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Sustaining China ’ s Growth Miracle A Delicate Balancing Act. Eswar S. Prasad Cornell University, Brookings Institution and NBER. Outline of Talk. Characterizing China ’ s ascendance Getting behind the growth story Policy challenges: short term, long term The rebalancing challenge

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sustaining china s growth miracle a delicate balancing act
Sustaining China’s Growth Miracle A Delicate Balancing Act

Eswar S. Prasad

Cornell University, Brookings Institution and NBER

outline of talk
Outline of Talk
  • Characterizing China’s ascendance
  • Getting behind the growth story
  • Policy challenges: short term, long term
  • The rebalancing challenge
  • China-US relationship
shares of world gdp in percent

30

30

Nominal

PPP

25

25

20

20

15

15

10

10

5

5

0

0

1996

2010

1996

2010

Shares of World GDP (in percent)
contributions to world gdp growth in percent

70

40

Nominal

PPP

60

30

50

40

20

30

20

10

10

0

0

1996

2010

1996

2010

Contributions to World GDP Growth (in percent)
income per capita usd thousand

50

50

Nominal

PPP

40

40

30

30

20

20

10

10

0

0

1996

2010

1996

2010

Income per Capita(USD thousand)
domestic demand usd trillion

3.0

12

Investment

Consumption

2.5

10

2.0

8

1.5

6

1.0

4

0.5

2

0.0

0

1996

2010

1996

2010

Domestic Demand(USD trillion)
trade and debt

Share of World Exports

Public Debt

10

16

(in percent)

(USD trillion)

14

8

12

10

6

8

4

6

4

2

2

0

0

1996

2010

1996

2010

Trade and Debt
macroeconomic policies
Macroeconomic Policies
  • Fiscal policy
  • Monetary policy
  • Exchange rate regime
short term policy challenges
Short-Term Policy Challenges
  • Controlling inflation
  • Restraining credit growth
  • Asset bubbles: Real estate?
  • Managing capital inflows
improving the balance of growth
Improving the Balance of Growth
  • From exports to domestic demand
  • Investment to consumption-led growth
  • Employment growth
  • Reducing regional disparities
why is urban household savings rate rising
Why is Urban Household Savings Rate Rising?
  • Chamon, Prasad (Jan. 2010), AEJ: Macroeconomics
  • Chamon, Liu, Prasad (Dec. 2010), NBER WP 16565
  • Precautionary motives: Buffer stock savings (young, middle-aged); Health risk (elderly)
  • Structural factors: Financial market underdevelopment; Pension reforms
twelfth 5 year plan
Twelfth 5-Year Plan
  • Comprehensive assessment of growth challenges
  • Key short-term priority: managing inflation
  • Lower but higher-quality growth: less resource- intensive, employment-generating, equitable
  • Strong signals to common households, local govts.
  • Financial system reforms; Capital a/c convertibility
  • But all reforms in China’s way, at China’s pace
tensions short term vs long term objectives
Tensions: Short-term vs. Long-term Objectives
  • Long-term goal: Raising wages
  • Short-term problem: Inflation
  • Long-term goal: Making RMB international currency
  • Short-term problem: Capital inflows
reform priorities
Reform Priorities
  • Financial sector development
  • Better monetary policy framework
    • Fx flexibility a piece of the puzzle
  • Social safety nets
  • Governance reforms (corruption)
risks
Risks
  • Sudden stop/reversal of capital inflows
  • Plunge in value of US dollar
  • Collapse of external demand
  • Loss of confidence in banking system
risks1
Risks
  • Sudden stop/reversal of capital inflows
  • Plunge in value of US dollar
  • Collapse of external demand
  • Loss of confidence in banking system
  • Asset price busts
  • Social instability
risks2
Risks
  • Sudden stop/reversal of capital inflows
  • Plunge in value of US dollar
  • Collapse of external demand
  • Loss of confidence in banking system
  • Asset price busts
  • Social instability
  • China-US relationship turns ugly
china u s relationship
China-U.S. Relationship
  • The exchange rate issue, bilateral trade
  • Restrictive government procurement policies (indigenous innovation policy)
  • Flashpoint: Chinese holdings of U.S. debt
  • Risks of the legislative process
prospects
Prospects
  • Short-term growth prospects look good
  • Many challenges for long-term growth
  • Sustainable high growth needs policy reforms
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