. Ensure and improve the people’s wellbeing 7. Vigorously enhance cultural development 8. Deepen reforms in key areas 9. Further improve the quality and level of opening to the outside world10. Strengthen efforts to promote clean government and combat corruptionSource: Prepared by the Ministry of Economy, Trade and Industry.
Table 1-4-1-23 2012 major economic targets
2012Target Actual result Target
GDP growth rate Around 8% 9.20% 7.50%Newly employed worker inurban areas 9 million people 12.21 million
peopleMore than
9 million peopleRegistered unemployment ratein urban areas Less than 4% 4.0% Less than 4.6%
Consumer price Around 4% 5.4% Around 4%Money supply (M2) About 16% 13.6% 14%Total amount of foreign trade Around 10% 22.5% Around 10%Fiscal deficit 900 billion yuan 850 billion yuan 800 billion yuanSource: Prepared by the Ministry of Economy, Trade and Industry based on various materials.
2011
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2. Risk factors (1) Immediate attention points
With respect to the Chinese economy, there are points that require immediate attention. (Housing prices)
As examined in Section 1 of this chapter, housing prices also risen also in China amid global monetary easing after the failure of Lehman Brothers, and there is a concern that a sharp decline in soaring housing prices could lead to a hard landing for the Chinese economy. Up to the present date, a tight monetary policy and measures to control housing prices have kept the housing market from overheating, and the number of cities where housing prices are falling has increased since the latter half of 2011 (see Figure 1-4-2-1). However, the government has not lowered its guard against the housing market because it is believed that, despite some real estate companies’ difficult position, housing demand remains strong along with the advancement of urbanization. (Debt problems of local governments)
The amount of local government debt has increased because local governments were put under a certain financial burden by the economic stimulus measure of 4 trillion yuan. The National Audit Office (corresponding to the Board of Audit of Japan) published the report that local government debt had reached 10.7 trillion yuan at the end of 2010: Among the debts, 6.7 trillion yuan is the debt that local governments have an obligation to repay; 2.3 trillion yuan is the debt that they have an obligation to guarantee; and 1.7 trillion yuan is the debt that they have an obligation to give a certain level of financial aid. According to the report, the debt that local governments have an obligation to repay account for 52.3 % of the local government’s revenues, and 70.5% in case of adding the debts that they have an obligation to guarantee. Figure 1-4-2-1 New home sales prices, nationwide, 70 cities
-70
-50
-30
-10
10
30
50
70
1 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3
2008 2009 2010 2011 2012
Decrease in housing prices
Increase in housing prices
Note: Number of cities with an increase or decrease (more than 0.1%) in housing prices from the previous month, included in major 70 cities. There is no change in the remains of 70 cities.Source: National Bureau of Statistics of China, CEIC database.
(Number of cities)
(Month, year)
Number of citieswith an increasein housing prices
Number of citieswith a decreasein housing prices
China local governments are, in principle, prohibited from independently financing and establish the investment companies called “local government finance platforms” to raise money required for infrastructure development, etc. from financial institutions. According to the abovementioned report
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by the National Audit Office, there are about 7,000 nationwide local government financing platforms, which owe 5 trillion yuan of the total amount of local government debts as borrowers.165 In contrast, according to the survey conducted by the China Banking Regulatory Commission from the standpoint of a financial institution, about 10,000 nationwide local government financing platforms had piled up debts of 9.1 trillion yuan as of September 2011, and only 65% of the debts are collateralized. There are controversial points about the local government financing platform due to its vague definition as well as its unclear operation and stance. The amount of local government debt has been decreasing because the central government strictly controlled new borrowing. However, the debt repayment deadlines are concentrated in 2012, and so the China Banking Regulatory Commission announced a policy to encourage local governments to consult with banks on a six-month to twelve-month moratorium in case of inability to repay the debt. (Slowdown in exports stemming from the European debt crisis)
As examined in Section 2 of this chapter, an evident slowdown in the European economy has resulted in a decrease in exports bound for Europe from China from the previous year in early 2012 (see Figure 1-4-1-10(a) above). The EU is the major export counterpart for China. That has a substantial impact on coastal areas with high dependence on exports (see Figure 1-4-2-2). It is necessary to pay full attention to future trends. . Figure 1-4-2-2 China’s major export counterparts (2011)
Hong Kong14.1%
Others31.4%
Japan7.8%
Singapore1.9%
Russia2.0%
Other EU economies5.9%
France1.6%
Italy1.8%
UK2.3%
Netherlands3.1%
Germany4.0%
U.S.17.1%
South Korea4.4%
India2.7%
EU2718.7%
Source: Global Trade Atlas.
(2) Mid- and long-term challenges and measures (A) Pitfalls of economic growth
China faces challenges pertaining its mid- and long-term growth as well as risks pertaining to short-term economic trends. China became the second in the world for total amount of GDP, but remains at a low level in terms of per-capita GDP (see Figure 1-4-2-3). In the past, there were many 165 Some sources point out that there include financing platforms of local governments only at provincial,
municipal and county levels and do not include those at town and township levels.
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developing economies falling into the “Middle Income Trap”166: a situation where a country which attains a certain income due to its economic growth will get stuck at that level. For example, though Singapore, South Korea, and Central and South American countries were at almost the same level in terms of per-capita GDP from 1960 to 1980, Singapore and South Korea post a continued rise in per-capita GDP, and on the other hand, Central and South American countries remains at the former level for a long time. A great deal of attention is paid to whether China’s growth can last for further high income levels. Figure 1-4-2-3 Per-capita GDP (price in 2000: dollar base)
-
5
10
15
20
25
30
35
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
China
South Korea
Singapore
Argentina
Brazil
Mexico
Note: For income levels, which are considered according to per-capita gross national income (GNI) calculated based on purchasing power parityby the World Bank, per-capita GDP (price in 2000: dollar base) in the World Bank Database was used here to grasp long-term data of
each country.Source: WDI (World Bank).
(Thousand $)
Argentina
South Korea
Singapore
China
Brazil
Mexico
Growth to the high-income country withoutfalling into the middle income trap
It is pointed out that the “Middle Income Trap” arises from exhaustion of the labor surplus in the agriculture sector, rising wage levels and declining cost competitiveness in international markets, and limitations of using existing foreign technology. Below, we review the recent trends in China, keeping in mind such mid- and long-term structural problems. (Labor market)
In the long term, tight supply and demand and wage increases in the labor market develop. Job offer to job-seeker rates in urban areas rose in the 2000s, exceeded 0.9 in 2004, and reached 0.98 immediately before the failure of Lehman Brothers (see Figure 1-4-2-4). Though temporarily declining after the failure of Lehman Brothers, the rate exceeded 1.0 and continues to rise remaining in the situation where the number of job offers exceeds the number of the number of job seekers. Some sources point out that the background to this is decrease in the labor surplus in rural areas167 and job 166 The after-mentioned joint report by the World Bank and Development Research Center of the State
Council of China points out the following: Developing economies can, in an early phase of development, gain high productivity increase by shifting labor force and capital from the low-productivity sector including agriculture to the high-productivity sector including manufacturing industries. Later, however, exhaustion of the labor surplus in rural areas and end of such shift between industries result in rising wages and declining cost competitiveness in international markets. Furthermore, technological catch-up has been promoted, and so it is necessary to increase productivity by innovation to find a new source of growth. Japan, South Korea and Singapore are cited as a country which became a high-income country without falling into the “Middle Income Trap”.
167 It is believed that, in the course of industrialization, absorption of the labor surplus in the agriculture sector into the industrial sector causes the exhaustion of the labor surplus in an agriculture sector and the tight supply and demand situation in the labor market to result in wage increase. This is called the
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creation in local areas encouraged by the economic stimulus measure of 4 trillion yuan. Such labor shortages cause rising wage levels as well as increased workers rights awareness and rising living costs, and recently the wage levels have become high, especially in coastal areas including Beijing, Shanghai and Guangzhou (see Figure 1-4-2-5). In comparison of the annual burden of Japanese affiliated companies (manufacturing industry) between China and neighbor countries, wages in such coastal cities have exceeded those in Jakarta, Manila and New Delhi, and have risen to the almost same level as those in Bangkok and Kuala Lumpur (see Figure 1-4-2-6). Figure 1-4-2-4 Job offer to job-seeker rate in urban areas in China
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Ministry of Human Resources and Social Security of the People's Republic of China, CEIC Database.
(Ratio)
1.08Failure of Lehman Brothers
(2008.9.)
Job offer to job-seeker rate is rising.
Job offer to job-seeker rate hasreached nearly 1.0 (0.98).
Figure 1-4-2-5 Average wage of China’s manufacturing industry in urban areas
(Thousand yuan)
Shanghai
Beijing
GuangzhouNationwide averageSichuan Province
Source：China Statistical Yearbook (National Bureau of Statistics of China).
(Demographics) It is expected that, just like Japan, China will have an increasingly aging population under the
one-child policy. According to the population projection by United Nations, China will reach the peak of productive-age population in 2015168, and the percentage of productive-age population will decrease (from 72.4% to 68.9%) for twenty years from 2010 to 2030 (see Figure 1-4-2-7). In contrast, the
“Lewis turning point” as introduced by Arthur Lewis, English economist. Some sources point out that, in China, the rural labor surplus, which was supplied as a rural migrant (míngōng) to cities in the coastal area, has began to be exhausted.
168 The population projection by United Nations reported that China would reach the peak of productive-age population (aged between 15 and 64) in around 2015, but China announced that the productive-age population decreased by 0.1% point in 2011.
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percentage of aging population will double (from 8.2% to 16.6%), and it is inevitable that measures be taken to counter the effects of an aging society and to shoulder a heavier social security burden. Furthermore, a decrease in the percentage of young population (from 19.5% to 14.6%) suggests future further aging. Figure 1-4-2-6 Comparison of the salary level of Japanese manufacturers in China and major Asian countries
0
1
2
3
4
5
6
7B
eijin
g
Shan
ghai
Gua
ngzh
ou
Dac
ca(B
angl
ades
h)
Han
oi(V
ietn
am)
Jaka
rta(I
ndon
esia
)
Man
ila(P
hilip
pine
s)
New
Del
hi(I
ndia
)
Ban
gkok
(Tha
iland
)
Kua
laLu
mpu
r(M
alay
sia)
Note: The annual burden of Japanese affiliated companies (manufacturing industry workers, who are regularly employed, with minimum three years working experience), including base salary, various allowances, social insurance, overtime money, and bonus. 2010 survey.Source: JETRO Web site (Investment cost data).
(Thousand $)
Figure 1-4-2-7 Outlook for China’s population composition
-200,000 -150,000 -100,000 -50,000 0 50,000 100,000 150,000 200,000
0-45-9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-8990-9495-99
100-
Note: Future population projections by United Nations, which are classified into long-range, moderate-range, and short-range projections. Here, the moderate-range projection is displayed.
Source: World Population Prospects: The 2010 Revision (United Nations).
Productive-age population
(aged between 15 and 64)
72.4%
Productive-age population
(aged between 15 and 64)
68.9%
Aging population (aged 65 and over)
8.2%
Aging population (aged 65 and over)
16.5%
(2010) (2030)
Young population (aged between 0 and 14)
19.5%
Young population (aged between 0 and 14)
14.6%
(Unit: thousand people)
(B) Transformation of the economic development pattern In response to such trends, we review the transformation of the economic development pattern
supported by the Chinese government at first. Afterwards, we introduce the joint report released by the World Bank and Development Research Center of the State Council of China in February 2012 to examine the issues reported thereof, including structural reforms to develop a market-based economy and encourage innovation. (Transformation of the industrial structure)
Major issues for the transformation of the economic development pattern cover the following: (i) transformation of the industrial structure, (ii) transformation of the demand structure, and (iii) balanced regional development. According to the transition of China’s industrial structure, on a GDP basis, the secondary industry has mainly grown while primary industry has been sluggish, and tertiary
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industry has grown late (see Figure 1-4-2-8). On the other hand, the number of workers has been shifting from primary industry to secondary and tertiary industries. However, primary industry still has a large number of workers and lags behind the other two industries in terms of per-capita GDP. As for the secondary industry, though the number of workers has increased in the past, and there is a limit on the capacity for employment due to the progress of mechanization. Instead, it is remarkable that the number of workers has been increasing in the tertiary industry. Figure 1-4-2-8 China’s industrial structure
0
5
10
15
20
25
30
35
40
45
50
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
100
200
300
400
500
600
700
800
900
1000
Source: National Bureau of Statistics of China, Ministry of Human Resources and Social Security of the People's Republic of China,CEIC Database.
(Trillion yuan) (Million people)
GDP (left axis) Number of workers (right axis)
Primary
Secondary
Tertiary
Primary
Secondary
Tertiary
GDP for each worker (2010) Primary industry 14.5 thousand yuan Secondary industry 85.8 thousand yuan Tertiary industry 65.9 thousand yuan All industries 52.8 thousand yuan
Under such circumstances, the Chinese government advocates in the 12th Five Year Plan both the modernization of agriculture, which lags behind in productivity, to improve rural residents’ livelihoods and the further development of the service industry which promises the future growth and increased capacity for employment. Furthermore, regarding the manufacturing industry, the policy was proposed to improve sophistication and international competitiveness mainly for seven strategic emerging industries (see Table 1-4-2-9). (Transformation of the demand structure)
In light of the demand side of China, the proportion of investment increased and the proportion of consumption decreased throughout the 2000s (see Figure 1-4-2-10). The transition of the contribution of China’s real GDP growth rate also shows that investment played a major role and, in addition, exports emerged in the middle of the 2000s as a driving force for economic growth due to the expanding trade surplus (see Figure 1-4-1-3 above). However, economic growth supported by domestic demand, especially the importance of consumption-driven growth, was further recognized amid continuing uncertainty of the world economy. The 12th Five Year Plan advocated a well-balanced economic growth among consumption, investment and trade, and moreover aimed to increase income exceeding the pace of economic growth to boost consumption. For example, action plans included to increase the per-capita real income of rural residents with a low growth rate of no less than 7% (beyond the economic growth target) in the same level as that of urban residents, and to increase the minimum wage standard on a nominal basis by no less than 13% on average each year. The abovementioned rising wage level reflects the Chinese government’s policy to aim at transformation of the demand structure. There are questions concerning whether or not China can shift
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to a structure where people can share the fruits of growth. Table 1-4-2-9 Strategic emerging industry
1 Energy saving and environmental protection industry2 New-generation information technology industry3 Biotechnology industry4 High-end machine and equipment industry5 New energy industry6 New material industry7 Clean energy vehicle industry
Figure 1-4-2-10 China’s GDP composition ratio
0
20
40
60
80
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Consumption
Investment
Net export
(%)
Source: National Bureau of Statistics of China, CEIC Database.
Increase in the proportion of investment and decreasein the proportion of consumption
Consumption
Investment
Net export
Looking at the result of economic growth in 2011 from such viewpoint, we can see the trend of the first year of the 12th FYP in line with the plan, in which the contribution of consumption increased while the contribution of investment decreased (see Figure 1-4-1-3 above).
Major tasks in 2012 for the Chinese government include a wide range of measures: to increase income of low- and middle-income groups through change in the structure of income distribution (policies such as tax reduction) for enhanced purchasing power; to expand services concerning people’s livelihoods such as care for the elderly, health care and insurance, culture, and tourism; and to encourage environment-conscious products.
Urbanization was in progress throughout the 2000s and the population in urban areas exceeded the population in rural areas for the first time in 2011 (see Figure 1-4-2-11). It is considered that urbanization causes increased consumption of durable goods and various services (including entertainment, health care and education) as well as increased investment for improving housing and the urban transportation system.
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Figure 1-4-2-11 Urbanization in China
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200
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600
800
1,000
1,200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
10
20
30
40
50
60Population in urban areasPopulation in rural areas
Urbanization ratio (right axis)
(Million people)
Source: National Bureau of Statistics of China, CEIC Database.
(%)
Population in urbanareas exceeds populationin rural areas.
Urbanization ratio51.3% in 2011
Population inurban areas
Population inrural areas
(Balanced regional development) In China, problems concerning disparities among regions, between urban and rural areas, and in
urban areas have arisen in the process of remarkable economic development. It is pointed out that generally in developing countries, disparities grow initially in the process of economic growth and shrink as the fruits of growth spread over the whole society. China, at first, gave priority to economic growth under the reform and door-open policy and now is engaged in correction of its growth disparities.
Firstly, as for disparities among regions in China, the transition of per-capita GDP by province shows that the eastern area (coastal area) including Shanghai has achieved high economic growth driven by export due to foreign capital inflows, while the central and western areas (inland areas) have experienced relatively delayed economic growth. For example, in comparison of per-capita GDP between the 1st- and 31st-ranked province,, the disparity widened to 10.9 times in 2000 (see Figure 1-4-2-12).
Under such circumstances, large-scale development of the western region was launched in 2000 aiming for growth based on rich resources and large-scale infrastructure development, and northern region development was implemented on a full scale as a national strategy in 2003 aiming for transformation of the industrial structure from a state enterprise-centered economy to a market-based economy, along with the promotion of foreign investment. Furthermore, in 2005, central region development was specified as a national strategy in the 11th Five Year Plan. These efforts have gradually reduced the abovementioned disparities in per-capita GDP. However, it is also true that t considerable disparities remained as of 2010.
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Figure 1-4-2-12 China’s per-capita GDP by province/city
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10
20
30
40
50
60
70
80
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
2
4
6
8
10
12
14
16ShanghaiBeijingGuangdong ProvinceHubei ProvinceSichuan ProvinceYunnan ProvinceGuizhou ProvinceDisparity (between the 1st and the 31st)
(Thousand yuan)
Source: National Bureau of Statistics of China, CEIC Database.
Shanghai (Eastern area)
Sichuan Province(Western area)
Guangdong Province(Eastern area)
Beijing (Eastern area)
(Times)
Hubei Province(Central area)
Yunnan Province(Western area)Guizhou Province (Western area)
Disparity(between the 1st and the 31st)
(right axis)
10.9 times
7.3 times
5.8 times
Secondly, as for disparities between urban and rural areas, the transition of per-capita income in both areas shows that the disparity has grown since the late 1990s (see Figure 1-4-2-13). Under such a circumstance, the administration of Hu Jintao and Wen Jiabao, which came to power in 2002, has tried to increase incomes mainly in rural areas with the aim of the realization of a “harmonious society.” Afterwards, income disparities between urban and rural areas stopped expanding and instead, there have been signs of a reduction since 2010. However, a factor of three disparity remains, and we need to focus on the future trends. Figure 1-4-2-13 Per-capita income in urban areas and rural areas
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25
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20111.5
2.0
2.5
3.0
3.5
4.0
Urban areaRural areaRatio of urban area / rural area (right axis)
(Thousand yuan)
Note: Per-capita disposal income and per-capita net income are displayed respectively for urban areas and rural areas.Source: National Bureau of Statistics of China, CEIC Database.
(%)
Administration of Hu Jintao and Wen Jiabao(From 2002)
Finally, as for income in urban areas, the transition of household distribution by income group shows that the households have shifted to the upper income groups and income levels have increased as a whole. This data does not show the household distribution of high income groups, but the situation, in which many households were concentrated in low income groups, has improved (see Figure 1-4-2-14).
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Figure 1-4-2-14 Household distribution by income group in urban areas in China
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2
4
6
8
10
12
14
16
- 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 100-
200520062007200820092010
(%)
(Thousand yuan)Notes: 1. Annual household income on a nominal basis. 2. The household income with over 100 thousand yuan is lumped together not to be connected.Source: National Bureau of Statistics of China, CEIC Database.
Household income
Shar
eof
the
num
bero
fhou
seho
ldst
oth
ew
hole
hous
ehol
d
2005
2010
2010
20052006
2007
2008
2009
(C) Measures for modernization of the economy and strengthening of a market-based economy (Report released by the World Bank and Development Research Center of the State Council of China)
The World Bank and Development Research Center of the State Council of China released the joint report “China in 2030” in February in 2012. According to the report, China has achieved remarkable economic growth for the past 30 years and over 500 million people were lifted out of poverty, and it is expected that China is likely to become a high-income economy and the world’s largest economy before 2030. On the other hand, however, the report throws a question concerning whether or not such growth is sustainable based on the world economy and environmental problems. The report answers to this question that China has the potential to sustain such growth, but achieving this objective will not be easy and China needs to implement a new development strategy. As a result, six strategic directions are proposed to become a high-income economy by 2030 (see Table 1-4-2-15). Table 1-4-2-15 Proposals contained in “China in 2030”
1. Implement structural reforms to strengthen the foundations for a market-based economy2. Accelerate the pace of innovation and create an open innovation system3. Seize the opportunity for “green growth”4. Expand opportunities and promote social security for all5. Strengthen the fiscal system6. Seek mutually beneficial relations with the worldSource: China 2030 (World Bank, Development Research Center
of the State council of China) (Feb, 2012)
The proposals cover a wide range of elements: to implement structural reforms to strengthen the foundations for a market based economy by redefining the roles of the government, reforming and restructuring state enterprises and banks, promoting competition, and deepening reforms in the land, labor, and financial markets; to accelerate the pace of open innovation by participating in global research and development networks as well as improving the quality of domestic human resources and universities; to expand opportunities for employment, public services and social security for all; and to strengthen the financial basis of local governments. Moreover, it is pointed out that the current 12th
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Five Year Plan provides an excellent start. We examine the current status of some key elements, taking into consideration of these proposals, the abovementioned reports on government activities announced at NPC, and the 12th Five Year Plan. (Strengthening of a market based economy) • Enterprise sector
High growth in China is supported mainly by the vigorous activity of private firms, but many sectors including electricity, petroleum and petrochemicals, telecommunications, coal, and transportation are kept under absolute control by state enterprises. Some sources point out that state enterprises bring pressure on private firms by their efficiency, monopoly on the market, and advantageous access to capital, resources and orders (the state advances, the private sector retreats). The abovementioned report points out that it is important to promote efficiency and the revitalization of the economy through free competition. • Financial market
In China, state banks have strong influence on the financial market, and the government is prominently involved in interest rates. Some sources point out that interest rates set by the government may be used in inefficient investment to lead to excess investment and that it is difficult for private firms, especially small and medium-sized firms, to get financing because state enterprises are given priority. Further growth of China will require reforms: supply of funds to sound private firms, especially improvement of systems to foster small and medium-sized firms, and financial liberalization including liberalization of interest rates. There is a concern about liberalization of interest rates because competition among banks causes financial crisis for some banks. Therefore, it may be necessary to introduce a financial safety net including depositor protection together. • Land
In China, the state has ownership in land and residents only have the right to use the land. This enables rapid progress in large-scale development, while this causes social problems were weak residents, especially farmers, cannot receive full protection. Moreover, the problems are escalated by the fact that tax revenue concerning sale of the right to use the land which was purchased and real-estate development becomes important fiscal resources of the local governments. For the purpose of solving the problems, it is necessary to protect residents’ rights as well as to address the issue of fiscal resources of the local governments as described later. • Labor force
Manufacturing industries in China are largely attributable to migrant workers from rural areas, who are called as the “rural migrants (míngōng),” and there were 250 million migrant workers in 2011 (see Table 1-4-2-16). Further economic growth demands the free movement of such workers, but such workers are put in a precarious position under the current family register system (hukou system). For example, when working in urban cities, rural migrants without urban hukous are denied access to social security services including health care, education or housing. It is expected that the growth rate of the labor force will slow in the future also in China, and the effective use of a valuable labor force is an important issue. For the purpose of solving the issue, it is necessary to reform the hukou system, to
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introduce social security instruments (pensions, health, and unemployment insurance) that are portable nationwide, and to address the issue of fiscal resources of the local governments that support such instruments. Table 1-4-2-16 Number of migrant workers
(Unit: Million people)
Easternarea
Centralarea
Westernarea
2008 225 85 140 43 52 452009 230 84 145 46 53 462010 242 89 153 49 56 482011 253 94 159 50 58 50
Note: “Within regions” and “Outside regions” are classified according to whether or not the workplace is within a township or a town where a family register exists.Source: National Bureau of Statistics of China, CEIC Database.
Migrantworkers
Withinregions
Outsideregions
Breakdown
(Science technology and innovation) While it is expected that the growth rate of the labor force will slow in the future, a high degree of
expectation is paid to the introduction of mechanizations as well as development and application to science and technology related industries to improve productivity. Looking at the movement of research and development expenses of China as an indicator, we can see that the ratio of research and development expenses to GDP has rapidly increased and reached the equivalent level to those of the United Kingdom in 2010 (1.8% of GDP). Furthermore, the 12th Five Year Plan sets the target to increase the ratio to 2.2% by 2015 (see Figure 1-4-2-17). Looking at the transition of number of patent applications as an indication of such achievement, we can see China’s efforts as the number of patent applications in China has rapidly increased since the beginning of the 2000s (see Figure 1-4-2-18).
The abovementioned report emphasizes that science, technology and innovation should proceed through free competition and the creative efforts mainly of private firms, and proposes that roles of the government include the establishment of domestic research and development networks, participation in global joint research, and fostering innovative cities taking advantage of the massing of enterprises research and development centers and world-class advanced universities, in addition to the establishment of standards and support with the tax system and subsidies. Figure 1-4-2-17 Ratio of research and development expenses to GDP of major countries
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
China JapanSouth Korea U.S.UK GermanyFrance
(%)
Source: Main Science and Technology indicators (OECD), China Statistical Yearbook (National Bureauof Statistics of China).
(Year)
South Korea
UK
France
German
U.S.
Japan
China
203
Figure 1-4-2-18 Number of patent applications in major countries
0
100
200
300
400
500
600
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
China
Japan
SouthKoreaU.S.
UK
Germany
France
Note: Total number of patent applications applied to patent bureaus around the world. Number of patent applications by country is classified according to the country of residence of applicants.Source: WIPO Statistics Database.
(Thousand case)
Japan
Germany
South Korea
China
U.S.
France
UK
(Environment, resources, and energy) With the economic growth in China, resources and energy consumption has rapidly increased to
create environmental problems. While demand for resources and energy is expected to expand also in the future, the 12th Five year Plan places environment protection and enhancement of resources and energy use as an important issue to set targets for increase in the ratio of non-fossil fuels, energy consumption per GDP, and CO2 emission. (Social security)
In China, there are differences in social security services (including education, health care, pensions and employment insurance) that people can receive under the hukou system. In addition, it is impossible to receive public services without family registration, as described above concerning the rural migrants. (Fiscal reform)
China’s local governments provide public services are directly connected to residents, and education, social security and health care account for a large percentage of the fiscal expenditure (see Figure 1-4-2-19). However, the local governments lack fiscal revenues to support necessary fiscal expenditures, and have no choice but to depend on money transferred from the central government or independently-earned income (see Figure 1-4-2-20). In 2009 and 2010, when local governments were put under a certain financial burden by the economic stimulus measure, in particular, a decline in the ratio of tax revenues to the fiscal expenditure caused debt problems of local governments as described in “(1) immediate attention points” in this paragraph.
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Figure 1-4-2-19 Breakdown of the fiscal expenditure of China’s local governments (2010)
Urban/rural community8.1%
Agriculture/forestry/fishery10.5%
General public service11.5%
Social security11.7%
Education16.0%
Medical and health care6.4%
Others35.8%
Source: China Statistical Yearbook (National Bureau of Statistics of China).
While it is required to strengthen the fiscal system of local governments, the central government introduced a pilot program in 2009 that allows local governments to issue bonds (which was previously banned) in the manner that the central government issues the bonds as an agent in order to allocate money to economic stimulus measures of 4 trillion yuan. Since then, respectively, in 2010 and 2011, 200 billion yuan of bonds were issued, and, in 2011, the central government allowed, on a trial basis, selected local governments (Shanghai, Zhejiang province, Guangdong Province and Shenzhen) to issue bonds independently. Furthermore, in 2012, the central government issued 250 billion yuan of bonds as an agent, and intends to allow about ten local governments including Beijing to issue bonds independently. Figure 1-4-2-20 China’s local government finance
0
1
2
3
4
5
6
7
8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201048
50
52
54
56
58
60
62
64Financial income
Financial expenditure
Ratio (Expenditure / Income)
(Trillion yuan)
Source: China Statistical Yearbook (National Bureau of Statistics of China).
(%)
Financialexpenditure
Financialincome
Ratio (Expenditure / Income)
As examined above, though China has taken measures in consideration of long-term issues, results are still as yet insufficient and many problems remain. It is desirable to take comprehensive measures to address the mutually related problems beyond fields. It is difficult to solve the problems immediately. Currently, China has been in progress to address the problems. We cannot assume that China will achieve further growth to become a high-income economy. However, China has already developed a large-scale economy following the U.S, and Chinese leaders are to be changed this autumn. China’s future moves attract global attention.
