China's Role in the Global Economy: myths and realities

so welcome to the LLC I’m a for macroeconomics who’s hosting this event so this is the first in a lecture series on important macroeconomic topics so next month Ethan Hills esky is going to talk about fiscal policy during the crisis and then mid-march I’m going to give a talk on whether everything you hear about macro is true or not and then Kevin Sheedy in April is going to give a talk about unusual unconventional monetary policies but this evening it’s my pleasure to introduce my colleague ko Jin so ko Jin got her PhD from Harvard and only four years ago in 2009 five years ago but she already has a very impressive CV she has published in the American Economic Review which is our top journal and she’s probably some very tough topics like why do capital flows not necessarily go to the countries that are most in need of capital she’s written in the Financial Times whether the Europeans could learn something from Asian countries she has worked or consultant at the IMF and the World Bank and a bunch of investment banks and so we’re very private sorry privileged that Kay Eugene is going to open the lecture series and she’s going to talk about China’s economic transformation myths and realities so she’s going to talk for roughly 40 minutes so after that you’re going to get a chance to ask questions please turn off your mobile phone but if you want to Twitter then you can in the hashtag is LSE macro thank you perhaps one of the least understood economies in the world today is China for the last thirty years it’s grown higher than on average ten percent per year it’s lifted hundreds of millions of people out of poverty and it has become world’s second largest economy so people that share a population living under about a dollar a day in nineteen eighty to eighty-five percent of the whole population by 2007 its plummeted to already thirteen percent and while it has been considered an economic miracle it’s often seen as a slumbering giant about to wake up and while people fear China’s rise people also fret about a China growth slowdown the world has challenged China’s economic policies sometimes controversial and their ramifications in the world including exchange rate manipulations capital controls unintended government policies and buying up Europe and the US China has also flooded the world markets with cheap capital and cheap labor exporting cheap goods around the world and it has often been accused as providing the backdrop for the recent financial crisis by bring massive amount of liquidity lowering the global interest rate so how do we see China in the global economy the roller has played and the role it will continue to play in the future but in order to understand that we first must turn to China itself and because China has garnered so much attention in the media in the press etc there has also been a lot of myths and misunderstandings and misconceptions about China’s economic structure so in this lecture the focus is going to try to be you know debunking some of prevailing notions so I want everyone in the audience to think about China not as a typical developing country now of course it’s adopted conventional development strategies urbanization industrialization globalization these have been instrumental to jumpstart China’s economic growth it involved massive transition out of agrarian societies China also became the world’s factory before it produced only for a small poor country and now it can produce for the world utilizing its resources globalization aided the process however unlike other typical developing countries there’s something different about China and one of the most powerful policy tools it has and it

will continue to have is precisely reform reform is China’s second revolutions that are great to leader than talking it’s probably to be precise are only great revolution but reform has been a powerful tool as we will see as an underlying source of growth and it is kind of the answer to why and how China’s growth can be sustained so the magic word is reform when thinking about China’s growth process because let’s not forget the historical context when China began its economic development in the late 1970s it was a centrally planned economy and by definition distortion ridden so the process of reform entailed gradual removals of distortions because unlike this ex Soviet bloc it chose to adopt a gradual istic transition process towards the market economy and there’s still many distortions left going forward there are many distortions yet to be removed so they took China took a gradual istic approach it started with from the 1980s where the government said well let’s try it out so the experiment experimentation started with special economic zones in the early 1980s or only four of them they received special industrial policies they welcomed foreign capital foreign trade by mid 1985 by mid 1980s four became fourteen by early 1990s the coastal cities which were the special economic zones expanded inland and studies have found that introducing a special economic zone into a city has over time increased GDP per capita of that city by twenty percent so the special economic zones worked in the 1990s reforms were characterized by a massive wave of privatization in particular the privatization of state-owned enterprises so inefficient entities of the state-owned enterprises were either driven out restructured or completely shut down they were privatized or they formed joint ventures with foreign companies so as you will see this kind of reform process of transition of reallocation of resources from inefficient areas to efficient areas from state-owned to private sector firms were was a major underlying source of growth and of course with China you can experiment with anything so 1992 the shanghai stock market reopened for the first time and dong zhuo King said well let’s just give it a try because if it doesn’t work we can always just shut it down so with these successful experimentations reform continued and deepened by the mid 1990s GDP growth has slowed down has stagnated what was the answer to that further reform so the next wave reforms in the 2000s were increasing globalization trade liberalization mm oh one China joined the WTO at the same time we saw growth pick up it rekindled growth it led to concurrently massive amount of corn surplus current account surplus trade surplus FDI foreign investment and all of that so reform as you can see what I’m trying to get at is that reform is a very powerful tool for the stimulus of growth unlike many other developing countries the recent third plenum reform package that was announced in November highlights the need for continued reform were not done yet there’s still a lot more to do and President Xi Jingping has basically put his legitimacy on the front line as to whether he can successfully implement these reforms reforms had been long delayed and they are at the forefront of the policies and it is very important if you read this carefully there’s a political undertone to his amount announcement of the reform package it is the party not the government that is going to push the reforms there’s a political government divide because the next wave of reforms is going to continue to challenge state-owned enterprises opening them to competition absorption by private sectors so President Xi in the new reform process will meet a lot of difficulty but if he were like Deng Xiaoping which was able to steer away all of these dissension

and hindrance to the reform process this will be successful but the emphasis is still reform think about China its growth process is by nature wedded to the process of reform this leads to the first myth I want to talk about which is is China’s growth model investment driven unbalanced and therefore unsustainable to clarify this concept you just think about output which conceptually is determined by three factors productivity capital labor the factors of production so the popular notion is that China’s growth is largely led by investment indeed investment rates were very high in the 1990s on average about 30% and now it’s over 40% proponents of a China growth slowed down or proponents of kind of and I’m you know unwinding of imbalance in the Chinese economy has in mind that diminishing returns the curse of diminishing returns is going to set it in other words with additional uses of capital capital become less efficient less productive so diminishing returns to capital will start to set in and this is why so-called China will slow down if it’s really investment driven but at the same time there’s a lot of evidence that there are still high returns to capital well about 20 percent and it has been increasing since the 1990s so how are we able to reconcile this fact with the popular conception that China’s growth models is investment driven growing like China growing like China is different investment growth is by no means the primary nor the most important source of growth in the last couple of decades growth came a great deal from the reallocation of resources of even existing resources without even pertaining appealing to creation of new resources existing resources in particular labor so the reallocation of existing resources from low productivity areas to high productivity areas from low productivity firms to high productivity firms contributed substantially to the productivity growth now there are two types of reallocation that have been most significant the first of which is rural urban kind of reallocation in particular the allocation the reallocation of resources away from the agrarian economy so the share of labor in agriculture at the end of the Maoist era was about 70% of the whole population and by 2007 it dropped to 30% but why would a rule urban reallocation contribute to productivity growth well the reason is that because of institutional restrictions in the late 1970s until the late 1970s people were very much tied to the land and severely restricted in terms of economic activities they are able to pursue so there was an oversupply of labour in agricultural sector and that lowered the return to labour in that sector so transition of labour away from the oversupply labor low return agriculture sector to the non agricultural sector contributed to growth but even more important is another type of reallocation which is the reallocation a way of away from state-owned enterprises to the private sectors so in a non our cultural sectors where the state-owned enterprises comprise the larger share of resources it it dropped from 52% of employment to third only 13% over this period and if you look at manufacturing firms this is a share of private sector employment these two are just basically measures of the same thing this is a share of private sector employment in manufacturing in the even in 1998 it was about 10% quickly climbed over to 60% by 2010 ok this is part of this wave of privatization that we observed so there has been a lot of reallocation away from state to private and this has contributed to growth because all state sectors are highly inefficient if you look at the average productivity growth between 1978 and 2007 the state sector grew at one point five two percent in contrast to the private firms at four point five six percent so the reallocation of labour in particular from state to private sectors contributed to aggregate productivity growth also rapid productivity growth in

the private sectors helped absorb a lot of the labor that was transferred out of the agriculture society created 420 million jobs now let’s do a counterfactual exercise let’s imagine that had the sector private sector not grown at all then calculations say that GDP per capita would have been on average three point seven nine percent lower annually okay of the ten percent on average that have grown absent private sector productivity growth and also people have shown that the gains to this reallocation of resources would have been much higher had there not been such a severe miss allocation of capital so what I mean by this is you know we talked a lot about allocation of labour across sectors and across firms but one of the constraining factors is that capital did not reallocate as swiftly and as efficiently as labour because we know that state-owned enterprises have access cheap access to capital and capital and private firms were highly constrained in terms of acquiring that habit also had these high productivity private firms been able to access capital had the capital also been swiftly reallocated across sectors then the gains would be much larger and in absence of any new capital formation or investment it’s shown that GDP you know China would have grown just as fast if said capital were able to reallocate efficiency efficiently so this leads to the next big thing the next big into impetus to growth is China’s growth over the answer is absolutely not because they’re still significant in this allocation of capital an example is looking at the state share of investment in the non agriculture sectors so the employment share by the end of 2004 only 13 percent and its contribution to GDP is less than 30 percent but it’s investment share is 53 percent it has a much better access to capital this is evidenced by the fact that returns to capital the blue line here is returns to capital for the state not for the non state firms it’s much higher than the returns to capital for the state firms it’s also evidenced by the high capital labor ratio of the state compared to the non state so the returns to capital were particularly high because capital was not able to easily go into these private sectors firm credit constrained is still very much a big deal so with the reallocation of capital plus the reallocation of labor there is still much more growth to come so the next big thing is winnowing distortions that better reallocate capital across sectors and across firms can lead to significant GDP growth and in particular studies have shown that catching up with us financial efficiency in terms of reducing this dispersion of returns to capital can lead to GDP increase of 60 to 100 100 percent eliminating differences in these returns can lead to productivity gains of 160 to 300 percent which are massive numbers by the way okay so removing distortions and better allocating capital can potentially be the next big source of growth so this is just to summarize that if you think that China is only driven by investment in formation of new capital think again because reallocating existing resources towards it’s more productive use has contributed a great deal to the growth so this is components of GDP growth and the red bars are those of within sector reallocation okay let productivity and that has been very important and finally putting things into perspective China is still very much a poor country in comparison okay this is real GDP per capita PPP adjusted in the early 80s it was about 5% of u.s. GDP per capita now it’s 20 percent but in terms of a catch up there’s still ways to go by no means is China a rich country in terms of levels it’s still very poor so the second puzzle or the second myth is China’s high saving rate so this is household saving rate for China in the late 80s there was about you know 5% very similar to the u.s. all right and not far from the advanced economies but over a matter of 20 years households saving rate quickly climbed to almost 30

percent okay households are saving 30 percent of the disposable income can track that to the profligate Americans and Europeans which have seen a rapid or you know a sustained decline in a household saving rate why is the high saving rate and the rising saving rate a puzzle that Chinese households like to save a lot is necessarily a puzzle the puzzle really is why china’s households are saving more and more over time over a period of rapid growth the chinese have experienced rapid income growth they know that chinese economy is growing in principle they should be even borrowing against their future income and therefore saving rates should fall right so why are they saving more and more there has been a lot of there been a lot of attempts to try to explain this puzzle why chinese save so much and save so more but we have to think about the two tests that it has to meet or the two criterium it has to meet first of all why it’s saving at such a high rate so the levels effect and the second of all why it’s growing over time also there’s a bit of confusion about you know is corporate saving the main driver is it urban versus rule these are important things the biggest puzzle is really the household saving rate okay the corporate savings have increased because of the greater profitability of corporations but the corporate saving rate has not increased over time in China it has actually fallen and also corporate savings has kind of increased across the board not just a Chinese phenomenon so it’s less of a puzzle so households saving rate has been increasing and moreover seventy-five percent of that increase in saving household saving comes from urban areas not rural areas so any account of why Chinese are saving so much has to fit these criteria there is a lot of interest and therefore the popular wisdom have extended to many different kind of explanations but they all meet some of these challenges some have appeal to culture Chinese are potentially thrifty but have they gone gotten thriftier over time that is less likely there is the notion that there’s a lack of social safety net you know so lack of social security system that bits people to save a lot but if that were really the main explanation for household saving then somehow Social Security have gotten worse over time to induce even greater saving uncertainty during the transition process where a lot of people were transitioning out of the state sectors into the private sectors losing their jobs have been considered to cause precautionary savings saving for a rainy day but has uncertainty gotten worse over time the last 20 years this is highly unlikely these are the popular wisdoms and they are not met without challenges but two of my favorite examples or two my favorite explanation has nothing to do with economics ironically enough the first one is a gender imbalance so there’s a large difference between the birth of males to females so by 2010 or 22 2004 every 100 girls there were roughly about 120 men 2120 boys okay so there’s a large gender imbalance and you might wonder why a sex imbalance could lead to differences changes in saving behavior well this is no country for young men marriage has just gotten ever so competitive and for matters of matrimony we can always turn to Jane Austen for an answer she lived to today she was certainly revised her opening statement in Pride and Prejudice and said that it is a universally acknowledged truth that every man in search of a wife must be in position possession of a house and a car and hence competitive saving motive not only do you want to save more or to secure a RZR eligibility your parents your entire household are going to save on your behalf one rural survey asks what are the primary reasons for saving the motives in households marriage is ranks among the top three so this is the aggregate gender imbalance sex ratio and

the aggregate private saving rate and there’s surprisingly you know a very clean correlation but also across provinces where the local gender ratio is higher there’s higher saving rate we also know that households when boys save more than households with girls so the competitive marriage saving motive has induced households to save on behalf of the sons and even more so there’s a spillover effect right because of the competitive notion of that but not to worry this is unlikely going to be a sustainable reason for China’s high saving rate because the Chinese men have found a solution they have taken the concept of globalization quite literally which entails importing whatever cannot be produced or cannot be produced cheaply and this is applied to the procurement of what now this is an ad for a vietnamese wife there’s a package for $6,000 you can have the return tickets meet the family applications for passport and this one which cost slightly more has four guarantees of which one includes securing or bring her home within three months okay purity and last but not least a one-year warranty that she’s not going to run away so you might you know so the mail-order brides have become a new solution to the competitive or the expenses entailed in the marriage process you might laugh that this is actually is actually quite factual in certain parts of Taiwan with severe a local gender imbalances 50% of the men have imported wives this is happening Korea Singapore and also is happening in China so competitive saving motive for marriage is going to collapse now second explanation which also has nothing to do with economics per se is one of China’s most controversial policies which is the one-child policy we are of the one-child policy generation that fertility controls have led to rapid decrease in urban fertility rate okay to almost about just slightly over one by nineteen eighty-two okay this is urban households 98% of urban households who had children had only one child so how does the one-child policy change saving behavior or effect advocates saving one experiment is to look at twins twins born under the one-child policy and comparing them to households with only child by the way just to make a clear you are allowed to keep your twin if you happen to have one under the one-child policy so we can do the experiment of contrasting the household saving behavior between an only child in a twin after the implementation of the one-child policy so on average the only child families save about eight point five percent more than the twin households this is between 2002 and 2009 this is also true across income kwant quintiles there are large differences in the saving rate between one child families and two children families now the first reason is not hard to fathom purely a reduction in expenditures can raise saving but these expenditures are not to be ignored because if you look at education expenditures they can amount to 15% of total household expenditures per child so while an only child may spend on average about 10% of household expenditure on education a to children household will spend about 17 or 18 percent of total household income on on education these expenditures are large they include education clothing apparel food etc etc so the expenditure effect can contribute to a decline in the saving rate but the second reason has to do more with institutional forces of the Chinese family structure which is that parents relied on children to support them for old age if you look at the evidence on this these are for people you know who are 65 years above the main source of livelihood come from family support more than 56 percent and on top of that the expectations of family support is about 50 percent for those between 45 to 65 years old so the more

children you have the more support you’re going to get and it’s more likely that you’re going to be able to reside with one of them this is such is the family institutional structure in China so imagine that you had on average about three to four children before implementation of fertility policies and now you’re only allowed one well you can surely expect a reduction in the total amount of transfers that you’re going to get so you have to incur additional saving and anticipation of that so saving for your old age when there’s a reduction in the number of children is another possible caused by the one-child policy now interesting byproduct of the one-child policy however is that despite the fact that they are spoiled little princes and little princesses they are going to be highly educated because underlying this notion is a quality quality trade-off if we put it in the framework of you know thinking about these transfers yes surely you have fewer children but you want to heavily invest in education so that they will have higher wages and be able to contribute more how where is evidence for the calling and quality trade-off well this is the household this is education expenditure per child for an only child and for twin okay you can see that during the mandatory stages of education there were no real differences in terms of education expenditures spent on each children but when it became discretionary at some point the education expenditure received by an only child was twice as high as that of a twin so this means that potentially there could be a human capital dividend it is found that twins are 40 percent less likely to pursue higher education and there are also 40 percent less likely to pursue an academic institution secondary academic institution than only child’s are so there is an underlying quality equality trade-off this leads to the projection of high labor productivity growth still going forward you know some project at least nine percent until 2020 6.7% until 2030 lady labor productivity is still very important because there’s a popular notion that China might age before it riches because of the demographic aging accelerated by the fertility policies but labor force is expected to decline by maybe about 0.2 percent but labor productivity growth also with this you know more educated and highly human capital driven only child generation can potentially ease some of the reduction and labor force what imbalance people think about China and think about imbalances and the greatest imbalance that has been put forth has been this imbalance between consumption saving and exports China exports too much consumes too little this kind of imbalance is unsustainable the perhaps the fundamental driver of this imbalance is an imbalance between governments and households the two policies unconventional and slightly controversial policies that have led to this great imbalance is what I call wage suppression and financial repression so if you look at wages in manufacturing they grew at on average about 7.6 percent compared to labor productivity growth in manufacturing which was on average 17% between 1997 and 2008 and real GDP per capita growth which was over 10% so wage growth has really lagged behind wages were suppressed that led to significant declines in the labor share financial repression you have to know that most of Chinese household saving going to bank deposits but they were earning very very low rates of deposit rate returns okay so while inflation has been there has been a pick up of inflation recently so many many years they were earning negative real returns on their saving on average they were earning about zero so this kind of financial repression and wage suppression led to banks becoming more profitable it is subsidizing corporations because of their cheap access to credit and most of these two corporations or state-owned enterprises enhance a large transfer of wealth from households to government this in my view is the biggest source of global

imbalances sorry of imbalances and it’s probably one of the main drivers for why China’s consumption is so low so when we think about China in the global economy and whether it can help with global imbalances by adjusting the exchange rate well let’s search deeper for some fundamental sources of imbalances exchange rates itself might not be the answer so finally putting all this together every what I’ve said all the myths I have talked about has an influence on the global economy by definition because China has now become a large open economy and everything it does will affect the world economy so concurrently while China has grown so fast and integrating the world economy since 1990 we have observed three remarkable trends in the global economy the first is a saving divergence I’ve shown you this this is household savings but also for private savings where savings have gone up in China and saving rate has declined in the US and oacd economies there has been a sustained decline in global interest rates over this period and how much of that is driven by China by the massive you know a kind of contribution of saving to the global economy how much did that contribute to the decline in global interest rates you still need a an open question at the same time over this period of fast growth in China and integration there has been global imbalances despite the fact that investment rates have been so high in China savings have been even higher leading to a net capital outflow a current account surplus that has increased over the last 10-15 years so China is exporting capital to the rest of the world in contrast to the US which has run been running a larger larger couric deficits so these macroeconomic facts in the global economy combined together consider together how much of that is due to the incoming of China we believe that there is quite a bit of story the China story there so looking into the future if I want to put it above and beyond what we have said about reallocating Capital removing distortions etc etc perhaps we can think about China is moving away from a cheap labor model to achieve capital model so if you think about historical analogies in a global economy this is not the first time that a country rising a rising country has seen such large increases in current account surplus amassed a great amount of wealth we’ve seen it during the first wave of globalization this country has had run a large current account surplus exporting capital to developing countries like in Latin America it’s the case for the US as well for a long period of time it is amassed massive amounts of external wealth ran large current account surpluses and in Japan since 1960 it’s run at carnac health surplus and never looked back but the experience of these countries with their net external debt imbalances have been very different the UK and the u.s. globalized it utilizes golden opportunity of accumulating massive amount of wealth to enter international eyes creating global capital markets internationalizing their currency in contrast to the experience of Japan which was relatively closed did not international eyes leading to assets bottled inside now which path is China going to take I think that part of the recent reform package and the reform direction is very much about continuing to open up hence the experiment of the shanghai free trade zone basically introducing Hong Kong into the mainland everything that Hong Kong can do you can do in Shanghai this is again part of the experiment is a meta experiment right so making Shanghai a global capital city so that Chinese citizens don’t just have to put their savings into bank deposits or housing but they can buy stocks of their favorite brand Starbucks coca-cola you know things like that so internationalizing and moving towards a cheap capital model is potentially a direction to go reform is a continued process like I said in the

beginning it is going to be the source of political legitimacy for the for the new regime their political legitimate rests not only on the design of a seemingly very comprehensive reform package but also on its implementation this is what we’re going to see in the next 10 to 15 years and the reform package is also emphasized a redistribution of wealth away from government back into households it has been explicitly stated in the reform package let’s not forget that one remaining challenge is intellectual property rights now if China still wants to attract global capital and especially global technology which is an important source of future growth it has to respect intellectual property now this is a golf course outside of Beijing which is a one-to-one replica of the Chateau Lafite in Bordeaux and the name is the John Lafitte Chateau with a double F and double T now by no means is this an exception because one of the wealthiest men will sit wealthiest businessman in China his whole residence is an exact replica to the White House so I think conceptually the Chinese have got to recognize that intellectual property is very important in order to continue this highly desirable factor which is technological growth and technological import from foreign countries some things fundamentally has to change but in the end what am I most concerned about if we think about the challenges that face China today it’s neither economic nor political it is social and it is not a social turmoil an Arab Spring in China a Jasmine Revolution mill is rather social decay destruction of meritocracy for one which has been bedrock to the Chinese society for thousands of years is emitted Lee one of the sustaining factors for thousands of years of feudalism in a row j’en of Confucian values and the disruption of the social and family fabric now many of people in this audience will understand exactly what I mean because we all know that corruption is at every stratum of society not just of the government to this I attribute three proximate factors roughly which is the lack of a legal constraint because legal infrastructure is not very developed nor religious restraint nor moral responsibilities so with a slight abuse of tonalá terminology in the use of William Butler Yeats I will quote that I’m most afraid of a terrible beauty being born thank you so we would like to give you the opportunity to ask you some questions so to maximize the number of questions please limit yourself to one question and try to be concise and finally wait till you get the microphone from one of the stewards who wants to start over there hello my name is Ellie John I’m a student at King’s College for studies thank you for this insightful presentation I really enjoyed MA but I have my doubts about the role of culture in economy and because you relied on culture in explaining several phenomena but don’t you think that in the case of China relying on culture can lead us to oversimplification of what is a complex phenomena there are numerous ethnic groups in China particularly the wiggers of Turkic origin and they have distinct culture so what do you think about this I have to say I absolutely agree with you culture I don’t think is the primary explanation for much of China’s growth in the puzzling phenomenon that we have seen because culture is a slow-moving factor and that hasn’t changed so much so when I was explaining why Chinese saving rate is so high was actually deliberately trying to stay away from any appeal to culture as an explanation so I think that because we observe change a rapid change and culture hasn’t changed that quickly that I would tend to agree with you that we rather stay away from that explanation hence the

study of economics now of course anthropologists would have other interesting ideas I’m Spencer and I’m a master student of economics here and I actually went to your class last year for International Economics so I’m I have to say sorry because I have really a tough question for you well it’s not okay so enjoy slice what you’re saying is that you’re worrying about economic order the social dimension of China’s development rather than economic and and the political but I would say there is well the social decay or social 2mo are essentially byproduct of China’s polical institutions and as what you’re saying is that reform reform reforms the key word for Chinese economies growth well I will say that right now reform has been highly captured or mutilated or hijacked it by interest groups in China and they are very smart they’re you think the understanding of porco systems and and they have a lot of local connections across the party across the stay or inter prices and across the ministry so the question is in order to have reform to be effective we should not assume like a social planner that’s going to do what the societies are doing the best what happened is that what happened if there’s a small segment of a society that they’re trying to gain a larger share of the pie in the economy and these are the interest groups and these are people are doing what exactly they’re doing so I wish to ask you this question that how would you comment on the political aspect of Chinese reform and how is that going to do to pose a challenge for the forest for its future dynamic thank you okay to cut to the relevant part of this I would say that the political government understands very well like I was saying the beginning that its political legitimacy rests on the implementation of reforms which has to be you know beneficial for everyone else not just the elitist so these these politicians are highly competent they understand that this is you know this precise problem so de nasi dagang sees himself almost as a new dong dong Xiaoping trying to start this wave of reforms in order to sustain the next decades of of you know political support so now of course you know there’s always corruption but I think if you look at the specific kind of explicit statements in the political reform it is very much about giving more land property rights to the rural population so that they can you know borrow against their collateral it’s a lot about financial market improvements it’s a lot about developing financial markets so that small medium sized firms can have better access to capital I think these are very explicit market-oriented reforms and not necessarily and quite fair you’re right about the fact that it’s going to see a lot of resistance from different vested interests that’s part of the challenge but that depends ultimately on whether Xi Jinping is able to steer away like things helping all this tension and resistance yes hello my name is yang Wei and I’m a student here and my question is a Pico people argue that a channel should transfer into a consumption that grows rather than an investment grows more mold and reducing it is now it is a is it a right time for this transition deucing or maybe later for this transition to happen well um I believe that as I was saying in the presentation that this kind of financial repression and wage suppression this imbalance between governments in household is ultimately something that has to change in order for you know households to want to consume more household income as a share of GDP has fallen rapidly in China and they’re getting very low returns on their savings potentially leading to higher savings right because of the low interesting tongue if you can’t diversify the assets in which Chinese people can save and only allow them to put into banks and property then it’s going to be a perennial problem so I think the reform if it is indeed successful in terms of you know building more opportunities for these households to you know raise wages and also raise their investment income then I can see that potentially happening but it should be underway if we believe the numbers from the one-child policy the recent reform process you know package is also about having more children having two children so likely that can reverse some of the high savings you know lower the

saving rate and go towards a declining trend of anything please I thank you for speaking with us my name is hung on the indices shooting here at Elte Elysee I wanted to serve that well-loved I may be observed that since 2008 critic within China his file structure.c DB of growth the implication being that especially among corporates and local governments the amount of debt has grown firing excessive their beliefs of said how you see the situation developing oh I completely agree the whole shadow banking the accumulation of local government debt is a cause of concern although I don’t think it’s a cause for panic the reason is that China still has massive amounts of liquidity in terms of the foreign reserves in terms of you know the government held the quiddity and there’s no question that if anything happens the government will step in to bail the banks and to rescue the local government so in that sense they don’t you know they don’t have the considerations that the West necessarily has and so I am concerned but not overly worried and one must also draw to the fact that China is a growing economy so that level of debt to GDP ratio could potentially slightly be different from a country that has no growth or it’s stagnating so I we with you but I’m not overly concerned it’s opened your last slide of some of the consequences of continued growth internally for China or do you think some of the consequences are geopolitically for the rest of the world especially China’s relationship with Japan Russia the u.s. yes I mean this is a you know challenging question because anything I say would probably be seen as having a biased view but I would say that of all the challenges I see it’s not what China is going to do to other countries but whether rather what China is going to do to itself in terms of the social decay now bring us back to history a little bit China was many times conquested by you know peripheral areas they called barbarians but they were militarily much more powerful ultimately it was always absorbed culturally by the Chinese because of the cultural preeminence and the Chinese have never really had a tradition of you know foreign aggression instead they collect you know the Institute kind of tribute systems with the Southeast Asian countries and peripheral areas to establish this kind of superiority but in terms of you know military conquest in them we don’t see many many you know instances so to be very honest if I I think tension with Japan is certainly a cause of concern but if you were to ask me whether China is going to you know kind of exploit its economic rise to be more militarily aggressive I would say I don’t think so yes I am Teresa Posca agent Treasury and well basically I found the fact that you said you don’t really fear an Arab Spring in China and quite fascinating because I guess there’s the second economic argument that once growth slows as we see in in China recently people become well aware of social circumstances so how are they going to tackle that are they going to reform the political system or do you see that right um absolutely so when they see growth slowing down that is a cause for concern for the government which is exactly linking back to my initial argument why they want to deepen reforms and the Chinese people if you have asked them they’ve expected a series of reforms which had long been delayed in the last ten years or so and to the announcement of the reform package and really really quite vast areas and quite deep has been a source of you know comfort to the people now next thing is about implementation if they’re successfully going to be able to implement these reforms and I think China’s you know Communist Party at least is safe for ten years now after that no one no one no one knows but it’s important to realize that the government the Communist Party is a self evolving entity people mistakenly think that it’s still the same over the lot you know the 20 years it’s changed a great deal it’s changed to circumstances it is actually very very flexible so it will adapt to new environments but I think the question of whether it will be substituted by something else is too early although that question might arrive in after 10 years yes thank you I’m a student here I’m doing a

degree in law biological studies but I would like to ask you that I come from a country which is predominantly tribal and feudal and when you talk of China considering the vastness of the country though you’re looking at it as one nation one country but there’s tremendous diversity how does this impact the mindset of the people though in your concluding points you do write that there are certain factors for which you say that yes there is a religious restraint or a moral responsibility what about the mindset of the people in China is it still tribal because if religion or moral values are not driving them what is driving them first is it the tribal of your mindset and as a consequence of this the impact on the governance of the country are the values of the communist party driving the future of the country or is that where the country is headed or that’s the unification force as perhaps Chairman Mao had tried to do so is it still the path dependence coming into the future the problem exactly that is there there is no driving force there’s no spiritual driving force that’s potentially that is precisely problem the spiritual void now for the longest period of time communism substituted confusion values and it was you know the kind of the spiritual salvation to many people but now it’s not the case and there’s no religion however the government has recently tried to encourage the return of Buddhism and let also underground Christianity and all these forces surface because they understand that the spiritual void is much more dangerous so if anything it’s the lack of that that is most most cause of concern but I do see a potential return in religion but that’s going to take a long time yes right and so during your talk you stress this central row of reforms now the question I find very interesting is what we can learn what other countries may potentially learn from this experience of doing reforms and it seems that you’re also stressing the central role of the state in pushing those reforms and you mentioned that the state is very capable now how much you think is due to this unique combination that the states for some reason has the essentials to actually generate economic activity and development so is there anything other countries can learn when they don’t have this type of institution set up tough questions tough to extrapolate from you know one experience but I certainly think in the beginning you know parts of development especially like China the centralization you know the central government was was critical you know that they jump-started investment in infrastructure they built cities everything was much more efficient and fast and to push through also to push through reform package you need a highly concentrated you know government and so I think that centralization was important especially in a country which needed to reform to remove distortions to keep that steer that on track you you know you can’t be fighting about what to do all the time so yes for about 3 to 4 years now people have been talking about hard landing in China but numbers have grown like clockwork every time industrial production retail sales come out they keep going at a constant pace so on if you look at reality on the ground any of these numbers be trusted second question is that the new Politburo seems to be more open to taking hard decisions maybe engineering the slowdown so that some of the imbalances built over the years can be wound down but as they try to engineer this slowdown can we expect China to grow sub 7% say for the next five years as some of these imbalances are done you’ve pointed out an absolutely correct statement which is part of the growth slowdown or even most of it is deliberate it’s the government intention to lower it to 7.5% approximately if it wanted to grow faster it could but the government believes that there’s an underlying potential imbalance but more about you know resources being absorbed by inefficient you know parts of the economy when growth is too fast you tend to not drive out the inefficient firms so I think in that sense it is true I think there’s too much of a worry about statistics in in China and Chinese government because ultimately the Chinese government also has to know what’s going on and you know who are you lying to by fabricating these results all the time but anyways there are now multiple sources of data that you can back check and so we’ve worked with you know multiple sources household level data and cross-checked and they seem pretty close so I think I think

intellectual honesty if you will is though is a is a trend going forward Jessica’s a leaf of jealousy I was really interested in your comments about the risk to the spiritual well-being of the population from this growth and development and this erosion of some of the traditional values but isn’t the biggest threat to spiritual well-being to have a modern where there is a government on top which is distribute paternalistic and to whom we look up to for decisions about what to take the country like little children who have to rely on the wisdom of the people they talk wouldn’t be the surest solution to this spiritual void to allow people more say in who governs them who decides which direction a conditional go to tough question again bring back the historical significance which has always played a role in China we’ve we’ve seen this a bit in the past because you know confusion confusion values were about what we call hundred flowers in bloom meaning simultaneous you know different diversity of opinions but China has always had a centralized structure even you know in its feudal Espace and this is what the people have reconciled with and have been used to but the reason I emphasize meritocracy was that I think that was kind of the central reason why the feudal society and this kind of structures were able to last because despite the fact that it was a highly centralized system it was the meritocracy that some of these key advisors were selected and there are so many many examples of people coming from very very poor country for poor families very famous generals advisers etc etc that rose to the top and became advisors so I don’t know to be honest whether giant Chinese would be able to say let’s throw away this structure you know for thousands of years and let’s just have a completely different one and see what what happens I just I don’t know that answer answer to that question but what I do know is that in the historical past China has had prosperity has had potentially more spiritual you know values even in highly centralized systems and so far hundreds of millions of people have been lifted out of poverty to be absolutely honest a lot of these Chinese people attribute that to the government dr. Jin viewed from America for example China’s the regarded as a very important commercial part part number one that’s not nested highway doesn’t get access you go to Washington there’s some fear of China they’re viewed from Europe it’s viewed as difficult to access but incredibly important to develop but do see in visit a future where China could think about other countries in terms of allies you think it could have a foreign policy that can be more meaningful than a commercial relationship or as a result of what you said in terms of potential do you see it’s still somewhat inward looking and dealing with the rest of the world is part of a purely economic solution to its problems great thank you for your question um I absolutely think so the problem is that China is on a very steep learning curve it’s never quite been forced to take a responsible international role until today and it’s learning very much how to deal with countries in Africa with the US and Europe and other developing countries in emerging countries so I think you know and also China has its intention to establish more relationships within the region but also forge a stronger relationship especially with other emerging countries but it is on the learning curve I mean the kind of horror stories that we tell about China going to Africa what it’s doing it part of it is just sheer ignorance sheer lack of you know awareness of other people’s customs and traditions and this notion can be applied to the issue of diplomacy as well China was a very nationalistic inward-looking country has to accustom itself to the the greater you know kind of international balance but I the Chinese learn very quickly so I think it is very much in the future about establishing more harmonious and more trustworthy international role yes please a Chinese booth has been fantastic you know even if you take recent 1.5% growth is is very good but somehow that GDP growth is not translating into

shareholder returns is it because of I know lack of good governance in the companies or is it some some other no in fact some other factors that are causing that because if you take last ten years China markets have been stagnant whereas GDP has been fantastic euro GDP growth has been fantastic encounter I didn’t get the first part compared to the returns – yeah Sheryl why it is not translating into shareholder returns now that that is a very good question and it’s a question you know it which I cannot exactly answer it is absolutely true that equity markets have performed extremely poorly compared to the GDP growth and all I can say is that you know that putting markets are highly you know there’s a lot of government intervention so and also the particular this is part of the financial lack of financial development in China you know netic every time you want to actually register on the stock market it’s not market determined you have this registration process where it’s hand approved by government officials I mean it is very fascinating questions I’m not quite sure what’s the ultimate reason why it hasn’t translated into the you know listed stock performance but you know that’s part of the reforms part of the part of this reform package is about you know improving the stock market and also liberalizing this registration process so we’ll see further there if we play the secon I thanks very much for your wonderful presentation so he basically said that that the growth in Chinese reform driven so I was wondering if you saw also diminishing marginal returns to reform and I’m saying this because I mean it’s very easy to to fix like huge missile locations such as like from the urban toward the world transformation but once you get to the like second-generation reforms like don’t you see like that may be running out of mileage and I said so in comparison to other regions like if you look at Latin America it’s not like they’re warren reforms but it’s like that these reforms weren’t particularly successful in in racing world yes excellent um well you know reforms are not endless but China is being propelled towards more of the production possibility frontier by removing these distortions I’ve highlighted a few reasons why I think that reforms have to continue and there are a lot of the inefficiencies especially in the financial markets in particular you know we don’t really even have a corporate bond market for example so there’s quite a way to go but it’s definitely true that it’s not going to be forever but I think the fact that it’s been transitioning out of a centrally planned economy makes it by definition very different from you know the forms that are implemented in Latin America one more question well nice sorry doctor thank that fascinating lecture I see your slide is titled a terrible beauty is born my question to you is shouldn’t it say a wonderful beauty is aging and I deeply worry about the aging population in China and that China doesn’t have the mechanisms in place to really look after what’s going to be a medical and a support nightmare what are your thoughts on that um I am unlike popular you know conventional wisdom less concerned about the demographic issues regarding aging I think that during one generation because of a one-child policy there has been a smaller share of the young people but that is quickly reversing because of the two children policy there’s been a lot of social security reforms and in particular I think that what I was emphasizing is that should labor productivity still continue to grow it can at least offset some of the potential reduction in the labor force but you know all that depends on its you know sustainability of growth you know in the next next couple decades but I think the aging population composition of that is going to be ameliorated by the fact that children are you know now we allow for two children and we can see some immediate effects of that in reversal but I would say that it is you know it is it is slightly worrying but I would emphasize again the factors that I’ve talked about in terms of human capital accumulation in terms of these you know new new children policies to think that it might not be as bad as people think well I’d like to thank you all for coming to the Elysee and let us all thank ke you one more time for an insightful and fascinating you