WHAT IS “CHINA MODEL”? MIT Sloan School of Management Yasheng Huang Professor MIT Sloan School of Management Founder China Lab and India Lab 1

WHAT IS “CHINA MODEL”?

MIT Sloan

School of Management

Yasheng HuangProfessorMIT Sloan School of Management

FounderChina Lab and India Lab

1

AGENDA

What is China Model?– Beijing Consensus: State capitalism– Gradualism: Gradual reforms but acceleration over

time– Reversal story: Substantial reforms but followed by

reversals Major challenges

– State capitalism and consumption decline– Rebalancing Chinese economy– Personal income, not GDP growth

– Prospects– Can urbanization contribute to rebalancing? — Effect of rebalancing on energy demand from China

2

IS CHINA MIRACLE DUE TO STATE CAPITALISM? Microeconomic studies contradict this claim

Case study: Zhejiang Wenzhou model: Capitalism and financial liberalization Middle of the country in per capita income in late 1970s Now the richest (outside Beijing, Shanghai and Tianjin) Higher asset income Higher personal income/GDP ratio Business innovations: Alibaba.com, Wanxiang, Wahaha

TFP studies: TFP growth of private sector outpaced that of state sector

3

BUT STRONG FEATURES OF STATE CAPITALISM

No democracy Top-down political controls– Tightening rather than loosening– 1980s vis-à-vis 1990s

Funding bias:– 90% of the stimulus program went to SOEs– 80% of bank loans to SOEs with 20% of

employment National champions are overwhelmingly

state-owned

4

A CHINA-INDIA COMPARISON

Boston Consulting Group: “The 2009 100 BCG New Global Challengers”

– Research on emerging firms based in developing economies

Of 100 firms selected: – China: 38– India: 19

5

THE CHINA-INDIA DIVIDE

The biggest difference between China and India: India’s growth is far more driven by private sector.

6

STATE CAPITALISM IS NOT A CONSTANT Relatively liberal phase: 1980s

Fast personal income and consumption growth No mercantilism: Fast GDP growth with an

overvalued exchange rate and trade deficit in several years

Some initial improvement in income distribution

Reversal: 1990s Intensification and entrenchment of state

capitalism: Since late 1990s

7

THE TRUE CHINA MIRACLE

How did China miracle begin? Getting the political economy right Financial liberalization Reversal of policies in the 1990s

8

POLITICAL ECONOMY PUZZLE

Vibrant rural entrepreneurship but why did rural entrepreneurs trust the Chinese state? Many landlords were executed in the 1950s Cultural Revolution (1966-1976): “Nasty, brutish

and long” Capricious politics: The Chinese prisoner’s

dilemma Policy credibility hinges on constraints on

rulers Academic literature (Weingast, North, Acemoglu

and Johnson, and many others) Is China different?

CHINESE POLITICS IN THE 1980S

Statics vis-à-vis dynamics in Chinese politics: Statics: China is/was not a democracy Dynamics: A substantial move away from the

status quo ante of the Cultural Revolution Entrepreneurs’ incentive depends

Not on a convergence with the best-practice political institutions

But on a dynamic movement toward convergence with these institutions

THE DENG XIAOPING EFFECT Final puzzle: How did rural entrepreneurs

know that politics had changed? Tens, even hundreds of millions of them Uncoordinated actions Lack of information and transparency

The Deng Xiaoping effect: Observability of policy/political changes Deng was observably different from Mao.

THE DENG XIAOPING EFFECT

Deng Xiaoping: Purged three times by Mao

Deaf ear to Mao His son was crippled by Mao’s red guards These Deng attributes: Widely known and

cognitively easy to interpret Implications:

The signaling was unambiguous More policy credibility than implied by

political changes alone

CHINA WAS NOT LIBERAL; IT WAS DIRECTIONALLY LIBERAL

Directional liberalism of the 1980s (All discontinued after 1989) Substantial media freedom in the early

1980s (by Chinese standard) Village elections introduced Recruiting capitalists into the Party (1981) Returning confiscated properties to former

capitalists (1979) Timing matters: The political effects were

exogenous to, not endogenous of, growth.

FINANCIAL LIBERALIZATION AND REVERSAL

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FINANCIAL REVERSAL DEFINITIONS AND MEASUREMENTS

Rajan and Zingales (2003) Financial development: the ease with which

any entrepreneur or company with a sound project can obtain finance, and the confidence with which investors anticipate an adequate return;

Motive of reversal: an interest group theory where incumbents oppose financial development to deter competition;

Measurements: size of financial system -- Bank deposit/GDP, equity market capitalization, # of listed firms/population, equity issuance/fixed capital formation.

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KEY RESULTS (QIAN AND HUANG 2011)

We document a financial reversal that occurred during the early 1990s in rural China. There were liberal financial policies in the 1980s to encourage

market operation and competition, but tight government controls in the 1990s.

As a result, there was a sharp curtailment of credit flows to the rural population and reduced financial resources to fund the nonfarm business operations run by Chinese rural entrepreneurs.

Little support for the view that emphasizes endogenous determinants such as formal/informal loan substitution, labor migration etc

Reversal was due to deliberate policy.

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EVIDENCE FROM BANK DOCUMENTSA1: Documentary evidence of financial liberalization during 1980s and reversal during 1990s in rural China. Features of the financial system 1980s 1990s Credit rationing of private enterprises

No Yes

Interest rate regulation More flexibility in rate determination

Controlled interested rate

Collateral, guarantee Qualification based Mandated Loan decisions Decentralized Centralized Loan officers Local and elected by members Appointed by top managers Government intervention Give control rights back to

shareholders Put under supervision of local government again

Entry barrier Deregulated, competition from nongovernmental capital is encouraged

Competition is repressed. Informal financing institutions were designated illegal and cracked down upon

Sources: People’s Bank of China (1999, 2001); Agricultural Bank of China (1984, 1985, 1986, 1988a, 1988b,1992a, 1992b,1994, 1995, 1998); State Council (1994, 1996, 1998); China Finance Association (1986, 1997, 2000 ); Chen Muhua (1987); Dai Xianglong (1997); Shi Jiliang (1999); Rural Work Leadership Team of Fujian Communist Party Committee (1997); Editorial Committee of Wenzhou Financial History (1995).

Han Lei, President of the ABC, July 20, 1984 “Rural areas need state-owned banks and credit

cooperatives for finance but at the same time, under bank supervision, we need to allow the existence of private (私人 ) free lending and borrowing.”

Chen Muhua, Governor of PBoC (1987): “Non-governmental (民间 ) capital mobilization and

non-governmental rural cooperatives have emerged. The various methods of financial mobilization have made a positive contribution to local economic development.”

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FINANCIAL LIBERALIZATION IN THE 1980S

Surveys and research in the 1980s: Average of six surveys of private firms

(1987): 41% received banks loans (Highest=66% in Shaanxi)

World Bank TVE study (1990): Private firms in Tianjin financing 39-44% of investments with bank loans.

William Byrd: “Banking institutions already see well-established private enterprises as solid borrowers.”

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SUBSTANTIAL CREDIT ACCESS IN THE 1980S

THE GREAT REVERSAL

• Chen Muhua (1986): • Under the banking regulations, individuals are not allowed to engage

in financial operations. The emergence of private (私人 ) credit shows that our financial work falls short of what is needed. This requires that our credit cooperatives and agricultural banks improve their services.

State Council (1998): Those funds, mutual assistance associations, savings associations,

capital service departments, share capital service departments, fund clearing centers, and investment companies established prior to this order and operating above the state law should be restructured with a deadline according to the regulations of the State Council. Those entities that operate after the deadline and continue to engage in illegal financing should be stamped out according to this order. Those with serious violations of a criminal nature should be held accountable for their legal responsibilities.

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MIT, March 9 2011

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THE SURVEY

A fixed-site rural household survey (FSRHS), conducted by China’s Ministry of Agriculture;

Implemented annually from 1986 to 1991; once in 1993, and again annually from 1995 to 2002.

Nationwide, 300 to 400 villages, stratified by socioeconomic development level and geography, were sampled each year, 20 to 120 households from each village were selected randomly.

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THE SAMPLE

Limiting to the six province data may in fact operate against our hypotheses – i.e., underestimate the degree of the 1990s’ financial reversal. Two out of the six are among the most developed provinces Sample average income level is higher than national average,

so is the access to bank loans, particularly so in 1990s. (National average values for certain variables are published by the Central Committee, Policy Research Office and the Ministry of Agriculture 2000).

Using the over 100 reconciliation equations to check the quality/consistency of the survey answers.

Our final sample includes 34,571 household* year for the 1986–1991 survey and 32,460 for the 1995–2002 surveys.

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ACCESS TO FINANCE

Figure 1A: % of households receiving formal or informal loans in the two periods.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

% of households receivingBank or RCC loans

% of households receivinginformal loans

% of households receivingbank, RCC, or informal

Loans

Access to Finance

1986-1991 Survey

1995-2002 Survey

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Baseline result-- a sharp drop in households’ access to bank loan in the 90s.Table 3: Baseline results for reduction of credit access as evidence of financial reversal

(1) (2) (3) (4) (5) (6) Y: Dummy that equals

one if loans are obtained from banks or RCCs

Y: log (value of the loan obtained from banks or RCCs)

Y: log (deflated value of the loan obtained from banks or RCCs

Reversal measure

Dummy (1995–2002 period) -1.96** -3.21** -9.30** -13.43** -1.75** -2.30** [0.45] [0.86] [1.62] [3.40] [0.09] [0.19] Economic variables

Log(cultivated land) 0.46** 0.52** 2.20** 2.76** 0.15** 0.32** [0.02] [0.03] [0.12] [0.14] [0.01] [0.01] Log(number of working 0.27** 0.23** 1.22** 1.06** 0.10** 0.14**

household members) [0.04] [0.05] [0.21] [0.24] [0.02] [0.02] Investment needs

Log(fixed assets investment) 0.12** 0.12** 0.66** 0.62** 0.09** 0.10** [0.01] [0.01] [0.03] [0.04] [0.00] [0.00]

Internal and external funding capacity Log(net household income) -0.42** -0.45** -1.78** -1.90** -0.10** -0.18** [0.02] [0.03] [0.11] [0.14] [0.01] [0.01] Log(remittance received) -0.02 -0.02 -0.1 -0.09 -0.01** -0.01 [0.01] [0.01] [0.05] [0.06] [0.00] [0.01] Education 0.15** 0.11** 0.79** 0.55** 0.08** 0.06**

[0.02] [0.02] [0.09] [0.11] [0.01] [0.01]

Control variables structural changes in the second sample period; Fixed effects: Year, Province, Subsidized family Production category

Observations 66,579 66,579 66,579 66,579 66,579 66,579

Pseudo R2 0.15 0.15 0.08 0.08 0.06 0.06

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Informal loan and household financial assets --- Is the decrease of formal loan due to substitution of informal loan or households’ increased financial strength?

Table 5: Formal, informal loan and financial strength of the households

(1) (2) (3) (4) (5) (6)

Access to formal credit (banks and RCCs)

Access to informal credit

Access dummy

Log (amount)

Log (deflated amount)

Access dummy

Log (amount)


Dummy (1995–2002 period) -2.04** -8.26** -1.41** -0.85** -3.02** -1.76** [0.36] [1.75] [0.11] [0.24] [1.10] [0.17]

Log(amount of 0.18** 0.89** 0.14** informal loan) [0.01] [0.03] [0.00] Log(financial assets) -0.05** -0.25** -0.02** -0.25** -1.24** -0.28**

[0.01] [0.05] [0.01] [0.01] [0.04] [0.01] Dummy (1995–2002 period) * 0.03** 0.14** 0.039**

Log(informal loan amount) [0.01] [0.05] [0.01] Dummy (1995–2002 period) * -0.01 -0.06 0.01* 0.05** 0.18** 0.11**

Log(financial assets) [0.01] [0.07] [0.01] [0.01] [0.05] [0.01] Other controls (economic, investment, funding capacity) Structural changes in the second sample period Fixed effects: Year, Province, Subsidized family Production category Observations 66,516 66,516 66,516 66,516 66,516 66,516 0.20 0.11 0.07 0.12 0.21 0.15

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Total loan balance -- Does the loan decrease because of a high amount of cumulated remaining balance?

Table 4: Evidence of reversal in the total loan balance

(1) (2) (3) (4)

Remaining balance on formal loans

Remaining balance on total loans

Log (amount)


Log ( amount)


Reversal measure Dummy (1995–2002 period) -10.76** -9.30** -1.95** -4.07**

[1.82] [0.72] [0.12] [0.16] Informal credits and internal financial strength

Log(amount of 0.60** 1.19** 0.10** 0.63** informal loan) [0.03] [0.01] [0.00] [0.00] Log(financial assets) -0.69** -0.87** -0.11** -0.36**

[0.05] [0.02] [0.01] [0.01] Dummy (1995–2002 period) * 0.33** 0.56** -0.02** 0.16**

Log(informal loan amount) [0.05] [0.02] [0.01] [0.01] Dummy (1995–2002 period) * 0.20** 0.42** 0.10** 0.28**

Log(financial assets) [0.07] [0.03] [0.01] [0.01] Other controls (economic, investment, funding capacity) Structural changes in the second sample period Fixed effects: Year, Province, Subsidized family Production category Observations 66516 66516 66516 66516 Pseudo R2 0.11 0.18 0.07 0.14

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Interest payment-- was the cost of loans higher in 90s than in

80s? Table 6: Robustness check for interest payment

Observation # Mean of interest payment rate Difference

t-test of difference

1st period

Bank and RCC loans only 2,281 5.43%

Informal loans only 5,967 1.63%

Both types of loans 2,288 2.43%

All observations 10,536 2.63%

2nd period

Bank and RCC loans only 643 5.66% 0.22% 0.26

Informal loans only 2,899 1.03% -0.60% -1.38 Both types of loans 503 1.77% -0.65% -0.93 All observations 4,045 1.86% -0.77% -2.23

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Is the reversal due to bad loan performance in the in the 1980s?

Historical bank performance data

We hand collect historical data on bank lending activities and loan performance (the Agricultural Bank of China’s Statistical Yearbook 1979–2008 and the China Finance Associations’ Almanac of China’s Finance and Banking 1985–2004).

Balance sheet information, annual transaction flows at the province level, including new loans, pay back rate, and new loans classified by borrower type, etc for both the Agricultural Bank of China’s (ABC) and the Rural Credit Cooperatives (RCCs).

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Bank activitiesBank performance and growth in lending activities during the 1980s and 1990s Panel A: Payback rate of loans Variable (rate in %) 1986–1991 1995–2002 t-statistics of difference Loan payback rate in RCCs 81.65 84.09 -1.46 Loan payback rate in ABC 91.71 84.58 5.41 TVE loans/ total loans from ABC 0.87% 1.26% -1.53 Agriculture loans/ total loans from ABC 1.20% 4.13% -4.33 Panel B: The growth rate of various type of loans, deposits, and organizations Variable (average growth rate in %) 1986–1991 1995–2002 t-statistics of difference RCC total loans 33.52 16.23 5.28 RCC new loans 474.03 RCC total deposits 30.24 18.63 2.89 RCC new deposits 85.87 ABC total loans 12.41 18.98 -0.59 ABC new loans 31.89 6.02 3.29 ABC new loans to TVE -260.66 -4.02 -0.95 ABC total agriculture loans 20.85 -4.85 4.47 ABC new agriculture loans 47.89 -19.10 1.64 ABC # of institutions -3.73 ABC # of employees 21.53

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Bank performance

Figure 5B: Agricultural Bank of China: Equity net worth

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-- Reduction of loan follows good performance.-- Reversal is worse in provinces that had performed better in the 1st period.

Table 11: Bank loan and bank performance

(1) (2) (3) (4) (5) (6) Y: A dummy that equals

one if loans are accessed from banks or RCCs

Y: log (value of the loan obtained from banks or RCCs)

Bank performance lag 1 year -0.47** -0.56** -0.60** -2.48** -2.85** -3.06** [0.14] [0.15] [0.15] [0.69] [0.71] [0.71] Bank performance forward 1 year 1.54** 1.74** 6.26* 7.44** [0.57] [0.58] [2.54] [2.56] Dummy (1995–2002 period) -3.12** -2.98** -2.79** -13.16** -12.29** -11.19** [0.80] [0.80] [0.80] [3.45] [3.44] [3.46] Better performing provinces 1986-1991 -0.23** -1.33** * Dummy (1995–2002 period) [0.08] [0.38] Economic controls YES YES YES YES YES YES Structural changes in the controls YES YES YES YES YES YES Various fixed effects YES YES YES YES YES YES Constant 0.79** -0.52 -0.67 0.07 -5.21* -0.67 [0.27] [0.55] [0.56] [1.26] [2.47] [0.56] Observations 64,199 62,741 62,741 64,199 62,741 62,741 Pseudo R2 0.16 0.16 0.16 0.08 0.08 0.16

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Patterns consistent with with policy changes: -- sectoral priority, party/government control, and mandatory collateral requirements

Table 13: Explaining reversal by policy change indicators: political status, sectoral priority, and collateral requirement changes

Access to formal credit (banks and RCCs)

Access to informal credit

Access dummy

Log (amount)


Access dummy

Log (amount)


Log(durable goods) -0.28** -1.36** -0.16** -0.02 0.07 0.08** [0.03] [0.14] [0.01] [0.02] [0.11] [0.02]

Dummy (1995–2002 period) * 0.16** 0.97** 0.16** 0.09** 0.38* 0.02 Log(durable goods) [0.05] [0.23] [0.02] [0.03] [0.16] [0.03]

Days worked on nonfarm business 0.17** 0.91** 0.17** 0.07** 0.39** 0.08** [0.02] [0.09] [0.01] [0.02] [0.09] [0.02]

Dummy (1995–2002 period) * -0.09** -0.48** -0.13** 0.00 -0.01 -0.01 Days worked on nonfarm business [0.03] [0.12] [0.01] [0.02] [0.11] [0.02]

Political status 0.02 0.12 0.02 -0.01 -0.07 -0.02 [0.05] [0.22] [0.02] [0.03] [0.18] [0.03]

Dummy (1995–2002 period) * 0.17* 0.74* 0.03 0.06 0.37 0.06 Political status [0.09] [0.41] [0.03] [0.06] [0.29] [0.05]

Dummy (1995-–2002 period) -1.89** -9.30** -1.36** -0.89** -3.40** -1.88** [0.43] [2.49] [0.12] [0.27] [1.22] [0.18] All other controls; Structural change in the controls; Various fixed effects Observations 63,017 63,017 63,017 63,017 63,017 63,017 Pseudo R2 0.21 0.11 0.07 0.12 0.06 0.04

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KEY RESULTS (QIAN AND HUANG 2011)

Rather than simply not having launched any financial reforms, China actually reversed those were initiated;

The financial reversal was related to exogenous policy changes rather than to endogenous economic or political economy determinants.

The financial reversal in the early 1990s mattered for credit access, rural entrepreneurship, development of non state-owned financial institutions, and rural income.

THE BIGGEST CHALLENGE: CONSUMPTION DECLINE

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PROBLEMS WITH STATE CAPITALISM

Two functions of state capitalism– Able to build infrastructures rapidly– Resource mobilization to target funding

Biggest problem with state capitalism:

– Low personal income growth (relative to GDP growth)

– Huge and growing imbalances: Declining consumption

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THE GREAT CONSUMPTION COLLAPSE

Household final consumption expenditure % GDP. From World Bank’s WDI.

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THE ROOTS OF GLOBAL IMBALANCES: THE GREAT DIVERGENCE

Household final consumption expenditure % GDP. From World Bank’s WDI

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CHINA’S UNUSUAL CONSUMPTION DECLINE


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IT IS NOT AN EAST ASIAN PHENOMENON


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CHINA AND INDIA: CONSUMPTION GAP


HAS CHINA RELBANCED? 15% RETAILS GROWTH in 2009 and 18% in 2010

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NO.

INSTITUTIONAL RETAIL CONSUMPTION HAS RISEN SHARPLY

0%

5%

10%

15%

20%

25%

30%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

% of institutional retail sales

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HOUSEHOLD CONSUMPTION HAS DECLINED FURTHER IN 2008 AND 2009


STABILIZING THE CONSUMPTION SHARE OF GDP DURING THE CRISIS PERIOD

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THE KEY TO REBALANCING IS PERSONAL INCOME, NOT GDP OR SAVINGS RATE.

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WHY DID CONSUMPTION DECLINE IN CHINA?

Precautionary savings hypothesis: – High and rising savings rate is the problem– Measures to reduce the savings by 1) product

marketing and distribution and 2) social protection

Cautionary spending hypothesis– Low income growth, not high savings rate– Policy and institutional reforms to

improvement employment and income growth

NO EVIDENCE ON RISE OF SAVINGS RATE

Rural income and consumption growth:– 1980s and since 2003: Consumption growth

matched income growth– 1990s: Income growth exceeded consumption

growth but by a slim margin Zhou Xiaochuan (07/09, governor of China’s

central bank)– No increase in household savings rate in recent

years No support for the pre-cautionary savings

hypothesis

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CAUTIONARY SPENDING HYPOTHESIS

Cautionary spending hypothesis: – Low personal/household income

growth relative to GDP growth– Low expectations of future income

growth The case of rural migrant workers

– Low consumption due to both precautionary savings and cautionary spending

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GDP AND PERSONAL INCOME DIVERGENCE

GDP AND HOUSEHOLD INCOME GROWTH: 1978-200852

REAL RURAL CONSUMPTION GROWTH (1978 PRICES)

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DATA INCONSISTENCIES

National Bureau of Statistics data– Moderate growth in the 1990s but still

there was growth– Relative decline of income at the lowest

income group but absolute gains Ministry of Agriculture household

survey data:– No income (nominal) gains from 1995 to

2000 at the lowest quintile

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Ministry of Agriculture data: No income (nominal) gains from 1995 to 2000 at the lowest quintile

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RURAL ECONOMY AND URBANIZATION

WHY RURAL SECTOR MATTERS

Demand side:– 721 million rural residents in 2008 – 230 million rural migrants (NBS 2009)– There are many “rural cities” in China (contrast with India)

Supply side (=Entrepreneurship):– Rural China is more entrepreneurial due to lack of social protection

and less political control– Households=business units in rural China– Households are unambiguously private

Global crisis:– Huge supply effect of rural migrant workers but almost no

consumption effect– Policy discussions to revive rural entrepreneurship and rural finance

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URBANIZATION AS THE KEY?

Most policy makers and economists believe that urbanization is the key to the rural development

But China’s urbanization is: – Politically driven due to state ownership of

land– Instigating substantial social conflicts due

to land disputes– Accompanied by a sharp consumption

decline and stagnant service sector

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A VERY SMALL SERVICE SECTOR59

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URBANIZATION AND PERSONAL INCOME: SURVEY EVIDENCE

IS URBANIZATION A SOLUTION TO IMBALANCE? Features of Chinese urbanization

State ownership of land No recognition of incumbency rights Substantial institutional rigidities during

fast urbanization (such as Hukou system) No evidence that urbanization has

boosted household consumption

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URBANIZATION (CHINESE STYLE)

Agglomeration effects of market-based urbanization Reduce transaction costs and lower the provision costs of public goods.

Raise income and consumption: Middle class

Political urbanization Geographic expansions Government pricing of land transactions

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SPATIAL MEASURE: URBAN AREA ( 市区 )

SPATIAL MEASURE: CONSTRUCTED AREA (城建区 )

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CONSUMPTION DECLINED SHARPLY AFTER 2000


SURVEY EVIDENCE ON RURAL MIGRANT WORKERS 4 waves of survey data

2006 2008 2009 2010

Key results: One-time increase from rural to industrial

reallocation of labor No or modest subsequent wage increase until

2005 Wage growth substantially lagged GDP growth

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2009 SURVEY ON RURAL MIGRANTS IN GUANGDONG

Wage growth is very recent 95% of respondents experienced first on-job

wage increase in 2005 53% of the sample migrated before 2000 Wage increase through job change: 3 times on

average 10% wage growth between 2005 and 2008 A small decline in 2009: Survivor bias

Stagnant wage growth in the 1990s German survey in Shenzhen (1993)

Real annual wage growth between 1993-2005: 1%

67

GUANGDONG’S GDP PER CAPITA (DEFLATED BY CPI)68

GDP AND WAGE DATA IN GUANGDONG (SURVEY DATA)

Rural migrant survey data from Zhongshan University

69


Consumption: High savings rate:

40% (Urban: 20%) But 47% with zero deposit balances

Very economical on food: 10 yuan per day But substantial spending on children

education: 1/3 spent on private education on children

2010 survey Average electricity consumption: 70 kwhs Median electricity consumption: 45 kwhs

70


Hukou system and precautionary savings 27% have expectations for a hukou

change #2 savings motivation: Build house and

return to home village Exclusion of public goods

Barred from access to local public schools Education of children ranked #1 savings

motivation

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Human capital trap But almost no expenditure on skill training No public investments in private schools

for migrant children Substantial achievement gaps Public/private school teacher pay: 5:1 Barred from college entrance examination

in Guangdong Forced to return to and attend inferior high

schools in home provinces

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REBALANCING CHINESE ECONOMY: WHAT IS REQUIRED

Matching personal income growth with GDP growth

Reforms, not government spending– Land reforms

– Urban registration reform

– Social provisions

– Political reforms

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ENERGY INTENSITY OF GDP

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PER CAPITA ENERGY USE: CHINA AND INDIA

ELECTRIC POWER CONSUMPTION

kWh per capita. World Bank’s WDI.

76

“CHINA EFFECT” ON ENERGY MARKET

China vis-à-vis India– Energy consumption gap between

the two countries dated to the 1970s– Bigger GDP– Faster growth– More energy intensive– Despite smaller share of imported

energy

Net import of energy use (World Bank WDI)

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KEY FEATURES OF CHINESE ENERGY CONSUMPTION

Acceleration of energy intensity since the 1998-2001 period

– Not due to consumption boom – But due to urbanization and intensification of

state capitalism China’s energy use is dominated by

industry/commerce rather than by household sector

– The household energy consumption only experienced modest growth over time

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% OF HOUSEHOLD ELECTRIC CONSUMPTION PEAKED IN 2000

National Bureau of Statistics, Statistical Yearbook,, 2009

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PERSONAL ENERGY CONSUMPTION SURGED VERY RECENTLY

NBS data; kg coal equivalent

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MODEST HOUSEHOLD ELECTRIC CONSUMPTION

NBS data; kWh per capita

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WOULD CHINA’S ENERGY DEMAND FALL SUBSTANTIALLY IF CHINA SUCCEEDS IN REBALANCING?

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THANK YOU!

Documents

WHAT IS “CHINA MODEL”? MIT Sloan School of Management Yasheng Huang Professor MIT Sloan School of Management Founder China Lab and India Lab 1