FORTUNE INSITITUTE OF INTERNATIONAL BUSINESS

MANAGERIAL ECONOMICS PROJECT ON CHINA UNBALANCED SUBMITTED TO : MR. K.M. KUMAR SUBMITTED BY: Sonali Jain Section C (156)

China Unbalanced
According to Huang, Chinas rapid economic growth has originated largely from the strategic geographic concentration of financial incentives, resources, investment, and people in the coastal regions to realize economies of scale and specialization. Understanding this spatial dimension of Chinas economic policy is essential to comprehending the rationale behind the countrys unbalanced growth model. Density: The strategic concentration of capital, labor, and infrastructure fostered rapid development in the coastal areas, a region that Deng Xiaopings economic policies targeted due to their preexisting ports, infrastructure, and labor resources. Distance: Improvements in transportation through the expansion of coastal highways facilitated the movement of people from inland to coastal areas. Division: Breaking down the barriers between provinces allowed for the easy relocation of manufacturing facilities, reducing costs and increasing Chinas productivity and competitiveness in the global market.

The result of this deliberate government policy was the emergence of an economic geography that initially favored the coastal cities with an emphasis on trade and production. However, over time, competition within China has led to a rebalancing of growth, as globalized industries have continued to flourish on the coast while other industries have grown in inland provinces. In contrast, Pettis emphasized that the crucial imbalance in Chinas growth model is the bias of investment over consumption and producers over consumers. A variety of policies, including a devalued currency, low wages relative to worker productivity, and low interest rates, serve as effective taxes on households, which are used to subsidize banks, manufacturers, and developers.

Is Chinas Current Growth Model Sustainable?

In order to maintain sustainable growth and rebalance global trade, China should enact measures to increase domestic consumption and imports, though this may prove difficult without key internal reforms. Difficulty of Increasing Consumption: Huang explained that Chinas reluctance to abandon its investment-led growth model derives from the fact that consumption is more difficult to stimulate than investment given its recent high growth and Chinas weak fiscal system. In recent years, growth in the rate of domestic consumption has mirrored the steady increase in household income, without increasing relative to incomea factor that is difficult to change in the short-term.

Increase Imports and Build Social Infrastructure: Thus, Huang suggests that a more effective focus of government policy would be on increasing imports through higher investment in socio-infrastructure rather than increasing consumption. He recommended that the Chinese government increase dividends paid to government out of the profits of state-owned enterprises and use the resulting revenues to fund a stronger social safety net and expanded social infrastructure, which would encourage more imports.

Boost Domestic Consumption: Pettis countered that Chinas continued sustainable development depends upon increasing domestic consumption as a percentage of GDP, which has dropped to lows never before seen in China or elsewhere. He argued that the most crucial reform would be raising the interest rate on savings and debt, which would effectively transfer income from net borrowers to households and thus increase consumption.

The Currency Debate

While the United States has pushed for the reevaluation of the Chinese renminbi (RMB), the panelists all agreed that the currency exchange rate is the not the key factor influencing Sino-U.S. trade imbalances and an exclusive focus on this issue detracts from more significant, mutually beneficial areas of reform. Boosted Imports: With a large trade surplus, the Chinese government has stated that it intends to invest in social services and infrastructure to boost imports rather than attempting to curb exports. Huang argued that such efforts are a positive step that will aid trade rebalancing.

Flexible Exchange Rates and Liberalized Capital Movement: Despite the fact that currency appreciation is not the sole important issue, Chinese and global interests would nonetheless be better served if China adopted a more flexible Chinese exchange rate. The internationalization of the RMB, coupled with a liberalization of capital controls, can help moderate Chinas capital inflows by making it easier for Chinese firms and households to move capital abroad, explained Huang.

Mutual Benefits: Brilliant added that, despite the medias portrayal of the China-U.S. trade relationship as a zero-sum game, the bilateral economic relationship has become increasingly integrated, providing benefits to both countries. Thus, there is no need to see Chinas economic growth as a threat or source of conflict.

U.S. Priorities: The United States should encourage China to move toward a more market-based, consumption-driven economy through a multilateral dialogue, Brilliant argued. The United States must also work to maintain its innovative competitiveness, promote enhanced IP protection in China, advocate equal treatment of U.S. companies operating in China, especially in government procurement, and encourage reform of Chinese state-owned enterprises.

Future Growth Rate

Chinas heavy reliance on investment and a large trade surplus is not sustainable, Pettis contended, and the rebalancing process will be difficult. Unbalanced growth will not facilitate long-term economic growth, and the world should expect to see Chinas growth rate slow in the future. The Politics of Growth Rates: Chinas future economic trajectory is essentially a political issue, Huang argued. If the Chinese government is able to accept a growth rate of 8 percent, then Chinas growth model could rebalance on its own through structural changes in the economy as activities moved further inland and urbanization increased. Both Pettis and Huang agreed that Beijings fixation on maintaining a growth rate of 10 percent generates a range of market distortions. An alternative growth model is necessary to promote a well-balanced development model in the long run.

Easing the Decline: While Pettis suggested that average growth rates over the next decade may drop as low as 3 to 5 percent, Huang argued that although Chinas future growth will decline as investment and trade surpluses decrease, high productivity and urbanization will ease the decline, leading to a more sustainable growth.

The Role of Inflation: Both Huang and Pettis discounted the likelihood that inflation would become a major threat to Chinas growth. As inflation rises in the coastal provinces, manufacturers reduce their production costs by relocating factories to inland cities, thereby reducing inflationary pressures along the coast and rebalancing wages and prices, explained Huang. Pettis also argued that Chinas economic system has a built-in mechanism for correcting inflation. As interest rates fail to keep up with inflation, the value of Chinese consumers savings decreases, leading households to reduce their consumption and causing prices to drop.

Urbanization: Although income inequality between urban and rural areas in China is widening, migration and urbanization could reduce this inequality by creating more balanced economic activities among different provinces. Huang recommended that the government reform the hukouor residential permitsystem to allow for increased flexibility in labor migration to promote further urbanization.