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Chinese Economy: Current Issues and Future Scenarios

Chinese Economy: Current Issues and Future Scenarios. FAN Gang National Economic Research Institute China Reform Foundation November, 2004. Trends or Scenarios:. Short-run: possible soft-landing: Government took actions much quicker;

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Chinese Economy: Current Issues and Future Scenarios

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  1. Chinese Economy: Current Issues and Future Scenarios FAN Gang National Economic Research Institute China Reform Foundation November, 2004

  2. Trends or Scenarios: • Short-run: possible soft-landing: Government took actions much quicker; • Long-run: Possibility of high growth for another decade—fundamentals are still favorable.

  3. Short-run Growth Cycles

  4. There has been a Over-heating again

  5. The main contributor: Investment Boom

  6. Why should (Chinese) economists worry about? • Potential growth rate: 8-9%; • Early find-tuning to stop the acceleration! • The economy is vulnerable to the fluctuations;

  7. A nice Soft-landing is highly likely • Government was quite quick to respond, so the over-heating was not fully developed; • Realistic policies, including administrative ones; • No hard-landing, if policy-making with normal wisdom.

  8. What will be the next? • With the growth rate back to the zone of 8-9%, China may continue the current boom for next 2-3 years; • While macroeconomic stability stays, more reforms will take place: banking, capital market, taxation…..

  9. Long-Run Development

  10. China is full of Problems and difficulties: Two Sets Set I. As a developing country -- Per capita GDP US$1,000 by 2002; 65% of population are rural. * Industrialization * Modern corporate system * Financial market development * Rule of law * Rural-urban difference and urbanization * Regional disparity and migration * Opening and competition * Unemployment: various categories * Democratization …………

  11. Set II. As the economy in transition -- Legacy of Soviet-type system, currently 80 millions working as state employees. * The state owned enterprise (SOEs) * The state banking system * Social security system * Planning to Market * Government reform and political changes ……

  12. Achievements or Reasons for Achievements • No longer as a State company dominated economy (up to 70% of GDP comes from Non-state sectors, most of small SOEs privatized); • Opening up (trade and FDI, WTO); • Decentralization of decision-making and diversification of society.

  13. Major concerns There are many concerns about if China’s growth would be interrupted by any kind of crises or upside downs. 2 biggest selected: • Financial crisis: NPL, etc, • Social crisis: Unemployment and social instability;

  14. Financial Risks • Financial Reform is seriously lagged behind as a bottleneck; • Foreign participation may cause financial difficulties for the state banks, but may improve the overall quality of financial assets, and therefore reduce the risk; • For the state banks, the NPL risk is still manageable.

  15. Unemployment and Social Stability

  16. Basic facts: • 25 millions of state workers were laid off in past 5-6 years; 6 millions still unemployed; at least 20 mil. More to come. • 45% of labor force, or 350—400 millions, are still dependent on farming, mostly under-employed; • 15 millions new non-farming jobs created by 7-8% growth per year;

  17. Why is still there the social stability • Special programs for the laid-off state workers; • New job creation by the growth; • Improvement of labor mobility; • Rural land system serving as China’s special social security for the rural unemployment;

  18. The realistic policies: • Prepared to go through a painful historical process of modernization; • Do not raise the expectations for the government subsidies; • Do more for education within the budgetary affordability; • Increase gradually the medical protection of the rural poor.

  19. Foreign Exchange Issues • Most South-East Asian currencies have been floating after 1997; • But China was forced to return to fixed regime since then.

  20. Market speculation still strong

  21. Revaluation seems less urgent in past months: -- Overall trade balance; -- Inflation is increasing; -- Uncertainty about the oil price and its impacts; -- US$ was not fast weakening until recently

  22. The real Issues: • How to de-peg from US$, and change to a basket-pegging system with higher flexibility? – That is China’s self-interest, not others’. • How to minimize the speculation; • How to catch up the good opportunity in the market to do so?

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