Wilbur Woo Sessions Assess Greater China Economy
China's middle class is growing rapidly, economists tell special sessions of annual UCLA Anderson Forecast conference. Mickey Kantor calls for improved trade.
The prestigious UCLA Anderson Forecast held its annual two-day conference at the campus's Sunset Village December 5-6 on the topic "The Outlook for Globalization after Two Years of Turmoil." The first day dealt with broad issues of the California economy and overviews of the progress of globalization, with reports by Edward Leamer, director of the Anderson Forecast, and a keynote address by medical anthropologist Jared Diamond. The second day took up regional status reports. Covered here were the two panels on the Greater China Economy, funded by the Wilbur Woo Foundation and cosponsored by the UCLA International Institute and its Asia Institute. The first examined the economy and politics of the mainland. The second, later in the day, looked at economic ties that link Hong Kong and Taiwan to the mainland. The Wilbur Woo Foundation also funded a lunchtime keynote address by former Secretary of Commerce Mickey Kantor (see box at end of article).
The Outlook on Liberalization and Development in China
The first panel assessed the current state of the economy in the People's Republic. It was chaired by James Tong (UCLA, Political Science). He opened by pointing to the rapid growth of a middle class: "Forbes magazine," he said, "reports than 76 individuals have US$100 million or more. A month ago the State Statistical Bureau reported the median household income for the top 10 percent of earners in major, medium, and small cities. For the big cities the median was 1.22 million yuan (US$148,780), medium cities 960,000 yuan (US$117,073), and small cities 750,000 yuan (US$91,463). There are more than 250 million credit cards in circulation in China. There are 33.7 million cell phones." He then introduced the panelists. Following is a summary of their remarks.
Timothy Bond, economist for Asia-Pacific area, Merrill Lynch, Hong Kong: The next big trend is rising private consumption.
Asia is set to reemerge, centered around China. The news media pose China as an export threat to the rest of the world, with exports growing at 30-50% per year. The Chinese are gaining global market share, while their prices are dropping about 11% a year. China is accused of exporting deflation. A common estimate of their recent and expected real GDP growth rate is 8% in 2000, 7.3% in 2001, 8.0% in 2002, and 7.8% in 2003. There is a consensus among China economists that the growth rate will remain at least 7.5% through the end of 2003.
On Investment. China is one of strongest investment stories in the world. Investment is not being driven by state spending. On the contrary, government expenditure is slowing. The other explanation is that it is driven by commercial incentives. Foreign Direct Investment (FDI) is picking up. There was a big jump from 1993 onwards.
There has been staggering export growth. This is a supply side story. It didn't drop off as sharply in 2001 and early 2002 as Southeast and North Asia.
Monetary growth rates are rising. Reserves are rising by nearly US$70 billion this year. Deflation is easing as demand picks up.
The next big trend is rising private consumption. This has been fairly stable after a jump in 1994 that set a new high that has persisted through 2002. There is an increasing availability of bank credit, a sharp increase in auto loans, and interest rates are fairly low.
The message from the 16th Party Congress was to expect a decline in labor uncertainty, a stronger social safety net, and more balanced growth (that is, more attention to smoothing out the existing disparities in rural vs. urban, western vs. coastal). This makes for consumer confidence and more consumer spending.
State sector employment has been declining since 1995 as inefficient state-owned plants have been shut down or privatized. SOE (State Owned Enterprise) reform topped the agenda at the party congress.
We will probably see more emphasis on developing the western provinces. Expect more reform of capital markets, such as fewer restrictions on foreigners buying Chinese stocks and securities. Don't expect to see heavy inflation.
Chen Baizhu, Marshall School of Business, University of Southern California: There has been a relative shrinkage of the agrarian population. The rural to urban ratio is now 2 to1, 66.6% rural, no longer the 80 percent ... quoted for many years.
China joined the World Trade Organization (WTO) recently. While the rest of the world has been in recession, China has maintained its 7-8% growth per year. Over last 20 years China grew at an annual 9.5% rate. It contributed 14% to world economic growth in those two decades, twice Japan's contribution. The United States contributed 21%.
The Chinese are asking if it is sustainable. It is driven by fixed investment, which increased this year by 24%, mainly FDI. In the 1997-98 Asian economic crisis China also had economic problems. But this year's growth rate is mainly from foreign rather than government investment. Probably this high growth rate will continue for the next few years, but it will be difficult after that without productivity increases. In the past there has been a growth of productivity, agrarian improvements, closing inefficient state enterprises. There will have to be new productivity initiatives if the growth rate is not to drop off in the future.
An important sectoral structural change is underway. In the United States there was the decline of agriculture and growth of industry in the first half of the twentieth century. In China there has been a relative shrinkage of the agrarian population. The rural to urban ratio is now 2 to1, 66.6% rural, no longer the 80 percent rural that was quoted for many years. In next few years 220 million farmers need to be relocated to the cities. There is substantial surplus labor in the countryside.
The second thing is economic polarization. Incomes are rising rapidly on the east coast. Some people are extremely rich. For example, the father of one of my students is very rich. He needed an operation and couldn't spare the time to come to the U.S., so he flew the whole staff of doctors and equipment to China.
It is estimated that there will be 20 million unemployed in the next few years. The government is trying to solve this, trying to provide some social security. It is hard to find the resources to fund this. Every year the government has to pay out US$25 billion to the city population for social security. There is no social security in countryside.
Nonperforming loans are one quarter of the loan holdings of Chinese banks, US$300 billion in nonperforming loans. There is also an increasing conflict between the economic system and the political system. This is becoming more and more intense. There is something like democratization or at least accountability that has started in the lower grass roots level, but moving upwards is very slow.
Ron Nechemia, President, Eurorient Financial Group, Los Angeles: My best guess is that Hu Jintao will be perceived as the president of the inland people.
China today for the first time in history is part of the global agenda. This was not true even in 1990. The first international fund devoted only to China is only a year old, created since China joined the WTO.
In China it is very easy to see that the economy is booming; not like Japan, where it is hard to assess. If you see less than 20 cranes from any hotel window there is something wrong.
I was in Beijing during the party congress. There is a new president, Hu Jintao. He is very easy to get along with, he has a 1000 megawatt smile. The Chinese say he is like the moon, with a light and dark side. He doesn't give any public speeches. When he does give an infrequent talk he doesn't deviate from the written texts. On one hand he is a reformer. He was a big promoter of the internet in China. But he was the governor of Tibet and did not hesitate to crack down on demonstrators. One of the reasons he was appointed president is that he is perceived as a fundamentalist. I don't see this as a real change, this transition. What is the interesting change that I see in the election of Hu Jintao is that all the previous leaders came from major cities. Hu Jintao was discovered by Hu Yaobong. He promoted Hu Jintao. He served for a long time in the rural areas, in Gansu and Guizhou. This is unusual. China's development effort is shifting from the coastal area to the inland area. Hu Jintao is probably going to be a major force in this rural development inland policy.
Mao Zedong was the president of the farmers. Deng opened the eyes of China to the world. Jiang Zemin was the president of the rich people. My best guess is that Hu Jintao will be perceived as the president of the inland people.
In the short term reform is going to accelerate. I have witnessed many many meetings of the government. They are saying this is a market economy, "now we are not going to get involved." Instead of driving the economic activity they are standing back and letting private forces do it.
China is moving very quickly from an agricultural economy to a knowledge based economy. They are developing strengths in biotechnology, agricultural productivity, computer science, and biomedicine.
One of the biggest changes I see as a result of the party congress is the increased intensity of financial market reform. The first international trust law was passed in China recently. At the time of the congress a week ago there were 28 trusts; by the end of this month there will be about 40.
The problem of reforming the pension law in China cannot be resolved easily. China's return on investment is 7-8 percent. How can you funds pensions? The Chinese people are weak in financial management. The government is pushing to increase its knowledge in financial areas. They are holding conferences and seminars continually all over the country to present information on financial management.
Banking: There is no legal way to touch the bad debts. People are afraid to touch them. If you call them in, state firms go bankrupt and there are layoffs. Layoffs imply big social problems. In the Soviet Union partnerships with foreign companies were facilitated by the creation of QFI [Qualified Foreign Intermediary] status, which led to special funds for privatization. This QFI status has just been adopted in China. Previously foreign companies were not allowed to trade on the Shanghai stock exchange. Now there are funds open to purchase by foreign companies with QFI status. So far these are high risk transactions, as the offerings are largely from the less profitable state enterprises.
Frank Lysy, Senior Advisor in the International Finance Corporation Economics Department, former World Bank economist, 1994-98: In the housing market there was no private housing in urban areas. In 3-4 years this has jumped to 65% private housing in the cities, an amazing change in just a few years.
The other speakers have been quite positive. There is much foreign investment, etc. But booms also go bust. What is the risk of that happening in China?
There is a really huge risk. There are big problems the policy makers have to work through in the next few years. We have seen these in many countries, including in China.
It is useful to compare China now to 3-4 years ago, in 1997-99 when the East Asia crisis had just occurred. if you compare now to 3-4 years ago, foreign firms seem to be profitable now, while they were not 4 years ago. That is one of the biggest changes. There has been some genuine state enterprise restructuring. About 25 million people lost their jobs. State enterprises seem to be more profitable now than they were before. The real concern is the banks and the nonperforming loans. They give loans to the state enterprises, the enterprises are bankrupt, and the loans are no good. The government 3-4 years ago refused to acknowledge the problem. Now they admit it and discuss it.
The best estimates were made by the IMF staff. Losses are 45-75 percent of GDP, this is between US$500 and US$800 billion. This is more than an IMF bailout could be.
Another positive over 10 years is that there was a real estate bubble in the 1990s. It started to come down in 1996. From the peak to the trough it was about 75% of value in Shanghai and about 50% in Beijing. Fortunately the financial system did not collapse.
There are other positives. Exports are booming, there is little black market, trade is strong, reserves are far larger than the debt. Car sales are booming, entry into the WTO is a positive.
In the housing market there was no private housing in urban areas. In 3-4 years this has jumped to 65% private housing in the cities, an amazing change in just a few years. They got these assets at a cheap price, often 20% of assessed value. But this also subjects the new owners to risk. Previously there was little reason to withdraw savings. With a housing market people may withdraw their money to buy houses and reveal the basic weakness of the banking system. We need to watch for the risk of bank runs.
Pension liabilities are also very large. Net government debt runs to 110% of GDP. Other countries have been that high but it is at the upper limit of what is viable. They have to stop the increase in these liabilities or people will lose their pensions or their bank deposits.
Remarks by Mickey Kantor at the Anderson Forecast Conference
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China has now acceded to the family of nations, as a member of the World Trade Organization and of APEC. U.S.-China relations are now at a high point since Tiananmen in 1989. U.S. presidents have not always acted wisely toward China. The Clinton administration's giving permission to Taiwan's President Lee Teng Hui to visit Cornell University in 1995 was a terrible mistake that inflamed China-Taiwan relations.
The development of the Chinese economy is truly remarkable. This year more Volkswagons will be sold in China than will be sold in the United States. China will import more steel than the U.S. will. This expansion has been paralleled by a growth of the trade connections between our two nations.
There are two movements that draw us closer. The first is trade. The second is technology--films, internet, fax, phone, air travel. These are the motors of globalization. For globalization to work we have to be willing to build facilities, invest capital, share technology. This is mostly positive. But you can't do what we did on steel and on the farm bill and make friends. I try to look ahead. My grandchildren's market will be the world. I want the world to welcome them into that market.
China is the balance wheel of Asia. It will pass Japan in about 10 years, in gross output, not per capita.
We do have some issues with China. Every president since 1949 has had a one China policy. We do not recognize Taiwan as a separate country. But Taiwan's security and interests are important.
The Chinese have been helpful on nonproliferation in Korea. The Sunshine policy of the South Korean government is the right policy. It is a mistake of the Bush administration to reject that.
Published: Tuesday, December 10, 2002