the rebalancing of the chinese economy

7/30/2019 The Rebalancing of the Chinese Economy

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RunningHeadTheRebalancingoftheChineseEconomy

TheRebalancingoftheChineseEconomy:

TheirPlan,theirPolicies,andthePotentialResults

JasonA.Fischer

MGT681

NiagaraUniversity

June2012


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TheRebalancingoftheChineseEconomy 2

Foroveradecade,ThePeoplesRepublicofChinahasexperiencedannualGDPgrowthlevels

above8percent,whilemorerecentlyteeteringaround10percentasshowninChart1.Many

economistswereskepticaltoforecastthesuccessthatChinawoulddiscoverasamarketdriven

economy,ultimatelycontrolledbyanauthoritarianCommunistParty.Theskepticismhassubsided,but

Chinahasbeenleftwithmanycomplicatedproblemsthatneedtobesolvediftheyseektowitnesseven

mildeconomicgrowthovertherestofthedecade.HowdidChinamanagetosustaintheseGDPgrowth

rateswhiletheglobaleconomyweakenedasaresultofthe2008financialcrisis?TheUnitedStatesand

theEuropeanUnion,neglectingthePIGS,entertainedgrowthratesof2.8percentand2.1percent,

respectively.The$1.897trillionUSDexportscompose24.51percentofChinasannualGDP.Aslabor

costsroseandtheglobaldemandforChineseexportswerereduced,Chinasoughtonesided

investmentdrivengrowthinbiginfrastructureprojectsasawaytomaintainGDPgrowthintheirhigh

speedeconomy.ThispaperwillanalyzethepotentialeconomiceffectsinChinaastherealestatebubble

deflatesandtheirabilitytoneutralizeanyoftheeffects.

TheonesidedinvestmentdrivengrowthinChinaduringthepastdecadehasallowedhighGDP

growthratestobemaintained.Chinaisbuildingnearly20newcitieseveryyear,whilevacancyratesfor

thesenewhighriseapartmentbuildingsremainatstartlinglevels.Analystshaveestimatedthatthereis

anywherefrom10milliontoashighas65millionuninhabitedapartmentsandhomesinthesenewly

manufacturedcities.65millionvacancieswouldbeenoughtoprovidehousingformorethanhalfofthe

U.S.population.Thegovernmentsobsessionwithbiginfrastructureprojectshaslimitedthequalityof

growththatwasbeingcreated.


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ThetwelfthfiveyearplanforThePeoplesRepublicofChinawasdebatedinOctober2010and

focusesoneconomicplanningfor2011through2015.("Chinas12thfiveyear,"2010) The17thCentral

CommitteeoftheCommunistPartyofChina(CPC)notedtheplanseffortstorebalancetheChinese

economybyshiftingemphasisfrominvestmenttowardconsumptionanddevelopment. TheCPC

continuedtoseteconomictargetsforthecountry. GDPissettomaintainannualgrowtharound8

percent,annualgrowthofpercapitaincomewillbearound7percent,and2.2percentofGDPwillbe

spentonresearchanddevelopmentby2015.Thetargetswillhelptheplancompleteothertasks

includingthe

readjustment

of

income

distribution,

curb

the

excessive

rise

of

housing

prices,

implement

prudentmonetarypolicy,intensifyanticorruptionefforts,andaccelerateeconomicrestructuring.

(Phan,2011) ThisfiveyearplancouldmitigatethefinancialwoesthatChinawouldexperiencewitha

suddendrasticdeclineinrealestatepricingsimilartowhattheUnitedStatesexperiencedbeginningin

late2007.

AstherealestateboominChinabeginstofizzle,itisimportanttonotethedifferencesin

financiallendingpoliciesbetweentheUnitedStatesandChina.First,theUnitedStateshadasubprime

mortgagecrisisthatoriginatedasaresultofpoorpoliciespertainingtolendingandborrowingpractices

bybigbanks. Second,U.S.bankswereinvolvedwithhighriskmortgageloansbecauseoftheinaccurate

creditratingsbeingpublishedbyagenciesduetoconflictsofinterest.Third,subprimeborrowershad

beenenticed

to

obtain

adjustable

rate

mortgages

because

of

the

eye

catching

below

market

interest

rateforapredeterminedperiodoftimewithoutrealizingthathigherpaymentsweresoontofollow.

AlthoughChinasrealestatepricesfelltoa16monthlowinMay2012asdemandexhausted,the

declinewasonly0.3percent,inlinewiththeexpectationsofaslowandsteadydecline.Themajor


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differingfactorforChinesehomebuyersandU.S.homeownerswastheneedtoprovideadown

paymentofatleast20percentandupto50percentforahomemortgageloaninChina.Theremaybe

40percent

of

wealth

in

China

tied

up

in

housing

compared

to

32

percent

in

the

U.S.duringitspeak,but

theChineseconsumerwillnotbemiffedasbadlyasAmericanshadbeen. However,theycanexpecta

goodportionoftheirwealthtodiminish.

ThroughoutthedecadeChinacontinuedtobuildnewcitiesandnewhomes.TheChinesewere

firstpermittedtobuyandsellhomesin1990.Yearswithoutopportunityhaveledtopentupdemand

thatisstillbeingfulfilledbutstartingtoplateauincertainregionsofMongolia. Someofthenewcities

thatChinahasspentlargepoolsofresourcesbuilding;remainmostlyuninhabited.DatelineSBS

reportedonChinasGhostCitiesinApril2011,focusingtheirreportaroundtheZhengZhoudistrict,

Dongguan,andOrdos.(Brown,2011) ThevideoreportwithAdrianBrownshowedsatelliteimagesof

thenewZhengZhoudistrictonaThursdayduringrushhour. Thenewcityhademptystreets,sidewalks,

shops,andthousandsofuninhabitedapartments.AdriantraveledtothenewSouthChinaMallin

Dongguan,whichislargestmallintheworldbasedongrossleasablearea,onlytofindthemallalmost

completelyempty. Thefactisthatithasbeen99percentvacantsinceitsopeningin2005. Dongguan

hasapopulationinexcessof10millionbutthemallresidesinasuburbofDongguanthatisonly

accessiblebycarorbus,leavingitinaccessibletothemajorityofthepopulationbecauseofthelackof

highwaysandanairport.Themallslocationmaybeoneflawandcauseforthestagnantdemandby

bothconsumersandretailers,buttheothermaybethattheconsumerculturehasbeengrossly

overestimated.


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ThefinalcityisOrdos,anoldcitythatflourishedinearlyyearsasthedemandforcoalrose,

whichhadbeenrecentlyreconstructedin2004atacostof$180billionUSD,wherethemajorityofthe

capitalwasborrowedfromU.S.banks. Manyofthenewapartmentshadbeenpurchasedbyconsumers

asinvestmentproperties,tryinguptheirwealthandgeneratingnoincome,asdemandissuppressed.

TherehavebeensomecomparisonsoftheChinesebuildingfrenzyonhousingtothatoftheJapanesein

the1960sandtheUnitedStatesinthe1980s.Historyshowsthatdemandforthosehomesincreased

onlyafewshortyearslater,concludingthatthepropertieswereonlybeingbuiltintheanticipationthat

demandwouldincrease.Thisisamagnificentcity,asseenfromGoogleEarth,andhasalarge

opportunitytobecompletelyinhabitedinthenextfiveyears. Itisestimatedthatnearly130million

peoplewillmigratefromtheruralareastotheurbancentersinthenextcoupleofyearsseeking

employmentopportunitiesoralifestylechange. Ordosneedstoincentivizelargeservicebased

businessestomakeahomeintheircity,ultimatelycreatingnewjobsanddrivinggrowth. Thiswillbe

themost

successful

way

to

capture

aportion

of

the

migrating

population.

Chinaisattemptingtorebalanceitseconomicmodelbycontrollingtheslowdowningrowthand

focusingonkeystructuralreforms. ChenDongqi,ViceDirectoroftheAcademyofMacroeconomic

ResearchundertheNationalDevelopmentandReformCommission,accentuatedthatthefirstaction

mustbetofurtherloosenmonetarypolicybycuttinglendingratesandthereserverequirementratiofor

bankstohelpboosteconomicgrowth.(Dongqi,2012) Chinesepolicymakershavesincepostedtworate

cuts,demonstratingtheirdedicationtohaveborrowingplayalargeroleinrevivingtheeconomythat

hasbeenoffthemarkfortwostraightquarters.Policymakerscouldhavecreatedcreditbyeasingthe

loantodepositratiorequirementsbecauseoftheeffectasmalladjustmentwouldhavewhenthetop


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fourbanksowngreaterthan50percentoftotaldeposits. Reutersreports,Theriskthoughisthat

easingtheLDRmightsimplyfuelovercapacityininefficientindustrieswithoutimprovinggrowth

prospects.(Yao,2012) TheendresultisthattheCentralBankdeterminedamorefavorableoutcome

wouldarisebygivingbanksmoreflexibilityinsettingtheirlendingrates. Ultimately,thiswillstimulate

borrowingaswellassatisfytherequirementtocreateamorecompetitivelandscapethatwillfund

privatesectorfirmsandboostgrowthinthedomesticprivatesector.Chinawillcontinuetomaintain

currentrestrictionsonhomepurchases,prohibitingindividualsfrombuyingmorethantwoproperties,

inanefforttocontrolanysignificantincreaseinmortgageratesamidthecutsinlendingrates.

ThereareanumberofothershiftsthatmustalsooccurifChinasrebalancingeffortwillbe

successful.First,Chinaneedstocompletetheshiftofitsrelianceonnetexportsandcapitalformationas

driversofgrowthandfocusondomesticconsumerdemand. Thecurrentaccountbalancestillmaintains

atradesurplus,althoughavolatileonethatiscontinuingtodwindle,whiletheservicesaccount

continuesto

suffer

as

the

Chinese

increase

tourism

and

business

related

travel.Secondly,Chinahas

experiencedacontinuedriseinrealurbanwages,yearoveryeargrowtharound10percentbetween

2003and2008andaround20percentasoflate. TherehasbeensignificantinvestmentinChinaandas

aresulttherehavebeensomeimprovementsmadeinlivingconditionsinruralareas.Therehasalso

beenademographicshiftastheaverageageoftheworkingpopulationreachesanalltimehigh,in

additionto

the

improvements

made

in

rural

areas,

that

is

creating

alabor

shortage

in

urban

areas.

(Jackson,2011)Thelaborshortageisthebiggestdrivingforcebehindincreasedunitlaborcostsinmost

industries.CoupleincreasedproductioncostswithanRMB/USDexchangeratethathasgrownfavorable

bymorethan30percentsince2005,andyouareleftwithmoreexpensiveChineseexports.Third,


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reformisneededinthefinancialsector.Thegoalistoloosenthecontrolsonforeigndirectinvestment

outflowsandincreaseforeigninvestmentbyChineseenterprisesandtoloosencontrolofdepositrates.

Finally,Chinamustoverhaulitsstatedirectedgrowthmodelandenableitsconsumerstospendmore

ontheirown. ThiswouldsustaintheChineseeconomyandgivetheworldeconomyaboostaswell. If

alloftheseshiftsaresuccessful,internalandexternaleconomicbalanceshouldbeachievedandquality,

sustainableGDPgrowthwillresult.

ThereareanumberofincentivesforChinatochangeitseconomicmodel.Currenteconomic

policiesare

contributing

to

wasted

resources,

increasing

polarization

and

adeepening

of

social

divisions,

andupwardspiralinginflation. Chart2,adaptedfromMorganStanleyResearch,graphstheConsumer

PriceIndex(CPI)from2001to2012.CPIpeakedinJune2011cominginaround6.2percentforthe

largestjumpsince2008. CPIstabilizedaround3.5percentinQ12012,significantlydownfromthe

levelsin2011. ThiscanbeattributedtogovernmentledRMBcurrencyappreciationthatishelpingto

maintainthepriceofimportedgoodsinChina. Chineseleadersunderstandthattheymustincrease

socialwelfareinordertoencouragedomesticconsumption. Chinacaneliminatemarketinefficiencies

oncapitalallocationbyreconfiguringitsempowermentofmassivestateownedenterprisesatthe

expenseoftheprivateindustry.

ThePeoplesRepublicofChinasawQ1GDPslowto8.1percent. AstheQ2numberissettobe

releasedinAugust,therearegrowingconcernsthatGDPmayfurthercooltobelow7.5percent. The

recentratecutsmayhavesignaledaweakQ2GDPnumberisontheway. AsChinastrugglestohitthe8

percentGDPtargetsetforthinthetwelfthfiveyearplan,thenumbersdonottrulyindicatethe


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economicsituationinChina. ThenumberofnewbiginfrastructureprojectsisdecliningasChinashifts

policiestoencourageincreaseddomesticconsumerdemand.Therealestatebubblemayhavealready

peakedandisslowlydeflatingwithoutprovidinganyindicationthatChineseinvestorswillbeaffectedas

theirAmericancounterpartswerein2008. TheGhostCitiesmaybeonthereceivingendofthe

anticipated130millionpersonmigrationfromruralareastourbanareasinthenextfiveyears,

eliminatingthetroublingvacancyrates. Coastalcitieswillcontinuetoexperienceannualincreasesin

laborcostsasthepopulationshiftsinlandandtheaverageageoftheworkingpopulationreachesits

highestlevelever.ManufacturingcompanieswillcontinuetoleaveChina,capitalizingonlowercostsin

countrieswithnew,moreefficientmanufacturingplantsandlowerminimumwagerequirements.China

needstoexercisecautionwhencuttinglendingratestostimulateeconomicgrowth. Therebalancingof

theChineseeconomyappearstobeinmotion,butspecialconsiderationsneedtobepaidtothe

aforementionedindicatorsandpoliciesifitistobesuccessful.


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TheRebalancingoftheChineseEconomy 9Chart1

Chart2


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Brown,A.()(2011).China[0seriesepisode].Retrievedfrom

http://www.sbs.com.au/dateline/story/about/id/601007/n/ChinasGhostCities

Chinas12thfiveyearplan.(2010,December10).Retrievedfrom

http://www.apcoworldwide.com/content/pdfs/chinas_12th_fiveyear_plan.pdf

Dongqi,C.(2012,May22).Chinashouldfurtherloosenmonetarypolicy governmentresearcher.

Retrievedfromhttp://www.foxbusiness.com/news/2012/05/22/chinashouldfurtherloosen

monetarypolicygovernmentresearcher/

Jackson,R.(2011).Specialreport:China.Retrievedfrom

https://www.chinabusinessreview.com/public/1104/jackson.html

Phan,G.(2011,Marcch5).Internationalbusinesstimes.Retrievedfrom

http://hken.ibtimes.com/articles/119137/20110305/chinadeliverskeytargetsthe12thfive

yearpan.htm

Yao,K.(2012,July6).Chinaratecutagamblethatbankswillboosteconomy.Retrievedfrom

http://in.reuters.com/article/2012/07/06/chinaeconomypolicyidINL3E8I61W520120706

the rebalancing of the chinese economy

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