Andrea Boltho

Magdalen College

Università di Oxford

Torino

10 dicembre 2018

UNIVERSITA DI TORINO

Potrà la Cina evitare un rallentamento alla giapponese ?

4.0

OUTLINE

Introduction: Some stylized facts

Why did Japan slow down ?Any parallels with China ?

Short-term: someMedium term: noneLong-run: one

Conclusion: It will happen, but only eventually

WILL CHINA AVOID A JAPANESE-STYLE SLOWDOWN ?

JAPAN AND CHINAGDP per Capita (in 2016 $ in ppps)

1950 1960 1970 1980 1990 2000 2010 2020

200

2,000

20,000

Japan

Sources: Conference Board, Total Economy Database, March 2018; Oxford

Economics Database, October 2018.

%

China

40,000

GROWTH OF OUTPUT, 1950-2020

(average annual percentage changes)

Japan China

1950-73 9.3

1973-90 4.1

1990-2020 1.0

1980-2010 10.1

2010-2020 7.1

Sources: Conference Board, Total Economy Database, March 2018; Oxford Economics Database, October 2018.

JAPAN AND CHINAGDP per Capita in ppp's (indices)

1950/80 1960/90 1970/00 1980 1990/20

100

1,000

Sources: Conference Board, Total Economy Database, March 2018; Oxford

Economics Database, October 2018.

China, 1980-2020 (1980=100)

2,000

/00

Japan, 1950-90 (1950=100)

JAPAN AND CHINA

Ratio of Gross Fixed Investment to GDP*

1950/80 1960/90 1970/00

10

20

30

40

50

Sources: Historical Statistics of Japan; Oxford Economics Database,

November 2018. * Constant prices.

China, 1980-2017

Japan, 1955-87

1980/10

JAPAN AND CHINAExport Performance in Manufacturing

(share of world market)

1950 1960 1970 1980

0

3

6

9

12

15

Japan(1951-1980)

Sources: GATT and WTO.

China(1980-2010)

/80 /90 /2000 /10

JAPAN'S SUCCESS STORY

A major ingredient: good (interventionist) policies

Belief in the importance of competition in thedomestic market

Yet, at the same time, belief in the virtues ofprotectionism vis-à-vis the outside

... but this could not continue in a globalizing world

Good coordination between monetary andfiscal policy through most of the high-growth period

... but this gave way to excessive financial liberalization and a massive bubble

And there were some excesses ...

CHINA'S SUCCESS STORY

The main ingredient: sensible policies

Accepting that markets are efficient

... but switching only gradually from plan to

market (unlike what happened in Russia)

Starting reform in agriculture (unlike what

happened in the USSR)

Opening to foreign trade and FDI (unlike

earlier Latin American policies)

Yet maintaining controls on capital

movements (unlike South-East Asia)

Of course, mistakes were made, e.g.:

Letting pollution reach sky-high levels

Allowing wide income gaps to emerge

And there were some excesses ...

INCOME DISTRIBUTION 2015 SELECTED COUNTRIES

Ratio of highest to lowest quintile

Swed. Germ. Japan* Italy China** USA*** Brazil

0

4

8

12

16

Source: World Bank. * 2008. ** 2012. *** 2016.

CHINESE EXCESSES

"China poured more cement and concrete between 2011 and 2013 than the US did in the whole of the 20th century"

L.Summers, Financial Times, 11 January 2016

POVERTY IN CHINA

Per cent of population living in poverty*

1990 67 per cent

2015 1 per cent

* Defined by the World Bank as an income below$ 1.90 a day at 2011 purchasing power parity.

Source: World Bank.

JAPAN AND CHINA - 1

Japan's growth decelerated sharply after 1990

Initial cause: The bursting of a financial bubble

Secondary causes: Monetary and fiscal policy mistakesSouth-East Asian crisis

Longer-term causes:Economic maturityDemography

JAPAN AND CHINA - 2

Does China face similar dangers ?

Financial bubble:Yes, up to a point

Other potential problems: Internal disequilibriaTrade war with the US

Longer-term causes:Maturity - eventually, but not yetDemography - yes !

JAPAN AND CHINA HOUSE PRICES

1980/2000 1985 1990/2010 1995/2015 2000

90

120

150

180

210

240

270

300

Japan

1980-2005

(1980=1000)

China*

2000-18

(2000=100)

* Major cities. Note: The 2000-05 data for China are VERY tentative.

CHINA - TOTAL DEBT*(in per cent of GDP)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

140

170

200

230

260

* Families, companies (excluding the financ. sector) and government.** China 2018 first quarter only. Sources: BIS, Oxford Economics.

Italy

(1996-2008)

China**

JAPAN AND CHINAHousehold Debt (in per cent of GDP)

2006 2008 2010 2012 2014 2016 2018

10

20

30

40

50

60

70

* Non financial sector.

Sources: BIS and Oxford Economics.

Japan(1980-92)

China

(1stqtr)

JAPAN AND CHINAPublic Sector Debt (in per cent of GDP)

2006 2008 2010 2012 2014 2016 2018

20

40

60

80

* Non financial sector.

Sources: BIS and Oxford Economics.

Japan(1980-92)

China

(1stqtr)

JAPAN AND CHINACorporate Debt* (in per cent of GDP)

2006 2008 2010 2012 2014 2016 2018

90

110

130

150

170

* Non financial sector.

Source: BIS.

Japan(1980-92)

China

(1stqtr)

CAN CHINA COPE WITH A FINANCIAL BUBBLE ?

Yes. Better, in any case, than most other

countries

Japan's monetary policy reacted very

hesitantly to what was happening. And

fiscal policy was tightened in 1997, just as South-East Asia plunged into crisis

China's authorities have many more fiscal

and monetary instruments than Japan had

at the time and have shown their readiness

to use them

In addition, capital controls protect the

country from a sudden outflow of capital

(as occurred in South-East Asia in the

late 1990s)

CHINA'S STRUCTURAL DISEQUILIBRIA

China's growth has been driven by an

incredibly high rate of investment which

has, until recently, been concentrated on

manufacturing and exports

The importance of exports has declined

somewhat, but the weight of investment

and of manufacturing remain excessive

The authorities are conscious of this and

would like to rebalance the economy

towards consumption and services

This, however, clashes with the growth

objective, particularly at present, in the

presence of a slowdown and a trade war

JAPAN AND CHINA

Ratio of Exports to GDP*

1950/80 1960/90 1970/00

0

10

20

30

Sources: Historical Statistics of Japan; Oxford Economics Database,

November 2018. * Constant prices.

China, 1980-2017

Japan, 1955-87

1980/10

GROSS FIXED INVESTMENT(in per cent of GDP; 3 years mov. avrgs.)

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

15

25

35

45

India

China

Italy

Japan

Germany

Source: World Bank.

MANUFACTURING OUTPUT

(in per cent of GDP; 3 years mov. avrgs.)

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

10

20

30

China

Korea

Source: World Bank.

Japan

Thailand

Taiwan

MANUFACTURING OUTPUT

(in per cent of GDP; 3 years mov. avrgs.)

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

10

20

30

China

EasternEurope

Eurozone

Source: World Bank.

LatinAmerica

India

USA

THE US-CHINA TRADE WAR

So far, this has been contained, and its

likely effects are hardly devastating

It could, however, last a long time, well

beyond Trump

It is not just about China's trade surplus,

but about a technological battle between

the world's two largest economies

And China would suffer more than America

given the trade imbalance:

2017 US exports to China $ 130 bn

2017 China exports to US $ 505 bn

And also its dependence on imports of

foreign technology

THE US-CHINA TRADE WAR

Cumulative effects of measures taken or

announced so far on GDP levels*

China USA

0

0.1

-0.1

-0.2

-0.3

-0.4

-0.5

* Including a 25% tariff from 1.1.2019. Source: Oxford Economics.

2018 2019 2020 2018 2019 2020

THE US-CHINA TRADE WAR

Cumulative effects of measures taken,

announced or threatened on 2021 GDP levels

China USA China USA

0

-0.3

-0.6

-0.9

-1.2

-1.5

Source: OECD

Current tariffsplus 25% in 2019

Tariffs on allChina-US trade

Raise tariffs on imports from the US to much

higher levels

Trump would do the same

Sell US Treasury Bonds

Could hurt China almost as

much as it hurts the US

Sharply devalue the renminbi

Could lead to massive capital

flight and destabilize many

other countries

Make life difficult for US companies in China

Possible, but US companies

matter for employment,

exports and technology

Gradually liberalize and open up which, in the

end, would be beneficial

(and, in the meantime, live with the costs)

HOW CAN CHINA RESPOND ?

CAN CHINA COPE WITH THESE CHALLENGES ?

Probably, in the light of its past (and more

recent) policy successes

It coped extremely well with the "Great

Recession"

It is reducing the share of investment

and of manufacturing in GDP

It has reduced the importance of exports

to the economy

It is achieving some reduction in

(regional) income differentials

It is gradually cooling the housing market

etc., etc.

THE BRICs IN THE "GREAT RECESSION"(GDP; per cent changes; 3 quarter moving averages)

2007 2008 2009 2010 2011 2012 2013

0

4

8

12

-4

-8

China

India

Brazil

Russia

CHINA - REGIONAL INCOME INEQUALITY

(Gini coefficients for regional per capita GDP)

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

0.15

0.20

0.25

0.28

Sources: China Economic Review , 2001; China Statistical Yearbook.

CHINESE POLICIES

" The Chinese political system has a

striking ability to target a few critical

issues and mobilize talent and resources

to address these issues when it is

absolutely necessary to do so".

Barry Naughton, The Chinese Economic System,

Cambridge MA, 2007, p.11.

WILL SUCCESS CONTINUE ?

But will such successes continue ?

Optimistic view:

The authorities are clearly consciousof the problems they are facing

Technocratic quality is improvingThe relatively liberal Bank of China

is gaining influenceRegional policy competition remainsin place

Pessimistic view:

There is one main danger: politics

Excessive centralization (as seen atpresent) can lead to very costlymistakes (remember Mao)

DENG AND CHINESE GROWTH

(GDP; percent changes; 3 years mov. avrgs.)

1978 1983 1988 1993 1998 2003

0

6

12

-6

-12

Source: Maddison.

9.7 % per annum

MAO AND CHINESE GROWTH

(GDP; percent changes; 3 years mov. avrgs.)

1953 1958 1963 1968 1973 1978

0

6

12

-6

-12

Source: Maddison.

The Great LeapForward (1958-62) -0.5% per annum

The Cultural Revolution (1966-76) 5.9% per annum

5.9 % per annum

JAPAN AND CHINAGDP per Capita (in per cent of US level)

1950 1960 1970 1980 1990 2000 2010 2020

0

20

40

60

80

100

Sources: Conference Board, Total Economy Database, March 2018;

Oxford Economics Database, October 2018.

China

Japan

United States

JAPAN AND CHINAGDP per Capita (in per cent of US level)

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

0

20

40

60

80

100

Sources: Conference Board, Total Economy Database, March 2018; Oxford

Economics Database, October 2018.

China

/00

Japan

United States

ASSUMPTIONS

GDP per capita average annual growth rates, 2020-2050

United States 1.4

Japan 0.7

China 4.0

Source: Oxford Economics Database, September 2018.

JAPAN AND CHINA

Population (indices)

1950 1970 1990 2010

100

110

120

130

140

150

160

Japan

(1950=100)

Source: UNPD

China

(1980=100)

/80 /00 /20 /40

Italy

(1950-100)

JAPAN AND CHINAAgeing (share of people aged 65 and more

in total population)

1950 1970 1990 2010

0

5

10

15

20

25

30

Source: UNPD

China(1980-2050)

Japan(1950-2020)

/80 /00 /20 /40

Italy(1950-2020)

4.0

AGEING AND ECONOMIC GROWTH

An older population is likely to:

i) Reduce growth because of lower labour supply

ii) Save less, thus raising interest rates and depressing

investment

iii) Lead to a rising pension burden and increasing health

costs, implying higher taxes, or budget deficits, and

spurring inter-generational tensions

iv) Be less dynamic and entrepreneurial

ENTREPRENEURSHIP BY AGE, 2009(percentages)

20-49 50-64 20-49 50-64 20-49 50-64 20-49 50-64 20-49 50-64 20-49 50-64

0

10

20

30

40

50

Thinking about starting a business Involved in early stage

start-up activities

China Japan Italy China Japan Italy

Source: EU, Eurobarometer.

Age:

ENTREPRENEURSHIP BY AGETotal entrepreneurial activity*, 2017

China Japan Eurozone

0

3

6

9

12

15

* Starting or owning/managing a new/recent venture. Source: GEM.

16- 25- 35- 45- 55-

24 34 44 54 64

16- 25- 35- 45- 55-

24 34 44 54 64

16- 25- 35- 45- 55-

24 34 44 54 64

Sources: Maddison, The World Economy, 2001 (for 1978); Boltho, Singapore Economic Review, 2004 (for 2020).

AN EARLIER PROJECTION

China

Share in World Output (ppp)

1978 4.92020 19.8*

China

Share in World Output (ppp)

1978 1.92018 19.1*

Source: Conference Board, Total Economy Database,March 2018.

2040 32.5*

* Assuming average annual growth of 4.75 for China and2.25 for the World.

* Assuming average annual growth of 6 per cent for Chinaand 3.5 per cent for the World.

* Actual growth rates: China 9.4 and World 3.3 per cent.