The economic rise of China: threat or opportunity?

China's economy is opening up to the outside world. This worries those who fear the huge pool of low-cost labor will drain jobs from U.S. shores, and less expensive goods will spark trade problems. The author points out that China's untapped market presents huge opportunities for U.S. businesses that would surely outweigh any loss of jobs, and also that the sort of jobs that would move to China left the U.S. a long time ago. And with respect to fair trading practices, China has made much progress.China ; Economic conditions - China

China’s Consumption Driven Growth Path

International Development,

The Sustainability of China's Recovery from the Global Recession

China faces major challenges in sustaining its economic growth in a period of weak global recovery, particularly in Europe. In 2009 China's net exports of goods and services dropped precipitously, resulting in a substantial drag on economic growth. To overcome this drag China launched a massive stimulus program, financed largely with bank credit. While it is now widely understood that China was the first globally significant economy to begin to recover from the crisis, critics nonetheless increasingly charge that the stimulus program has substantial flaws and that China's early economic recovery cannot be sustained. One prominent critic has gone so far as to suggest that the stimulus has created a debt-fueled bubble that will collapse, causing China's growth to plunge to only 2 percent. Nicholas Lardy suggests these criticisms are exaggerated. Contrary to repeated criticisms, this stimulus had a substantial consumption component and focused on investment in infrastructure rather than expanding capacity in traditional industries such as steel. But the stimulus did come at a cost insofar as it led to a substantial increase in the borrowing of local investment companies, which local governments will have to ultimately repay, but the infrastructure provided through these companies likely will contribute to China's sustained economic growth and thus to increasing government tax revenues as well. The authorities recognize flooding the economy with more credit is not the way forward and that they will have to take strong additional policy initiatives to sustain economic growth. These include raising the prices of inputs such as water, electricity, and other resource products as well as introducing realistic environmental taxes and fees. These reforms, as well as a more flexible exchange rate, would reduce the distortions that for much of the past decade have favored industrial growth and exports over services and consumption and would contribute to sustaining China's impressive long-term economic growth.

China: Toward a Consumption-Driven Growth Path

China's decision to transition away from growth driven by investment and a growing global trade surplus toward one more dependent on domestic consumption is laudable. But to date China's initiatives have been too modest to change its underlying growth dynamic. China's external surplus continues to balloon and, short of a US recession, seems likely to expand further in 2007. Household consumption as a share of GDP continued to decline in the first half of 2006. Despite much lip service to increasing budget outlays on social services, little evidence of a fundamental shift in government spending has emerged. So Chinese households' precautionary saving persists. There is little evidence of a more flexible exchange rate and increased independence of monetary policy that would allow higher domestic interest rates. These and other factors suggest that China's transition toward more consumption-driven growth is likely to be substantially delayed.

Financial Repression in China

The Chinese banking system has improved significantly over the past decade, but in one critical respect, it appears to have regressed. The People's Bank of China controls interest rates in a way that has led to significant financial repression--low and now negative real return on deposits--as inflation has risen in recent years. This distorted interest rate structure is a significant obstacle to further reform of the financial system and to sustaining China's rapid economic growth. Financial repression costs Chinese households about 255 billion renminbi (US$36 billion), 4.1 percent of China's GDP, and a fifth of it goes to corporations, one-quarter to banks, and the government assumes the rest. Financial repression reduces the cost to the government of sterilized intervention to sustain China's undervalued exchange rate relative to the cost it would face if interest rates were liberalized. But the financial repression that facilitates an undervalued exchange rate imposes substantial, if partially hidden, costs on China's economy. It has led to lending rates that are far too low, resulting in excess demand for bank loans and increased use of quantitative targets to control credit growth. These have led to a less efficient allocation of capital through the banking system and to a huge underground financial market. Financial repression is also contrary to the government's long-term goal of developing a commercial banking system. It has also depressed the growth of household income, undermining the government's goal of transitioning to a growth path that relies less on investment and net exports and more on domestic consumption. Finally, financial repression seriously hinders the development of a fully and efficiently functioning capital market.

China's Embrace of Globalization

As China has become an increasingly important part of the global trading system over the past two decades, interest in the country and its international economic policies has increased among international economists who are not China specialists. This paper represents an attempt to provide the international economics community with a succinct summary of the major steps in the evolution of Chinese policy toward international trade and foreign direct investment and their consequences since the late 1970s. In doing so, we draw upon and update a number of more comprehensive book-length treatments of the subject. It is our hope that this paper will prove to be a useful resource for the growing numbers of international economists who are exploring China-related issues, either in the classroom or in their own research.

Capital Account Liberalization and the Role of the Renminbi

Despite an erosion of consensus on its benefits, capital account convertibility remains a long-term goal of China. This paper identifies three major preconditions for convertibility in China: a strong domestic banking system, relatively developed domestic financial markets, and an equilibrium exchange rate. The authors examine each of these in turn and find that, in significant respects, China does not yet meet any of the conditions necessary for convertibility. They then evaluate China’s progress to date on capital account liberalization, including recent efforts to promote renminbi internationalization and greater use of the renminbi in trade settlement. The paper concludes with an overview of remaining obstacles to convertibility and policy recommendations.China, renminbi, capital account

What Kind of Landing for the Chinese Economy?

Rarely has the outlook for the Chinese economy been so contested. Th e fi nancial press widely quotes three alternative perspectives on the short- and medium-term outlook. One school argues that the Chinese government's recent eff orts to rein in overly rapid growth are working and that the economy is now on a glide path to what is referred to as a soft landing. While "soft landing" is usually not fully defi ned, its chief feature in this case is that Chinese economic growth slows modestly from its current pace of 9 to 10 percent to around 8 percent and that the rate of job creation does not slow enough to constitute a major political challenge for the regime. At the other end of the spectrum is the hard landing school, which argues that the authorities to date have not tightened suffi ciently, that loan and investment growth remain excessive, and that the authorities soon will be forced to take more drastic action that will trigger a sharp correction. Finally, the no landing school argues that China's eff orts to slow growth modestly are misguided since the economy was not overheating in 2003 and early 2004. In this view, China is in the early stages of a secular boom that has several additional years to run.

China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity

This paper argues that the way in which China is portrayed in the revived Bretton Woods thesis (BW2) is not consistent with several important trends in, and features of, the Chinese economy; nor does the strategy in the BW2 seem sensible for China's long-term economic development. Whether it is the behavior of China's real exchange rate, the costs of sterilizing large reserve inflows, the role that FDI plays in financing China's fixed asset investment, the participation of foreign firms in China's exports and in the ownership of export industries, or the political economy of trade protectionism in the United States, the BW2 does not provide a good explanation either for how China has behaved in the past or how it should behave in the future. We conclude that the BW2 does not provide a persuasive story for why large US current account deficits and undervalued Asian exchange rates can or should continue for the next decade or longer.China's exchange rate policies, revived Bretton Woods system, Chinese economy