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China’s Medium Growth Prospects

China’s Medium Growth Prospects. Anoop Singh Director, Asia and Pacific Department International Monetary Fund. May, 2013. Main Messages. Current Growth Model: Not Sustainable Reform Delays or Inaction: Raise Risks of Crisis and Middle Income Trap Reforms: Focus on Enhancing Productivity.

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China’s Medium Growth Prospects

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  1. China’s MediumGrowth Prospects Anoop Singh Director, Asia and Pacific DepartmentInternational Monetary Fund May, 2013

  2. Main Messages • Current Growth Model: Not Sustainable • Reform Delays or Inaction: Raise Risks of Crisis and Middle Income Trap • Reforms: Focus on Enhancing Productivity

  3. Outline • Current Growth Model: Context • Current Growth Model: Reaching its Limits • Growth Prospects under Reform Scenario • Reforms to switch from Extensive to Intensive Growth

  4. Current Growth Model: Context

  5. External imbalances retreat…

  6. …on the back of weak external demand…

  7. ...and high domestic investment

  8. Current Growth Model: Not Sustainable

  9. Relatively low capital stock, but issue is pace of investment

  10. Residential investment is relatively high compared to peak ratios in other economies

  11. Moreover, high dependence on credit

  12. …with signs of diminishing returns

  13. …across most provinces

  14. Reform delays or inaction: runs risk of crisis

  15. Consequences of failure to rebalance: caught in the Middle Income Trap

  16. Growth Prospects under Reform Scenario: Shifting from Extensive to Intensive Growth

  17. Upside: moving from middle to high income

  18. Challenging task ahead: demographic trends imply need to accelerate reforms • Demographic changes and potential for rise in labor costs • Other comparators such as Japan and Korea did not face such a large headwinds during their transition from middle to high income

  19. Challenging task ahead: filling the productivity gap

  20. Most provinces have (slightly) narrowed gap in output per worker relative to Shanghai

  21. Mostly accounted for by convergence in physical capital input…

  22. However TFP has diverged relative to Shanghai

  23. Reforms to switch from Extensive to Intensive Growth

  24. Reforms • Greater contestability of markets • Leveling the playing field between firms and across sectors • Increasing competition in all sectors • SOE reform • Financial sector reform • Align cost of capital with return on investment • Better allocation of capital • Urbanization • Will support consumption • Create services that will help capitalize earlier investment • Hukou Reform • To support urbanization • Maintain competitiveness

  25. Enhance contestability

  26. Financial sector reform: Improving the Allocation of Credit

  27. Disintermediation out of banks underscores urgency of financial reforms

  28. Urbanization and Services: international experience suggests room for gains

  29. Other Policies Needed for Rebalancing • Accelerate household consumption growth through • raising household disposable income • strengthening the social safety net • Curb incentives for excessive investment by • increasing cost of inputs • financial sector reform to align cost of capital with return on investment • Stronger renminbi is part of the package • will increase household purchasing power over imports • divert invest from export-oriented to domestically-oriented sectors • These policy objectives are in line with the key goals of the 12th Five Year Plan

  30. Summary • China is at a crossroad • Reforms undertaken in the next few years will determine how likely it is to escape from the middle income trap. • Reforms need to focus on switching from extensive to intensive growth

  31. Thank You

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