China’s Macroeconomic Situation inwith Predictions and Policy Recommendations for the Next Fi.doc

1、chinas macroeconomic situation in 2013 with predictions and policy recommendations for the next fi abstract: chinas economy is currently on a modest recovery path, but its foundation still remains fragile. according to our projections, the rate of gdp growth in 2013 might be over 8% and higher than

2、the rate of last year. in the next 5-10 years, the accelerating growth trends seem to reach an end, and chinas growth tends to step into a new phase characterized by a structural growth deceleration. we predict that the potential growth rate might fall into a range of 7%-8% per year. moreover, accor

3、ding to the estimates on the non-agricultural employment elasticity and labor force supply, in 2013-2017, a 7% annual growth is sufficient to achieve the full employment of urban and rural people. it implies that instead of the rapid growth rate, chinas macroeconomic objectives for the next 5-10 yea

4、rs should focus more on the development quality, which refers to the improvement in microeconomic efficiency, increasing competiveness and stimulating technological innovations. accordingly, the policy concerns should shift from demand-side management to supply-side management. keywords: structural

5、growth deceleration, supply management, stable growth of higher efficiency jel classification: e60 after the 18th cpc national congress, the public showed optimism for chinas economic growth and reform in 2013 and the next few years, mainly because the future development patterns are expected to tak

6、e a new approach. in particular, the growth rates might drop from near 10% over the past 30 years to around 8%. the macro policies in response to the potential declining growth rates are facing several challenges, which include short-term policies to ensure macro stability and mid-long term plans of

7、 development and reform. this paper aims to offer sound insight into chinas macroeconomic situation in 2013 and the next five years and make relevant policy recommendations. 1. chinas macroeconomic situation in 2013 the macroeconomic model created by the chinese academy of social sciences (cass) for

8、ecasts that chinas economy is expected to grow by over 8% in 2013, slightly higher than in 2012. in 2013, the consumer price index (cpi) is anticipated to rise to 3%-3.5%. 1.1 forecasts about chinese economic growth by major world organizations in forecasts concerning chinas economy, major world org

9、anizations believe that the chinese economy has bottomed out in 2012 and will recover in 2013 (see table 1 and 2 for details). the world bank, international monetary fund (imf), asian development bank (adb) and other major international organizations predict growth rates averaging at 8.07% for china

10、s gdp in 2013; major investment banks calculate a slightly higher average rate of 8.13% for the same period. 1.2 forecast of 2013: 8% growth rate, 3%-3.5% cpi (1) fixed asset investment (fai) will increase steadily and rapidly. a fundamental reason behind this continued rise of fai in 2013 is that a

11、fter the 18th cpc national congress, a leadership transition was accomplished and local provinces have yielded to their strong impulse for investment. this inclination is strengthened by the quickening urbanization and industrialization in central and western china. as historical experience shows, t

12、here would be a hike of investment at the second and third year of each five year plan period. however, some factors are also restraining investment increases, including inadequate local finance and burdensome debt, declining corporate profits, a limited supply of land available for construction, th

13、e daunting task of destocking and advanced capacity, and the lack of new technologies and profitable projects for industrial improvement. taking into account the above factors, we conclude that investment increase in 2013 will be slightly higher than that of 2012. (2) consumption is expected to grow

14、 steadily. for many years, chinese consumption in general has registered relatively stable growth with small fluctuation. several policies (such as “home appliances going to the countryside” and “old swap new” program) did boost consumption, but with limited effects due to weak growth in income leve

15、ls that remains the major factor affecting consumption growth in china. fortunately, over recent years, the income of urban and rural chinese residents has been steadily increasing and the plan to double per capita income by 2020 was proposed in the 18th party congress report. in addition, in the ne

16、ar future the cpc central committee is set to announce a plan of reforming income distribution. added together, these factors will help create a positive stimulus on household income and consequently household consumption. (3) export is also expected to slightly recover. given weak global demand and

17、 the prevalence of trade protectionism, china faces serious challenges in improving external demand. however, there exist several favorable factors. for example, the global situation in 2013 will be better than in 2012; major headways have been made in establishing free trade areas and implementing

18、the “going out” strategy. with these factors and policies to stabilize sales overseas, chinas exports in 2013 will not encounter a slowdown and in particular the contribution of external demand to gdp growth will not drop significantly. (4) the carryover effect on cpi growth in 2013 is less than 1%.

19、 sluggish global growth and a stable chinese economic development mean that global total demand will not expand substantially. in addition, domestic grain production is likely to grow for a ninth successive year and industrial production capacity remains sufficient, both of which inhibits price hike

20、s. however, some price-rise factors should not be overlooked, such as greater pressure from imported inflation created by quantitative easing in developed economies, cost increases of domestic production factors and probable progress in price reform. overall, the cpi in 2013 can be maintained at 3%-

21、3.5%. (5) the employment situation in china continues to improve. although chinas economy showed a downward trend in the past two years, the ratio of job seekers still remains higher than 1 (the job seekers ratio is the ratio of unemployed job seekers to job openings, and a ratio greater than 1 sign

22、ifies the numbers of job openings are greater than the number of job seekers.). the ongoing high ratio shows that the balance of power between supply and demand in labor markets has shifted to the advantage of workers. wages will continue to rise, pushing up labor cost. this trend is in line with th

23、e goal of doubling per capita income as proposed in the 18th cpc national congress. a review of growth cycles since chinas initial economic reform displays that half of the 34 years of economic growths from 1978 to 2011 experienced double-digit growth rates. further analysis indicates that rapid eco

24、nomic growth mostly occurred in the mid and later phases of each five year plan period and basically coincided with a leadership change. therefore, we believe that the chinese economy is most likely to follow this historic trajectory in 2013 and although it will not grow by double-digits, it will su

25、rpass last years performance. 1.3 macroeconomic policy recommendations for 2013 (1) the key to stabilizing growth should be maintaining investment momentum, including investment in infrastructure construction, citizens employment situations and social security housing construction. in particular, st

26、rict enforcement of energy saving and environmental protection strategies require corporations to adopt more environmentally-friendly production methods. in other words, energy saving and emissions reduction policies actively update equipment replacement standards for chinas manufacturing and constr

27、uction industries. various measures, such as setting market entry standards, and fiscal and financial measures, should be taken to advance the application of green energies in the two industries. in this way, equipment would be updated timely and new dynamics of investment growth created. (2) china

28、should adhere to the policy of “seeking progress while ensuring stable growth” and give full play to pro-active fiscal policies. major measures include appropriate increases of fiscal deficits. other measures, such as a moderate decrease of treasury stock, are also a crucial part of the current pro-

29、active fiscal policy. but since quantitative expansion (fiscal expenditure expansion) has potential drawbacks, it may be preferential to utilize structural tax reduction. measures of a structural tax reduction include enlarging the scope of the reform of transforming business taxes to vats and allow

30、ing input tax deductions on the investment of factories and buildings to avoid double tax imposed on the investment of equipment. also, increasing fiscal deficits to boost structural tax reductions and lightening the burden on corporations should prove beneficial. (3) china should create new models

31、to finance urbanization and alleviate risks posed by local financing platforms. rapid advancement of urbanization inevitably brings about the question of financing. the answer is fiscal and financial innovation, which will defuse the risks brought on by local financing platforms. first, china should

32、 reduce the size of government and push for fiscal and taxation reforms. in particular it should strengthen the financial capabilities of local governments, for example, by allowing local governments to issue bonds and creating new sources of taxation so as to lessen their dependence on land sale fo

33、r finance. second, while strictly monitoring the real estate market, china should encourage local governments to issue municipal bonds and explore mechanisms of issuing local bonds in market while supervising their issuance. in addition, the role of policy banks should be increased by allowing them

34、or the state to issue special treasury bonds as a substitute to local financing platforms so as to reduce debt risks. third, china must strive for financial innovation, initiate the process of securitizing public utilities projects and alleviate the problem of maturity mismatches on the balance shee

35、ts of local governments. (4) china should reduce government intervention in microeconomic activities and encourage the development of the private sector. when the economy begins to slow down, the role of the private sector or the market should be even more emphasized so as to ensure government inter

36、vention in microeconomic activities is minimized. to do this, it is necessary to break monopolies, ensure real fair competition, and propel reform in finance, taxation and project approval to create a favorable environment for the private sector. this would not only help stabilize growth, but more i

37、mportantly, produce opportunities for the private sector to grow, restructuring and improving overall industrial competitiveness. 2. chinas macroeconomic situation in the next five years and policy recommendations 2.1 the shift from structural growth acceleration to structural growth deceleration th

38、e macroeconomic model of cass forecasts that from 2011 to 2015, the potential growth rates of the chinese economy will be about 7.8%-8.7%; from 2016 to 2020, 5.7%-6.6%; and from 2021 to 2030 a further decrease to 5.4%-6.3% (see table 3). this means that the chinese economy has begun to shift from “s

39、tructural growth acceleration” of the past 30 years to “structural growth deceleration” in the next 5-10 years and that single-digit growth will become standard. this decline in growth is structural in nature, mainly because in terms of economic organization the employment rate of the chinese manufa

40、cturing industry has peaked and economic growth is becoming more reliant on the service sectors, most of which have lower productivity than the manufacturing industry. in terms of the structure of production factors, labor force supply in china has declined and economic growth is more dependent on c

41、apital and technological progress. meanwhile, low capital returns and slow technological advances have continued to be a hindrance to chinas economy. specifically, china will gradually lose the rapid growth that helped it catch up with developed countries “structurally.” the primary causes for this

42、change can be attributed to the following: (1) resource allocation efficiency declines. chinas economic growth of the past 30 years was mainly created by the transfer of a huge rural population into the manufacturing industry. since the manufacturing sector has significantly higher productivity than

43、 agriculture, this transfer process has continuously increased overall yields. however, at the present time manufacturing employment has reached a saturation point and the increased labor force population has to be diverted into the service sectors instead. unfortunately, the productivity of the lat

44、ter is mostly lower than that of the manufacturing industry. therefore, the shift of the chinese economy from manufacturing-centered to service-oriented causes a loss in total productivity. (2) efficiency of technological learning declines. over the past 30 years the chinese economy has been catchin

45、g up with developed nations. the successful equilibrium was possible because of highly efficient technological learning. but as china gradually became a world technology pioneer, the efficiency of higher learning was decreasing, which resulted in relatively slower progress in technology. more import

46、antly, this means that china has to pursue indigenous innovation, instead of overly depending on importing technology. this transition will not be easily achieved. (3) globalizations dividend decreases. it is globally recognized that of the past two hundred years, the two decades from 1987 to 2007 d

47、isplayed continuous prosperity. internet-based globalization fuelled the global economic development while further obscuring distinctions between nations and races. yet the financial crisis which began in 2007 fully exposed the disadvantages of the current round of globalization and initiated a new

48、period of worldwide adjustment. the dividend of the last round of globalization thus came to an end. the ensuing “rebalancing” of the global economy is compelling countries to self-adjust and explore new forms of globalization. (4) the efficiency of production factors supply has also diminished. as

49、the demographic dependency ratio continues to climb in china, the supply of cheap labor, capital, land and environment in the traditional sense will no longer be possible. for instance, our calculations show that the unit labor cost of the chinese manufacturing industry rose by 16.9% from 2004 to 20

50、10; during the same period, german labor cost increased by 4.4%, south korea 4.8%, the u.s. fell by 4.6% and japan fell by 3.7%. although in absolute terms chinas manufacturing sectors still hold an edge in unit labor cost, the rapid increase of labor cost has already greatly undermined this advanta

51、ge and has impacted the international competitiveness of chinese manufacturing corporations. therefore, the time when the government was able to produce rapid growth by intervening in resource allocation is coming to an end. china must fully pursue an indigenous growth model driven by increases in p

52、roductivity. 2.2 external factors for structural growth deceleration apart from changes in the above domestic economic variables, china also faces some external factors which will constrain future growth. the factors are mainly as follows: (1) global rebalancing and the reshaping of globalization wi

53、ll create a worsening international environment for chinas development. some major developed economies are not satisfied with the current model of globalization and hope to adjust it. in particular, the u.s. and europe want to alter current rules and improve their advantages in global trade and inve

54、stment, which will undermine chinas position in global competition. attempts have been made to associate china with “state capitalism” by establishing a principle of “neutral competition” so as to lessen government support of economic activities and weaken chinese corporations competitive edge in gl

55、obal markets. given the predicted increase of chinas energy consumption and carbon emissions due to rapid economic growth, efforts to set carbon emissions rules through climate negotiations and the rejection of chinas claim of “common but differentiated responsibility” also hinder chinas growth pros

56、pects. developed nations led by the u.s. are maintaining technology restrictions against china. at the same time, they attempt to make the formulation of articles and conditions regarding global intellectual property protection favorable to them and remove provisions regarding chinas domestic ip pro

57、tection and government procurement that are detrimental to foreign capitals and brands. (2) the third industrial revolution will reconfigure the distribution of interests in international labor divisions among developed and developing economies. it is to a great extent the digitalization and serviti

58、zation of the manufacturing industry that is leading this third wave. developed economies are still leading this trend, which would slowly strip developing economies of their comparative advantages in cheap labor. this is due to the trend that contribution of labor to manufacturing is to be compress

59、ed and marginalized, while digitalization, creative ideas and design will take center stage. this new division of labor and new distribution of interests will help developed nations regain their edge in manufacturing in this new round of industrial revolution and poses a serious challenge to china, which is still at the mid-later stage of traditional industrialization. (3) china will face greater external constraints on resources