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The China Miracle DemystifiedJustin Yifu LinThe World BankWhen China began its transition from a planned to a market-oriented economy in 1979, it was a poor, inward-looking country with a per capita income of US$182 and a trade dependence (trade to GDP) ratio of 11.2 percent.1China’s economic performance since then has been miraculous. Annual GDP growth averaged 9.9 percent over the 30-year period, and annual growth in international trade, 16.3 percent China is now a middle-income country, with a per capita GDP of US$3,688 in 2009, and more than 600 million people have escaped poverty. Its trade dependence ratio has reached 65 percent, the highest among the world’s large economies. In 2009 China overtook Japan as the world’s second largest economy and replaced Germany as the world’s largest exporter of merchandise. China’s car market is now the world’s largest, and Shanghai has been the world’s busiest seaport by cargo tonnage since 2005. The spectacular growth over the past three decades far exceeded the expectations of anyone at the outset of the transition, including Deng Xiaoping, the architect of China’s reform and opening-up strategy.2Interest among academics in China’s transition and development experience hasPaper prepared for the panel on “Perspectives on Chinese Economic Growth” at the Econometric Society World Congress in Shanghai on August 19, 2010.1Unless indicated otherwise, the statistics on the Chinese economy reported in the paper are from China Statistical Abstract 2010, China Compendium of Statistics 1949–2008, and various editions of China Statistical Yearbook, published by China Statistics Press.2Deng’s goal at that time was to quadruple the size of China’s economy in 20 years, which would have meant average annual growth of 7.2 percent. Most people in the 1980s, and even as late as the early 1990s, thought that achieving that goal was a mission impossible.increased exponentially in the past three decades.3I. The Reason for China’s Extraordinary Performance in Transition In this paper I try to provide answers to five related questions: Why was it possible for China to achieve such extraordinary performance during its transition? Why was China unable to attain similar success before its transition started? Why did most other transition economies, both socialist and nonsocialist, fail to achieve a similar performance? And can other developing countries achieve a similar economic performance?Rapid, sustained increase in per capita income is a modern phenomenon. Studies by economic historians, such as Angus Maddison (2001), show that average annual per capita income growth in the West was only 0.05 percent before the 18th century, jumping to about 1 percent in the 19th century and reaching about 2 percent in the 20th century. That means that per capita income in Europe took 1,400 years to double before the 18th century, about 70 years in the 19th century, and 35 years thereafter.A continuous stream of technological innovation is the basis for sustained growth in any economy. The dramatic surge in growth in modern times is a result of a paradigm shift in technological innovation. Before the industrial revolution in the 18th century, technological innovations were generated mostly by the experiences of craftsmen and farmers in their daily production. After the industrial revolution, experience-based innovation was increasingly replaced by field experimentation and, later, by science-based experiments conducted in scientific laboratories (Lin 1995; Landes 1998). This shift speeded the rate of technological innovation, marking the3 The EconLit database includes 27 peer-reviewed scholarly journal articles with China or Chinese in their title published in 1979, a number that jumps to 70 for 1989 and 1,016 for 2009.coming of modern economic growth and contributing to the dramatic acceleration of income growth in the 19th and 20th centuries (Kuznets 1966).The industrial revolution not only accelerated the rate of technological innovation but also transformed industrial, economic, and social structures. Before the 18th century every economy was agrarian; 85 percent or more of the labor force worked in agriculture, mostly in self-sufficient production for the family. The acceleration of growth was accompanied by a move of labor from agriculture to manufacturing and services. The manufacturing sector gradually moved from very labor-intensive industries at the beginning to more capital-intensive heavy and high-tech industries. Finally, the service sector came to dominate the economy. Accompanying the change in industrial structure was an increase in the scale of production, the required capital and skill, the market scope, and the risks. To exploit the potential unleashed by new technology and industry, and to reduce the transaction costs and share risks requires innovations as well as improvements in an economy’s hard infrastructure, such as power and road networks, and its soft infrastructure. Soft infrastructure consists of such elements as belief, the legal framework, financial institutions, and the education system (Lewis 1954; Kuznets 1966; North 1981; Lin 2010).A developing country such as China, which started its modernization drive in 1949, potentially has the advantage of backwardness in its pursuit of technological innovation and structural transformation (Gerschenkron 1962). In advanced high-income countries technological innovation and industrial upgrading require costly and risky investments in research and development, because their technologiesand industries are located on the global frontier. Moreover, the institutional innovation, which is required for realizing the potential of new technology and industry, often proceeds in a costly trial-and-error, path-dependent, evolutionary process (Fei and Ranis 1997). By contrast, a latecomer country in the catching up process can borrow technology, industry, and institutions from the advanced countries at low risk and costs. So if a developing country knows how to tap the advantage of backwardness in technology, industry, and social and economic institutions, it can grow at an annual rate several times that of high-income countries for decades before closing its income gap with those countries.In the post–World War II period, 13 of the world’s economies achieved average annual growth of 7 percent or above for 25 years or more. The Commission on Growth and Development, headed by Nobel Laureate Michael Spence, finds that the first of 5 common features of these 13 economies is their ability to tap the potential of the advantage of backwardness. In the Commission’s language, the 13 economies, “they imported what the rest of the world knew and exported what it wanted” (World Bank 2008, p. 22).4After the transition was initiated by Deng Xiaoping in 1979, China adopted the opening-up strategy and started to tap the potential of importing what the rest of the world knows and exporting what the world wants. This is demonstrated by the rapid4The 2nd to fifth features are, respectively, macroeconomic stability, high rates of saving and investment, market system, and committed, credible, and capable governments. Lin and Monga (2010a) show that the first three features are the results of following the economy’s comparative advantages in developing industries at each stage of its development, and the last two features are the preconditions for the economy to follow its comparative advantages in developing industries.growth in its international trade, the dramatic increase in its trade dependence ratio, and the large inflows of foreign direct investment. While in 1979 primary and processed primary goods accounted for more than 75 percent of China’s exports, by 2009 the share of manufactured goods had increased to more than 95 percent. Moreover, China’s manufactured exports upgraded from simple toys, textiles, and other cheap products in the 1980s and 1990s to high-value and technologically sophisticated machinery and information and communication technology products in the 2000s. China’s exploitation of the advantage of backwardness has allowed the country to emerge as the world’s workshop and to achieve extraordinary economic growth by reducing the costs of innovation, industrial upgrading, and social and economic transformation.II.Why Did China Fail to Achieve Rapid Growth before 1979? China possessed the advantage of backwardness long before the transition began in 1979. The socialist government won the revolution in 1949 and started modernizing in earnest in 1953. Why had China failed to tap the potential of the advantage of backwardness and achieve dynamic growth before 1979? This failure came about because China adopted a wrong development strategy at that time.China was the largest economy and among the most advanced, powerful countries in the world before pre-modern times (Maddison 2007). Mao Zedong, Zhou Enlai, and other first-generation revolutionary leaders in China, like many other Chinese social and political elites, were inspired by the dream of bringing about China’s modernization as fast as possible.Lack of industrialization—especially lack of the large heavy industries that were the basis of military strength and economic power—was perceived as the root cause of the country’s backwardness. Thus it was natural for the social and political elites in China to prioritize the development of large, heavy, advanced industries after they won the revolution and started building the nation.5Starting in 1953, China adopted a series of ambitious Five-Year Plans to accelerate the building of modern advanced industries with the goal of overtaking Britain in 10 years and catching up to the USA in 15 years. But China was a lower-income agrarian economy at that time. In 1953, 83.5 percent of its labor force was employed in the primary sector, and its per capita income (measured in purchasing power parity terms) was only 4.8 percent of that of the United States (Maddison 2001). Given China’s employment structure and income level, the country did not possess comparative advantage in modern advanced industries of high-income countries, whether latent or overt, and Chinese firms in those industries were not viable in an open competitive market. In the 19th century the political leaders of France, Germany, the United States, and other Western countries pursued effectively the same strategy, motivated by the contrast between Britain’s rising industrial power and the backwardness of their own industry (Gerschenkron 1962; Chang 2003).65 The desire to develop heavy industries existed before the socialist elites obtained political power. Dr. Sun Yat-sen, the father of modern China, proposed the development of “key and basic industries” as a priority in his plan for China’s industrialization in 1919 (Sun 1929).6 While the policy goal of France, Germany, and the United States in the late 19th century was similar to that of China in the mid-1950s, the per capita incomes of the three countries were about 60–75To achieve its strategic goal, the Chinese government needed to protect the priority industries by giving firms in those industries a monopoly and subsidizing them through various price distortions, including suppressed interest rates, an overvalued exchange rate, and lower prices for inputs. The price distortions created shortages, and the government was obliged to use administrative measures to mobilize and allocate resources directly to nonviable firms (Lin 2009; Lin and Li 2009).Thanks to these interventions, China was able to quickly establish modern advanced industries, test nuclear bombs in the 1960s, and launch satellites in the 1970s. But the resources were misallocated, the incentives were distorted, and the labor-intensive sectors in which China held a comparative advantage were repressed. As a result, economic efficiency was low, and the growth before 1979 was driven mainly by an increase in inputs.7III. Why Didn’t Other Transition Economies Perform Equally Well? Despite a very respectable average annual GDP growth rate of 6.1 percent in 1952–78 and the possession of large modern industries, China was almost a closed economy, with 71.3 percent of its labor force still in traditional agriculture. In 1952–78 household consumption grew by only 2.3 percent a year, in sharp contrast to the 7.1 percent average growth after 1979.All other socialist countries and most developing countries after World War II adopted a development strategy similar to that of China. Most colonies gained political independence after the 1950s. Compared with developed countries, these newly percent of Britain’s at the time. The small gap in per capita incomes indicated that the industries on the governments’ priority lists were the latent comparative advantages of the three countries (Lin and Monga 2010b).7 Estimates by Perkins and Rawski (2008) suggest that the average annual growth of total factor productivity was 0.5 percent in 1952–78 and 3.8 percent in 1978–2005.independent developing countries had extremely low per capita income, high birth and death rates, low average educational attainment, and very little infrastructure—and were heavily specialized in the production and export of primary commodities while importing most manufactured goods. The development of modern advanced industries was perceived as the only way to achieve rapid economic takeoff, avoid dependence on the Western industrial powers, and eliminate poverty (Prebisch 1950).It became a fad after the 1950s for developing countries in both the socialist and the nonsocialist camps to adopt a development strategy oriented toward heavy industry and import substitution (Lal and Mynt 1996). But the capital-intensive industries on their priority lists defied the comparative advantages determined by the endowment structure of their low-income agrarian economies. To implement their development strategy, developing countries introduced distortions and government interventions like those in China.88 There are different explanations for the pervasive distortions in developing countries. Acemoglu, Johnson, and Robinson (2005); Engerman and Sokoloff (1997); and Grossman and Helpman (1996) propose that these distortions were caused by the capture of government by powerful vested interests. Lin (2009, 2003) and Lin and Li (2009) propose that the distortions were a result of conflicts between the comparative advantages of the economies and the priority industries that political elites, influenced by the dominant social thinking of the time, targeted for the modernization of their nations.This strategy made it possible to establish some modern industries and achieve investment-led growth for one or two decades in the 1950s to the 1970s. Nevertheless, the distortions led to pervasive soft budget constraints, rent-seeking, and misallocation of resources. Economic efficiency was unavoidably low. Stagnation and frequent social and economic crises began to beset most socialist and nonsocialist developing countries by the 1970s and 1980s. Liberalization from excessive state intervention became a trend in the 1980s and 1990s.The symptoms of poor economic performance and social and economic crises, and their root cause in distortions and government interventions, were common to China and other socialist transition economies as well as other developing countries. But the academic and policy communities in the 1980s did not realize that those distortions were second-best institutional arrangements, endogenous to the needs of protecting nonviable firms in the priority sectors. As a result, they recommended that socialist and other developing countries immediately remove all distortions by implementing simultaneous programs of liberalization, privatization, and marketization with the aim of quickly achieving efficient, first-best outcomes.But if those distortions were eliminated immediately, many nonviable firms in the priority sectors would collapse, causing a contraction of GDP, a surge in unemployment, and acute social disorders. To avoid those dreadful consequences, many governments continued to subsidize the nonviable firms through other, disguised, less efficient subsidies and protections (Lin and Tan 1999). Transition and developing countries thus had even poorer growth performance and stability in the 1980s and 1990s than in the 1960s and 1970s (Easterly 2001).During the transition process China adopted a pragmatic, gradual, dual-track approach. The government continued to provide necessary protections to nonviable firms in the priority sectors. At the same time it liberalized the entry of private enterprises, joint ventures, and foreign direct investment in labor-intensive sectors in which China had a comparative advantage but that were repressed before the transition. This transition strategy allowed China both to maintain stability by avoiding the collapse of old priority industries and to achieve dynamic growth by simultaneously pursuing its comparative advantage and tapping the advantage ofbackwardness in the industrial upgrading process. In addition, the dynamic growth in the newly liberalized sectors created the conditions for reforming the old priority sectors. Through this gradual, dual-track approach China achieved “reform without losers” (Lau, Qian, and Roland 2000; Lin, Cai, and Li 2003; Naughton 1995) and moved gradually but steadily to a well-functioning market economy.A few other socialist economies—such as Poland 9IV. Lessons of China’s Development for Other Developing Countries , Slovenia, and Vietnam, which achieved outstanding performance during their transitions—adopted a similar gradual, dual-track approach (Lin 2009). Similarly, Mauritius adopted such an approach in the 1970s to reform distortions caused by the import-substitution strategy, becoming an extraordinary success story in Africa (Subramanian and Roy 2003).Can other developing countries achieve a performance similar to that achieved by China over the past three decades? The answer is clearly yes. Every developing country has a similar opportunity if at each stage of its development the country knows how to develop its industries according to its comparative advantages so as to tap the potential of the advantage of backwardness in its technological innovation and structural transformation. A well-functioning market is a precondition for developing an economy’s industries according to its comparative advantages, because only with such a market can relative prices reflect the relative scarcities of factors of production in the economy. Such a clear functioning market naturally propels firms to enter industries consistent with those country’s comparative advantages. If a developing9 In spite of its attempt to implement a shock therapy at the beginning, Poland did not privatize its large state-own enterprises until very late in the transition.country follows its comparative advantages in technological and industrial development, it will be competitive in domestic and international markets. In other words, it will grow fast, accumulate capital rapidly, and upgrade its endowment structure quickly. When the endowment structure is upgraded, the economy’s comparative advantages change and its industrial structure as well as hard and soft infrastructure need to be upgraded accordingly. In the process it is desirable for the state to play a proactive, facilitating role in compensating for externalities created by pioneer firms in the industrial upgrading and coordinating the desirable investments and improvements in soft and hard infrastructure, for which individual firms cannot internalize in their decisions. Through the appropriate functions of competitive markets and a proactive, facilitating state, a developing country can tap the potential of the advantage of backwardness and achieve dynamic growth (Lin 2010).Most developing countries, as a result of their governments’ previous development strategies, have various kinds of distortions and many existing firms are nonviable in an open competitive market. In this respect too, China’s experience in the past 30 years provides useful lessons. In the reform process it is desirable for a developing country to adopt a dual-track approach, providing some transitory protections to nonviable firms to maintain stability but liberalizing entry into sectors in which the country has comparative advantages to tap the advantage of backwardness. If they can do this, other developing countries can also achieve stability and dynamic growth in their economic liberalization process.Thirty years ago no one would have imagined that China would be among the 13economies that tapped the potential of the advantage of backwardness and realized average annual growth of 7 percent or above for 25 or more years. For developing countries now fighting to eradicate poverty and close the gap with high-income countries, I hope that lessons from China’s transition and development will help them join the list of those realizing growth of 7 percent or more for 25 or more years in the coming decades.China too can still benefit from the potential of the advantage of backwardness. After 30 years of transition China’s per capita income is only about 7.4 percent of the average for high-income countries when measured by market exchange rates and 16 percent when measured in purchasing power parity terms. I hope that China also will learn from the lessons of its past and maintain a dynamic, sustainable, and inclusive growth in the coming 30 years.ReferencesAcemoglu, D., S. Johnson, and J. A. Robinson. 2005. “Institutions as the Fundamental Cause of Long-Run Growth.” In Handbook of Economic Growth, vol. 1A, ed. P.Aghion and S. N. Durlauf, 385–472. Amsterdam: Elsevier.Brandt, L., and T. G. Rawski, eds. 2008. 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Helpman. 1996. “Electoral Competition and Special Interest Politics.” Review of Economic Studies 63 (2): 265–86.Kuznets, S. 1966. Modern Economic Growth: Rate, Structure and Spread. New Haven, CT: Yale University Press.Lal, D., and H. Mynt. 1996. The Political Economy of Poverty, Equity, and Growth: A Comparative Study. Oxford: Clarendon Press.Landes, D. 1998. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York and London: Norton.Lau, L. J., Y. Qian, and G. Roland. 2000. “Reform without Losers: An Interpretation of China’s Dual-Track Approach to Transition.” Journal of Political Economy 108 (1): 120–43.Lewis, W. A. 1954. “Economic Development with Unlimited Supply of Labour.”Manchester School of Economic and Social Studies 22 (2): 139–91.Lin, J. Y. 1995. “The Needham Puzzle: Why the Industrial Revolution Did Not Originate in China.”Economic Development and Cultural Change41 (2): 269–92.———. 2003. “Development Strategy, Viability and Economic Convergence.”Economic Development and Cultural Change 53 (2): 277–308.———. 2009. Economic Development and Transition: Thought, Strategy, and Viability. Cambridge: Cambridge University Press.———. 2010.“New Structural Economics: A Framework for Rethinking Development.” Policy Research Working Paper 5197, World Bank, Washington, DC.Lin, J. Y., and F. Li. 2009. “Development Strategy, Viability, and Economic Distortions in Developing Countries.” Policy Research Working Paper 4906, World Bank, Washington, DC.Lin, J. Y., and C. 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The Growth Report: Strategies for Sustained Growth and Inclusive Development. Washington, DC: World Bank.。
中国经济建设的作文英语Over the past few decades, China has undergone a remarkable transformation, evolving from a closed, centrally-planned economy to a more market-oriented and globally integrated economic powerhouse. This essay will explore the key factors that have contributed to China's economic construction andthe impact it has had on the world.Firstly, the economic reforms initiated in the late 1970s by Deng Xiaoping were a pivotal moment in China's economic history. These reforms opened up the country to foreign investment, leading to the establishment of Special Economic Zones (SEZs) where market-oriented policies were first tested. The success of these zones served as a catalyst for further liberalization and reform across the country.Secondly, China's accession to the World Trade Organization (WTO) in 2001 marked a significant milestone in itsintegration into the global economy. Membership in the WTO required China to lower its trade barriers, which in turn attracted multinational corporations and foreign direct investment, further fueling economic growth.Thirdly, the Chinese government's focus on infrastructure development has played a crucial role in its economic rise. Massive investments in transportation networks, including highways, high-speed rail, and ports, have facilitated the movement of goods and people, enhancing economic efficiencyand growth.Moreover, China's large and increasingly affluent population has created a vast domestic market, which has been a key driver of its economic expansion. The rising middle class has increased consumer demand for goods and services, providing a strong impetus for economic activity.However, China's economic development has not been without challenges. Issues such as income inequality, environmental degradation, and a rapidly aging population pose significant hurdles for the country's continued growth. Additionally, the global economic landscape is shifting, with rising protectionist sentiments and trade tensions affecting China's export-oriented economy.In conclusion, China's economic construction has been a story of rapid growth and integration into the global economy. While challenges remain, the country's commitment to reform and development has positioned it as a major player on the world stage. As China continues to evolve its economic strategies, its impact on the global economy will undoubtedly continue to be significant.。
Globalization and China’s Economic and Financial Development(Preliminary draft– not to be quoted 9/8/05)Gregory C. ChowTo understand China’s economic reform and developmen t since 1978 one may conveniently divide the topic into its domestic and international aspects even though the two are closely related. It is the purpose of this essay to examine the international aspects as China has taken part in the process of world economic globalization, a salient feature of world history today. The Chinese leader Deng Xiaoping who initiated and directed economic reform from a planned to a market economy understood the importance of globalization and adopted what he called an “open-doo r policy” as an essential part of the reform program.The term globalization refers to the crossing of national boundaries. It means the flow of goods, capital, information/technology and people across national borders. China practiced globalization in the Han dynasty (206BC-220AD) when trade took place between the Han Chinese and neighboring people in the North-west through the Silk Route. During the Tang dynasty (618-901) trade flourished and the Silk Route expanded as Chinese traded with the Romans. However, in the Qing Dynasty and in the period of the PRC up to Deng Xiaoping’s open-door policy China tried to close its doors and resisted globalization. I will survey the accomplishments of globalization for China’s economic development and clarify some controversial issues concerning globalization.1. Foreign Trade.First consider foreign trade or the flow of goods across national borders. Since 1978 China has encouraged free trade and abolished trade restrictions step by step. The government has changed its policy from the administration of foreign trade by the Ministry of Foreign Trade, to giving provincial governments much autonomy in foreign trade and to allowing private enterprises to engage in foreign trade. The total volume of foreign trade or the total volume of exports and imports increased from 20.64 billion US dollars in 1978 to 620.8 billion in 2002, accounting for 65 percent of GDP and was growing at the rate of 35 percent per year. In 2004, the trade volume reached 1.1 trillion US dollars, and had a growth rate of 30 percent. China became the third largest trading country in the world, next to the United States and Germany.Today exports from China can be found all over the world. In terms of US-China economic relations exports from China have benefited many Americans in providing them with high-quality consumer goods at low prices, but have also generated resentment and resistance by some American manufacturers and workers. Chinese exports to the US may hurt some US industries producing similar products. US workers in these industries may suffer temporarily, but in the long-run the labor market is able to adjust as new industries are developed to hire the displaced workers. In the long run, the aggregate unemployment rate (now at 5 percent) has not been visibly affected by the Americanimports of foreign goods. Note also that exports from China, in fact about 60 percent of them, are produced by foreign invested enterprises in China and some are American companies.Outsourcing of jobs such as having someone in Asia read X-ray or answer phones has also created resentment in the United States. From the economic point of view, outsourcing of jobs as illustrated above is the same as import of services from China. The effects are the same as for the import of goods produced in China that I just talked about. Such imports are good for China and for US although some workers may be displaced temporarily. Although this point is valid, Professor Greg Mankiw of Harvard and at the time Chairman of the P resident’s Council of Economic Advisers got into trouble when he made this valid point in a Congressional hearing in 2004 because such a viewpoint can be unpopular for American workers and politicians.As an importer China provides a large market for foreign manufacturers and has gained economic power as a result. Demand for imports to China propels economic growth of other countries in the world. China first took a mercantilist stand in the restriction of imports, but after the rapid expansion of Chinese exports, the table has turned as some developed countries including the US are considering the imposition of restrictions on imports from China. The imposition of quotas on textiles from China is an example.In 2001 China joined the World Trade Organization. Membership in WTO required China to lower its tariffs for manufacturing as well as agricultural products. The lowering of tariffs helped increase competition for Chinese manufacturers and farmers and provide cheaper products for Chinese consumers.Foreign trade has helped economic growth in China in three aspects. First international specialization that takes place as each country produces the goods for which it has a comparative advantage in producing will enable the country to obtain more goods than by domestic production alone. Second, exports are a part of aggregate demand and an increase in aggregate demand helps increase the country’s national output. Thirdly, trade together with foreign investment has brought in modern technology and method of management that has increased productivity in China.2. Foreign InvestmentA. Flow of physical capital in the form of foreign direct investment has been good in promoting China’s economic growth. Since economic reform started in 1978 China’s policy concerning foreign investment has made an 180 degree turn, from treating it as a form of exploitation by foreigners to welcoming it for China’s economic development. In the years 2001 to 2003, the amounts of direct foreign investment actually utilized were respectively 49.7, 55.0 and 56.1 billion US dollars. Foreign investment has provided physical and financial capital, technology, and management skill and practice to China. However foreign investment is not a fundamental economic factor in China’s rapid growth but only a vehicle propelling that growth. There are three fundamental factors, namely (1) abundance of high-quality human capital that includes skillful andhardworking laborers and resourceful entrepreneurs, (2) sufficiently well functioning market institutions and (3) the position of a late comer that can adopt modern technology from the more developed countries. These three fundamental factors have enabled China to attract foreign capital; otherwise the capital could have been invested elsewhere.Now China is exporting capital, not only to less developed countries but also to the United States. Chinese investment has helped the economic development of some Asian and African countries. Investment in the United States is illustrated by the attempt in the Spring of 2005 by the Chinese National Offshore Oil Corporation Cnooc to buy Unocal in the United States although the attempt turned out to be unsuccessful. The attempt is a part of the free flow of capital.From the viewpoint of the United States, export of capital from US to China that takes place when a US factory moves from Cleveland to Shanghai is also considered a case of the outsourcing of jobs as the factory is supposed to go to Shanghai to take advantage of the less expensive and good quality labor in China. This case of outsourcing of jobs is different from simply buying goods or services from China that I talked about earlier since it takes the form of foreign investment. Capital flows to China in this case but not in the previous case that involves only foreign trade. Such an investment is good for the US as it raises US GNP. The reason is that what this piece of capital can produce in China is more than it could be producing in the US; otherwise the factory would not have moved. Therefore the move increases total output of the US which the economists call gross national product or GNP. The move, however, has a harmful effect on the workers in Cleveland who lose their jobs when such a factory moves. As in the case of competition from imports from China, there will be job loss in selected industries in the short runBut aggregate employment in the US in the long run will not be affected.In the course of globalization there is movement of resources between nations. The movement is good for each nation in the long run but may have harmful effects in the short run for a segment of the population. The same can be said about the movement of economic resources between different regions of one country. In US history, the movement of textile factories from New England to the South to take advantage of the lower labor cost is good for the country’s economic development, both in New England and in the South. In New England some workers were displaced during the move but other industries were developed and people were employed again without leading to an increase in the unemployment rate in the region.On the negative side, there may be environmental problems associated with new factories built in the course of globalization, but this problem exists for domestically financed factories and for economic development in general. The Chinese government has paid serious attention to environment protection. Economists try to balance the harm from possible damage to the environment with the gain in having more output. In general poorer countries in the course of economic development are willing to accept some environmental degradation in exchange for more output but they should be aware of the damage which may be long-lasting.B. Concerning financial investment, the free flow of financial capital is one objective in the development of financial markets. China welcomes foreigner to invest in its stock markets in Shenzhen, Shanghai and Hong Kong, and also desires to invest its capital abroad. Movement of financial capital is one aspect of the free flow of resources to where they yield the highest return so that total output of the world would be larger. In this connection I would like to call your attention to the fact that the working of the free market involving the free flow of resources was well understood by the great Chinese historian Sima Qian of the Han dynasty. In chapter 69 entitled "The biographies of the money markets" of his book Historical Records he wrote:"There must be farmers to produce food, men to extract the wealth of mountains and marshes, artisans to produce these things and merchants to circulate them. There is no need to wait for government orders: each man will play his part, doing his best to get what he desires. So cheap goods will go where they will fetch more, while expensive goods will make men search for cheap ones. When all work willingly at their trade, just as water flows ceaselessly downhill day and night, things will appear unsought and people will produce them without being asked. For clearly this accords with the Way and is in keeping with nature." What he calls nature is what we call the law of economics.On the negative side of the free flow of financial capital it enables financial crises to take place, including the Asian financial crisis of 1997-8. This crisis did not affect China very much as the Chinese government has had a wise policy of adopting international financial reform at a moderate speed especially in allowing a gradual opening of financial markets and of the capital account in international finance because economic institutions are not ready. But globalization itself is good for the reform of banking and financial institutions in providing foreign competition to push the reform forward. Using foreign competitio n to speed up economic reform was the main reason for the former Premier Zhu Rongji in leading China to join the WTO in the first place.The strategy of using foreign competition to speed up economic reform of domestic institutions, however effective, has limitation in promoting the reform of China’s banking system and large state-owned enterprises for two reasons. First, while Chinese government officials have been pragmatic in most aspects of economic reform, they have been conservative and slow in allowing foreign banks to enter the domestic market. Second, Chinese banks and state enterprises are state-owned and controlled and operated by bureaucrats who can take advantage of the economic power conferred upon them to benefit themselves. Corruption is a major hindrance to economic reform at the current juncture of China’s economic development as I have discussed elsewhere. See Chow (2005) for a discussion of the problem of corruption and Allen, Qian and Qian (2005) that contains measures for China’s financ ial reform that may be hindered by corruption as well.The Exchange Rate IssueAn important determinant of foreign trade and foreign investment is the exchange rate. A low value of Chinese RMB makes Chinese exports cheaper and investment in Chinamore attractive if the investment is to produce for export. Many countries in the world including those in the European Union, Japan and Taiwan, have adopted the flexible exchange rate system while China adopted a fixed exchange rate up to July 2005 but the government did change the fixed rate several times in the 1980s and early 1990s relativeto the US dollar as its government deemed appropriate. Most recently the Chinese government has adopted a managed floating rate with the government deciding the rate around a small band daily relative to the value of a basket of foreign currencies but the basket is not explicitly specified. There are pros and cons of the fixed and the floating exchange rate systems. (See the Appendix for a more detailed discussion.) A fixed exchange provides an anchor for the government in the conduct of its monetary and fiscal policy. It limits the discretionary power of the government in the exercise of its monetary and fiscal policy that may lead to excessive inflation or deflation. An expansionary monetary or fiscal policy would lead to inflation and lower the value of the currency as compared with a more stable US currency. Thus the fixed exchange rate system might be good for a developing country which has difficulty in disciplining itself in the exercise of its monetary and fiscal policies. The flip side is the power that it gives up and its dependence on the monetary policy of the US if the exchange rate is fixed as in terms of the US dollar. I was one of the several economists who proposed a flexible exchange rate for Taiwan three decades ago. After the Taiwan government adopted it the economy seemed to function well.Let us consider two questions: First, what exchange rate regime should China adopt? Second, given the current regime of a managed float should the RMB be revalued? Since the Chinese government has already declared its position to adopt a more flexible regime in the long run as the situation permits, I should not comment on the first question. Making recommendations on policy which is already decided is fruitless. Let me just point out that in the adoption of a suitable exchange rate system the Chinese governmentis practicing its tried and proven method of reform of economic institutions, namely, gradualism and experimentation in order to decide on a good system and when to adopt it. On the second question many foreign governments including the US government have pressured the Chinese government to raise the value of the RMB for their own benefits. Some US economists including Alan Greenspan have said that the effect of the exchange rate of the RMB on the US economy is rather limited. Concerning the effect on the Chinese economy, I believe that the RMB is still undervalued and revaluation is good for the Chinese economy. We have witnessed the undervaluation of the RMB or the overvaluation of the dollar in terms of the RMB by the excess supply of the dollar in the foreign exchange market in China due to its high price and the resulting accumulation ofa large amount of foreign exchange reserves in China in the amount of over 700 billionUS dollars. The increase was over 200 billion just in 2004 alone. An undervalued RMB has caused the large export surplus and large inflow of foreign investment and the associated large inflow of foreign exchange reserves. The inflow of foreign exchange hasbeen converted into RMB and has caused a rapid increase in money supply M2 in 2002. The rapid increase in money supply has led to great increases in investment and output in 2003-5 and in prices in 2004-5 (while from 1998 to 2002 China had a very stable or slightly decreasing price level). A more detailed discussion of the effects of money supply on aggregate output and prices can be found in Chow and Shen (2004).Thus the undervalued RMB was a main cause of an overheated Chinese economy in 2003-4. The Chinese government tried to slow down the overheated economy by the administrative means of controlling the extension of credits by banks and limiting the number of construction projects. If the banks had had no extra money to lend out in the first place, there would have been no need to control the amounts of bank credit and to restrict investment in construction which was financed by such credits. Thus an undervalued RMB is the culprit of the overheated Chinese economy. To solve the potential problem of overheating and inflation in the future the government needs to raise the value of the RMB substantially. Another reason for revaluation of the RMB is that a high valued RMB would enable the Chinese to buy more imports for consumption and economic development rather than accumulating an extremely large amount of foreign reserves that are mostly lying idle or earning a small amount of interest from investing in US Treasury bonds.3. Transfer of Information and TechnologyTogether with the flow of goods and capital is the transmission of information and technology. This has benefited China by upgrading its technology. So far China has mainly been an importer of technology but it will soon be an important exporter as it is already an exporter of technology to some less developed countries. In recent years the Chinese government has spent a large amount on higher education and Chinese universities, especially the top ones, improved rapidly. See Chow and Shen (2005). This will help China to become one of the world leaders in technology.As of today, China has already helped many developing countries in Asia and in Africa by investing in these countries, providing them with technology, labor and assisting them in economic development in general. China seems to have done very well in this regard, in view of the fact that it has its own poor regions to develop also. Chinese diplomacy is based on mutual respect, treating a small country as equal and trying to help solve its problems if it is feasible. The effort of the Chinese government in assisting the developing countries and its diplomatic posture as a friendly country are doing as much in increasing China’s influence in the world scene as its rising economic power. Returning to China as an importer of technology, we know that the import of technology from the US to China is good for China, but is it good for the US? A part of the answer is yes. The main reason for capital and technology to move from US to China is to get a higher return to capital. It raises US GNP as I have explained and that is good for the US. In the very long run, however, one can make a case that this transfer of technology might be bad for the US although it is not necessarily so. To make the case, the transfer may enable China to improve its technology in the future to a point when it will overtake theUS in the industries in which the US now has monopoly power. To illustrate, when the Japanese took over much of the monopoly power of the US automobile industry in the 1950s and 1960s, the US lost is comparative advantage in producing automobiles. One can argue that the transfer of technology in producing automobiles from the US to Japan was bad for the US. See Samuelson (2004) which makes the simple point that when there is technological change that improves the technology of country 1 (China) in the production of good 1 in a two-good economy, the welfare of country 2 (United States) may decrease if it can no longer specialize in producing good 1 and does not engage in trade with China.This above argument that the US may lose economically by transferring technology to China is different from the fear of military threat from China after it acquires the technology. The fear of military threat can justify restricting the transfer of military technology to China. I personally believe that the Chinese government has no desire for military expansion but many Americans have an opposite view. This is not an issue that can be settled by further discussion in this essay.4. Migration of PeopleFourth, about the movement of people. The Chinese have moved to many parts of the world to find jobs, to settle down or to get educated. They have contributed to the countries where they have settled or are visiting. The out migration of Chinese has been considered a problem for China especially when the emigrants are educated or have skills. The problem is called brain drain. This problem was considered an issue much discussed in Taiwan in the 1970s but is not considered a serious problem in China today. I do not consider it a problem for China. Even when the overseas Chinese live abroad, they are helping China by short-term visits as lecturers, traders and advisers. More overseas Chinese will return as opportunities improve in China as the number returning has continued to increase in recent years. People moving to live and work in China have benefited China also. They show the Chinese how to improve their life style by living in other ways if desired and may help improve the legal system and legal behavior of the Chinese people. Here again the free movement of people has more benefits to the movers, to their home countries and to the host countries than possible harm. Sima Qian’s statement “So chea p goods will go where they will fetch more, while expensive goods will make men search for cheap ones” applies not only to the free flow of goods, but of capital and people as well.In China’s economic globalization there is one aspect of the movement o f people whichis very important and unique and is independent of foreign investment and foreign trade. This is the movement of overseas Chinese all around the world who are educated and experienced in their profession and are willing to return to China to give lectures and advice in the process of reform and development. This is an important component of the human capital contributing to China’s economic development. It is unique to China in terms of the number of overseas people involved and their willingness to help, although Israel has had a similar experience as well. The contrast with the case of Russia’seconomic reform and development is sticking. Here the open-door policy has worked again.Conclusion:After examining the facts of globalization for China we can all recognize that the open-door policy first advanced by Deng Xioping when China had a very different ideology has been a great success in helping to modernize China. The dream of the Chinese people for over one hundred sixty years since the Opium War of 1840 to modernize China has been finally realized. A main contribution to the modernization process is the open-door policy which allows globalization to take place.In this essay we have surveyed the four important aspects of globalizati on in China’s economic reform and development since 1978. Understanding the nature and historical development of China’s open-door policy for the purpose of modernization will enable us to appreciate the forces at work that will propel China’s economic gro wth in the future and the role of China in the world economic community.ReferencesAllen, Franklin, Jun Qian and Meijun Qian, “China’s Financial Reform: Past, Present and Future” to appear in Loren Brandt and Thomas Rawski, ed. China’s Economic Trans ition: Origins, Mechanism, and Consequences. University of Pennsylvania, Wharton School, mimeo, 2005.Chow, Gregory C. China’s Economic Transformation. Oxford: Blackwell Publishing Company, 2002.Chow, Gregory C. Knowing China. Singapore: World Scientific Publishing Company, 2004.Chow, Gregory C. “Corruption and Economic Reform in the Early 21st Century,” Princeton University, Department of Economics, mimeo, 2005Gregory C Chow and Yan Shen, “Money, Price Level and Output in the Chinese Macro-economy.” Princeton University. Center for Economic Policy Studies, Discussion Paper, 2004.Gregory C. Chow and Yan Shen, “Demand for Education in China.” Princeton University. Center for Economic Policy Studies, Discussion Paper, 2005.Samuelson, Paul A. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization,” Economic Perspectives, 18: 3 (Summer, 2004), pp. 135-146.Appendix on RMB revaluationExchanges between Ron McKinnon and Gregory Chow Exchanges set 1 Friday July 29, 2005Dear Ron,I happen to disagree with much of your WSJ article and provide my comments below. Any reaction from you for my education and enlightenment would be much appreciated. Best regards,GregoryFrom Wall Street Journal article of July 29 by McKinnon with comments by Chow.On July 21, 2005, China again gave in to concerted foreign pressure -- some of it no doubt well intentioned -- to give up the fixed exchange rate it had held and grown into over the course of a decade. Congress had threatened to pass (and may still do so) a bill that would impose an import tariff of 27.5% on Chinese imports unless the renminbi was appreciated, and had pressured the Bush administration to retain China's legal status as a "centrally planned" economy (despite its wide open character) so that other trade sanctions -- such as anti-dumping duties -- could be more easily imposed.A decade ago, when negotiations over China's entry into the WTO began, a raft of Wall Street banks, investment banks, insurance companies, and other financial institutions subsequently pressured the U.S. Treasury to require China to loosen its capital controls and gradually permit the entry of foreign firms into China's domestic financial markets -- even though these financial conditions were not required of other WTO member countries. China is complying with these terms, as well as eliminating tariffs and quotas on imports beyond what was required by the WTO agreement.While (uncertain) currency appreciation or the premature dismantling of capital controls on currency inflows and outflows are not as malign as an opium plague, the danger to China's heretofore robust economic growth and great success in lifting large numbers of people out of abject poverty should not be underestimated.Chow: There is no substantial causal relation between China’s growth and a fixed exchange rate. Note that China’s exchange rate v. the dollar was changed several times during this growth period. (A)By holding the exchange rate of 8.28 Yuan to the dollar constant for almost 10 years, and building monetary policy around this anchor, China's rate of inflation in its CPI has converged to that in the U.S., at a low level of about 2% per year.Chow: Here also, China had low inflation not because of the fixed exchange rate but because of the restrictive monetary policy of Zhu Rongji (low rate of growth of money supply) from 1996 to 2002. (B)In part because other East Asian countries (except Japan) were also more or less peggedto the dollar in a region where almost all trade is invoiced in dollars, the fixed dollar exchange rate was a very successful anchor for China's monetary policy. This collective dollar pegging within East Asia also ensured exchange stability and price-level alignment, which allowed regional trade and investment to grow rapidly and efficiently. Under the fixed rate, China's own high GDP and productivity growth were particularly impressive.Chow: No causal effect between the fixed exchange rate and GDP in the Chinese case, although for some developing countries which could not impose monetary discipline a fixed exchange rate is good in forcing them to do so. (C)However, on July 21, the renminbi was appreciated by 2% -- a small amount in and of itself -- while a narrow band of 0.3% on either side was maintained. More important was the implicit announcement that the old "parity" rate of 8.28 Yuan per dollar was being abandoned, but there was no clear statement of how the heavily managed float would evolve. Now that the future exchange rate has become uncertain, executing monetary and foreign exchange policy in China will be much more difficult. I have five negative comments on the new policy:(1) With the fixed exchange rate now unhinged, the People's Bank of China (PBC) will have to come up with a new anchor or rule that governs monetary policy. None was announced when the PBC let the exchange rate go. Will the PBC institute an internal inflation target? What will be the financial instruments it uses to achieve this target?Chow: If the people’s bank watches out for the growth of money supply why would it need a new anchor? (D)(2) Because China's inflation rate had converged to the American level (or slightly less), any substantial sustained appreciation of the RMB (the Americans want 20% to 25%)will drive China into deflation -- preceded by a slowdown in exports, domestic investment, and GDP growth more generally.Chow: Substantial appreciation of the RMB will have an opposite effect: if we believe that rapid growth in money supply will cause inflation, then appreciation of the RMB will reduce trade surplus and the inflow for foreign reserves which have been turned into RMB to cause inflation in 2004-5. Appreciation of RMB will reduce inflation. (F)(3) If the PBC allows only small appreciations (as with the 2% appreciation announcedon July 21) with the threat of more appreciations to follow, then hot money inflows will。
Global Imbalance, Financial crisis and China’s Economic RecoveryZHANG Xiaojing, TANG Duoduo, LIN Yueqin(Institute of Economics, Chinese Academy of Social Sciences)ABSTRACTThis paper examines the inherent relationship between the global imbalance and financial crisis from historical review and literature survey. This paper sets up a two-country model featured by monetary hegemony showing that the financial crisis of 2008 is interrelated with the United States’ expansionary monetary policy and the hegemony of U.S. dollar. This paper then analyses the impact of crisis and the policy responses, focusing on the preconditions for China’s economic recovery. Through international comparison, we argue that one of the Great Depression’s lessons is the exorbitant government intervention in some areas and the necessary condition for China’s recovery is economic flexibility, namely, resilient market mechanisms.Key words: Global imbalance; Financial crisis; Economic flexibility; Economic recoveryThe US subprime mortgage crisis that broke out in the summer of 2007 has escalated into a global financial crisis. Both developed economies at the epicenter and emerging economies at the peripheral have suffered from its huge impact, and the spillover effect is still taking its toll on the real economy. As the most serious one since the Great Depression, the current financial crisis is adjusting the global growth cycle that was still robust over the past few years, plunging the whole world into an inevitable recession.What is the real cause of this crisis, how big is its impact, and how to get out of it? This is a question that most academic researches and policy authorities are trying to answer. This paper attempts to examine this issue from a unique perspective. Specifically, Part I discusses the internal correlation between imbalances and crisis, creating a two-country model of imbalances and crisis from the perspective of currency hegemony. Part II deals with the crisis’s impact and policy reactions. Part III explores the decisive factors for economic recovery through international comparison. Part IV puts forward conclusions and policy recommendations.I. Global imbalance and the financial crisisOpinions on the cause of the current global financial crisis, though varied, generally fall into two groups: the first view holds that this financial crisis is different from previous ones, in that it is caused by special factors like financial sophistication. The other view stresses that financial crises are essentially triggered by the same causes, with striking similarities in their phenomena and transmission mechanisms. We agree with the second view for two reasons. First, the current crisis is a precise replica of the classic syllogism: credit expands - bubbles burst - default gets out of control. Second, it is equally wrong to blame this crisis on financial sophistication as to blame the “tulip mania” on tulips.With this view in mind, we closely examined both long and near-term reference points. On the near term, we studied previous global imbalances; on the long term, we anatomized the dollar-dominated international monetary system since the establishment of Bretton Woods System. Global imbalances are nothing new, and have repeatedly haunted the global economy well before the World War II. As review of the imbalances thereafter shows, first, given its unique role in the world economy, the United States has always played a key role in previous imbalances. Second, after the collapse of the Bretton Woods System, world economic operations have undergone major transformations, with the US current account repeatedly in severe deficits. Lastly, the US expansive monetary and fiscal policies are often precursors of global imbalances.As for global imbalances, numerous studies have been devoted to this subject since the dawn of the new century. Proceeding from traditional views, some research primarily focuses on the potential impact of US current account deficits and external debts on the US dollar exchange rate,worrying about steep dollar depreciations that may potentially drag the world economy into chaos. Judging from reality, asset price bubbles caused by global excess liquidity should be a bigger concern, as a crisis may be triggered once asset bubbles burst, rather than the dollar plummets.Other research proposes inspiring new opinions set at a broader perspective. For instance, the popular view of “Bretton Woods II” holds that as a new peripheral, Asia’s fixed exchange rate region has reconstructed the US-centered Bretton Woods System, in which peripheral countries adopt an export-oriented strategy through exchange rate undervaluation, capital control and export of sovereign capital. In this case, the US current account deficits are hallmarks of a successful international monetary system, which is perfectly sound and sustainable. However, the view of “hard asset crunch” holds that only developed economies like the US, Japan and the EU are able to provide safe and liquid reserve instruments, while emerging economies lack such a capability. Therefore, the slower the growth of Europe and Japan, the less capable other countries are in providing financial assets, the greater US current account deficits, and the lower global interest rate levels.Despite such insights, little attention was paid to the US dollar hegemony and the dollar’s role in global imbalances and financial crises. McKinnon (2005) blamed global imbalances on the international dollar standard. For historical reasons, international merchandise trade and capital flow are priced in the US dollar, making the United States “the only country that affords huge indebtedness in its own currency and immune from the risks that other countries whose debts are denominated in foreign currencies usually face”. In this context, what the US international borrowings face are soft constraints that finally led to its low savings rate. That’s why it is more precise to say that the US faces soft constraints of international borrowings than to say that the US is capable of providing hard assets due to the dollar’s unique status.Based on the model of Caballero et al (2008), we introduced currency through Cambridge Equation and introduced exchange rate through purchasing power parity (PPP) to create a two-country model on imbalances and crises from the perspective of currency hegemony. This model primarily focuses on global imbalances under the condition of “central countries” in the international monetary system. As peripheral countries hold the currencies of central countries, when the issuance of money exceeds a certain limit, causing global liquidity and actual interest rate to go beyond stable conditions of economic growth, two extreme conditions of high interest rate and low interest rate will occur. High interest rate will harm the real economy, and excess liquidity may cause inflation and thus “stagflation”. Under low interest rate, asset prices may deviate from the real economy and form asset price bubbles.Three conclusions can be drawn from the model: 1) when a sovereign country’s currency becomes an international standard, the country must maintain current account deficits to inject liquidity into the global economy, which means that the country earns seigniorage from the restof the world; 2) given the dual properties of their currencies, central countries will exert tremendous impacts on global asset market through monetary policies, and when the amount of money issued by a central country exceeds a certain limit, it will create tremendous risks for the global economy; 3) the expansionary monetary policies of peripheral countries have a smaller impact on the global economy, but will bring huge risks to their own economies once the policies are overdone.Combining the model with reality, we hold that the expansionary fiscal and monetary policies of the US are the fundamental causes of this round of global imbalances. The unique role of the dollar, or the dollar hegemony, has played a key role in this process. The US dollar standard has two connotations: first, the United States has the responsibility and obligation to provide liquidity to the global economy to meet its needs. This requires the US to have a certain degree of deficits in its international balance of payments. Second, the US can leverage its unique influence on the global economy to serve its own interest through ways including seigniorage. Intertwined with domestic and foreign policies, such conflicting rights and responsibilities have pushed the US macroeconomic policies into a dilemma. Accommodating domestic targets would expose the global economy to huge risks. This is why “supranational currency” is being called for so strongly.II. Crisis impacts and policy responsesAlthough it is no more than a year since the subprime mortgage crisis has evolved into a global financial crisis, it is by no means a simple transformation. Globalization has made the economic relations among various countries closer. It has stimulated global economic growth through massive flows of goods and factors, and also synchronized the economic cycles of various countries, giving rise to systemic risks of the global economy.1. Impact of the subprime mortgage crisis in the context of synchronized business cyclesThe world is experiencing a synchronized economic cycle unprecedented since the World War II. Both developed and emerging economies have been hit hard by the crisis, and no one is immune from its repercussions. As our research indicates (see Table 1), before China’s entry to the WTO (1996Q1: 2001Q4, common factors could only explain for 3% of China’s GDP. After China’s entry to the WTO (2002Q1: 2008Q3), the role of common factors had dramatically changed. Half of China’s quarterly GDP fluctuations could be explained in light of the impact of random common factors. Obviously, international economic factors have a significant impact on China. The coefficients in Table 2 provide further evidence on the correlation between common factors and China’s GDP. Before China’s entry to the WTO, the correlation coefficient was -0.049,and after the entry, the figure became 0.76, which matches the degree of correlation of the US,Japan and the EU. Following this correlation, if the subprime crisis is taken as a global commonfactor, it must have a tremendous impact on China.Table 1: Impact of common and special factors onGDP(Y), consumption (C) and investment (I)Variance contribution of common factors (%) Variance contribution of special factors (%)1996Q1:2001Q4 2002Q1:2008Q3 1996Q1:2001Q4 2002Q1:2008Q3 Y 50.8 43.5 49.2 56.5C 45.6 36.0 54.4 64.0USI 48.6 27.1 51.4 72.9Y 5.1 62.2 94.9 37.8C 5.8 21.9 94.2 78.1JapanI 3.3 53.0 96.7 47.0Y 3.0 50.5 97.0 49.5C 3.2 1.0 96.8 99.0 ChinaI 1.3 8.0 98.7 92.0Y 24.6 67.4 75.4 32.6C 22.5 62.0 77.5 38.0EUI 42.7 60.4 57.3 39.6 Source: Taskforce of Macroeconomic Research Department, Institute of Economics, CASS (2009)Table 2: Correlation coefficient of variables and common factorsY C I1996Q1:2001Q4 2002Q1:2008Q31996Q1:2001Q42002Q1:2008Q31996Q1:2001Q42002Q1:2008Q3US 0.879 0.70 0.825 0.63 0.858 0.55 Japan 0.160 0.84 -0.207 0.50 0.001 0.78 China -0.049 0.76 0.073 -0.08 -0.047 0.29 EU 0.595 0.88 0.560 0.84 0.795 0.83 Source: taskforce of Macroeconomic Research Office, Institute of Economics, CASS (2009)2. China’s policy responsesChina’s economic downturn is triggered by both external shocks and its own structural adjustment (ZHANG Xiaojing, 2008; LIU Shucheng, 2009). Hence, China’s policy reactions should not only aim at resolving the crisis but also accommodate mid and long-termrestructuring. Overall, China’s policy reactions fall into the stages below:(1) First half of 2008: the policies to fight overheating and inflation began to be adjusted to prevent a possible economic downturn. But the crisis’s severity was not well understood. When inflation intensified, the balance still shifted to preventing it. Similarly, international opinions also considered that inflationary risks were greater than downward risks.(2) Second half of 2008: the central authorities noticed the crisis’s severity, and in response to the export and economic slowdown in the coastal regions, adjusted the priority of macro-regulation to “maintain steady and rapid economic growth and prevent excessive price rise”. The adjustment was also complemented with well-guided fiscal, tax and financial measures.(3) Mid-September, 2008: The bankruptcy of Lehman Brothers was a turning point for the worse. Policies swerved: tightening policies were replaced with proactive fiscal policies and moderately relaxed monetary policies. Specifically, China’s export tax rebate was raised on three occasions, lending and deposit interest rates were lowered on five occasions, deposit reserve ratio was lowered on four occasions, personal income tax on savings interest was temporarily exempted, the stamp tax of securities transactions was lowered, housing transactions tax was reduced, and SME credit support was strengthened.(4) Before the end of 2008, the central authorities took major steps to stimulate domestic consumption and adopted a four-trillion yuan stimulus package.(5) Early 2009, the industrial adjustment and rejuvenation plan was adopted. The four-trillion yuan stimulus package primarily focuses on infrastructure and welfare programs, with little effect on industries. Moreover, the package has not taken into account mid and long-term industrial adjustment. It is in this context that the adjustment and rejuvenation program was launched with the central objective of adjustment, such as to curb excess capacity, adjust industrial layout, improve technical levels, increase concentration, enhance international competitiveness, conserve energy and protect the environment. These efforts are supply-side adjustments, but will also create new demand.(6) Technical innovation. Future competitiveness still depends on scientific and technology strengths. It is easy for businesses to make profits during economic booms, but they tend to neglect R&D and innovation as well. But in times of crisis, the importance of innovation comes to the spotlight. Only through embarking on innovation can China’s economy develop into a higher level after the crisis. Both the four-trillion yuan package and the industrial adjustment and rejuvenation program have special commitments to technical innovation.(7) Improve social security. This is the very purpose of economic growth. Social security is even more important during a crisis like the current one.In general, China’s policy reactions include measures to expand domestic consumption, increase employment and ensure people’s well-being, and went through the following stageswith different priorities: adjustment of policy directions, four-trillion yuan investment package, industrial rejuvenation program, innovation and social security. The reactions first aimed at immediate problems and later focused on mid and long-term considerations, social security and scientific development.III. Conditions for China’s economic recovery:international comparisonIn general, an economy’s recovery depends on its initial conditions, development stages and its flexibility. The following paragraphs will examine China’s advantages (or weaknesses) in these aspects from the perspective of international comparisons.1. Initial conditionsInitial conditions refer to the basic situation of an economy when a crisis occurs, including the indicators like fiscal, financial and international balance of payments, which may drastically change under the impact of a crisis. We identified through international comparison that China’s initial conditions have the following features: high savings rate, low proportion of bad loans, sound fiscal system, and limited exposure to external risks.(1) High savings rateAs Table 3 shows, China’s savings rate in 2006 was 54%, ranking first among the BRIC countries and higher than the world average of 22% by more than 1.5 times. High savings rate means that China has abundant capital and compared with other economies that heavily depend on overseas financing, has a great room for maneuver in coping with crises.Table 3 Comparison of BRIC countries and world average savings rate(Share of total savings to GNI, %)1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 China 27 33 40 37 38 41 44 47 51 54 Brazil 19 18 19 14 14 15 16 19 17 18India 15 17 22 26 26 27 29 32 33 34 Russia .. .. 30 37 33 29 30 31 32 31 World average 25 23 22 22 21 20 20 21 21 22Source: World bank, World Development Indicators (WDI) database。
I like to talk about the content of cooperation for our New Silk Road Corridor. Now, I will talk about the details of the areas for development, the content of development.They should promote policy coordination, facilities connectivity, unimpeded trade, financial integration and people-to-people bonds as their five major goals, and strengthen cooperation in the following key areas:First, I talked about Facilities connectivityFacilities connectivity is a priority area for implementing the Initiative.In accordance with the existing economic foundation and condition, and the pre-conditions of our cooperation, our efforts must first be put to energy resources, the transportation grid, electricity systems, communications networks, other such basic infrastructure platforms, and the networking together of such platforms. There is a saying in China, “to develop wealth, you have to first build roads”. The connectivity of infrastructure facilities, including railways, highways, air routes, telecommunications, oil and natural gas pipelines and ports, will also be promoted. The development corridor’s economy can only prosper when human resources, logistics and economic flow (人流, 物流, 资金流) have all been brought on-line and integrated. This will form part of a move to establish an infrastructure network connecting various Asian sub-regions with other parts of Asia, Europe and Africa.unimpeded trade, steps will be taken to resolve investment and trade facilitation issues, reduce investment and trade barriers, lower trade and investment costs, as well as to promote regional economic integration. We should make innovations in our forms of trade, and develop cross-border e-commerce and other modern business models. Efforts will also be made to broaden the scope of trade, propel trade development through investment, and strengthen co-operation in the industry chain with all related countries.Financial integration is an important underpinning for implementing the Belt and Road Initiative. We should deepen financial cooperation, and make more efforts in building a currency stability system, investment and financing system and credit information system in Asia. China has set up a $40 billion Silk Road Fund that experts believe will open for investment in the near future. The focus will be on the construction of roads, railways, ports and airports across Central Asia and South Asia. We should expand the scope and scale of bilateral currency swap and settlement with other countries along the Belt and Road, open and develop the bond market in Asia, make joint efforts to establish the Asian Infrastructure Investment Bank and BRICS New Development Bank, conduct negotiation among related parties on establishing Shanghai Cooperation Organization (SCO) financing institution, and set up and put into operation the Silk Road Fund as early as possible. We should strengthen practical cooperation of China-ASEAN Interbank Association and SCO Interbank Association, and carry out multilateral financial cooperation in the form of syndicated loans and bank credit. The implementation of "One Belt and One Road" stratgy requires a large number of investment from financial institutions, including AIIB.policy coordination is an important guarantee for implementing the Initiative. We should promote intergovernmental cooperation, expand shared interests, enhance mutual political trust. Countries along the Belt and Road may fully coordinate their economic development strategies and policies, work out plans and measures for regional cooperation, negotiate to solve cooperation-related issues, and jointly provide policy support for the implementation of practical cooperation and large-scale projects.People-to-people bond provides the public support for implementing the Initiative. We should carry forward the spirit of friendly cooperation of the Silk Road by promoting extensive cultural and academic exchanges, personnel exchanges and cooperation, media cooperation, youth and women exchanges and volunteer services, so as to win public support for deepening bilateral and multilateral cooperation. We should send more students to each other's countries, and promote cooperation in jointly running schools. We should also increase personnel exchange and cooperation between countries along the Belt and Road.We should enhance cooperation in and expand the scale of tourism.We should push forward cooperation on the 21st-Century Maritime Silk Road cruise tourism program. We will also expand cooperation on traditional medicine. We should increase our cooperation in science and technology, and work together to improve sci-tech innovation capability.that building the “One Road One Belt” long-term process of development is not something to be finished in a few years. We are very clear about that. There are opportunities and at the same time, there are challenges. So we must retain a clear head about this.What possible problems will China faceOvercapacity Problem1. OBOR opens up new export markets to compete with America and Japan.2. It helps emerging market countries and less developed countries in infrastructure construction, using the sufficient foreign exchange reserves to solve the overcapacity problemResources AquisitionChina's oil and gas resources are highly dependent on overseas mineral resources.OBOR will build some effective channels to get resouces. It contributes to the resources diversification. National SecurityThe industry and infrastructure of coastal region ,western area and central area need to be protected from external concealed threats.OBOR will improve the capability to strengthen the national security at risk of conflict.Trade InitiativeOBOR will make China have a greater say in global market and regional economy.Transportation NetworkWith building a transportation network in the neighboring area, OBOR will promote the export trade and mobilization of resouces.China's Regions in Pursuing Opening-UpIn advancing the Belt and Road Initiative, China will strengthen interaction and cooperation among the eastern, western and central regions, and comprehensively improve the openness of the Chinese economy.Northwestern and northeastern regions. We should make good use of Xinjiang's geographic advantages and its role as a window of westward opening-up to deepen communication and cooperation with Central, South and West Asian countries, make it a key transportation, trade, logistics, culture, science and education center, and a core area on the Silk Road Economic Belt. We should give full scope to the economic and cultural strengths of Shanxi and Gansu provinces and the ethnic and cultural advantages of the Ningxia Hui autonomous region and Qinghai province, build Xi'an into a new focus of reform and opening-up in China's interior, speed up the development and opening-up of cities such as Lanzhou and Xining, and advance the building of the Ningxia Inland Opening-up Pilot Economic Zone with the goal of creating strategic channels, trade and logistics hubs and key bases for industrial and cultural exchanges opening to Central, South and West Asian countries. We should give full play to Inner Mongolia's proximity to Mongolia and Russia, improve the railway links connecting Heilongjiang province with Russia and the regional railway network, strengthen cooperation between China's Heilongjiang, Jilin and Liaoning provinces and Russia's Far East region on sea-land multimodal transport, and advance the construction of an Eurasian high-speed transport corridor linking Beijing and Moscow with the goal of building key windows opening to the north.Southwestern region. We should give full play to the unique advantage of Guangxi Zhuang autonomous region as a neighbor of ASEAN countries, speed up the opening-up and development of the Beibu Gulf Economic Zone and the Pearl River-Xijiang Economic Zone, build an international corridor opening to the ASEAN region, create new strategic anchors for the opening-up and development of the southwest and mid-south regions of China, and form an important gateway connecting the Silk Road Economic Belt and the 21st-Century Maritime Silk Road. We should make good use of the geographic advantage of Yunnan province, advance the construction of an international transport corridor connecting China with neighboring countries, develop a new highlight of economic cooperation in the Greater Mekong Subregion, and make the region a pivot of China's opening-up to South and Southeast Asia. We should promote the border trade and tourism and culture cooperation between Tibet autonomous region and neighboring countries such as Nepal.Coastal regions, and Hong Kong, Macao and Taiwan. We should leverage the strengths of the Yangtze River Delta, Pearl River Delta, west coast of the Taiwan Straits, Bohai Rim, and other areas with economic zones boasting a high level of openness, robust economic strengths and strong catalytic role, speed up the development of the China (Shanghai) Pilot Free Trade Zone, and support Fujian province in becoming a core area of the 21st-Century Maritime Silk Road. We should give full scope to the role of Qianhai (Shenzhen), Nansha (Guangzhou), Hengqin (Zhuhai) and Pingtan (Fujian) in opening-up and cooperation, deepen their cooperation withHong Kong, Macao and Taiwan, and help to build the Guangdong-Hong Kong-Macao Big Bay Area. We should promote the development of the Zhejiang Marine Economy Development Demonstration Zone, Fujian Marine Economic Pilot Zone and Zhoushan Archipelago New Area, and further open Hainan province as an international tourism island. We should strengthen the port construction of coastal cities such as Shanghai, Tianjin, Ningbo-Zhoushan, Guangzhou, Shenzhen, Zhanjiang, Shantou, Qingdao, Yantai, Dalian, Fuzhou, Xiamen, Quanzhou, Haikou and Sanya, and strengthen the functions of international hub airports such as Shanghai and Guangzhou. We should use opening-up to motivate these areas to carry out deeper reform, create new systems and mechanisms of open economy, step up scientific and technological innovation, develop new advantages for participating in and leading international cooperation and competition, and become the pacesetter and main force in the Belt and Road Initiative, particularly the building of the 21st-Century Maritime Silk Road. We should leverage the unique role of overseas Chinese and the Hong Kong and Macao Special Administrative Regions, and encourage them to participate in and contribute to the Belt and Road Initiative. We should also make proper arrangements for the Taiwan region to be part of this effort.Inland regions. We should make use of the advantages of inland regions, including a vast landmass, rich human resources and a strong industrial foundation, focus on such key regions as the city clusters along the middle reaches of the Yangtze River, around Chengdu and Chongqing, in central Henan province, around Hohhot, Baotou, Erdos and Yulin, and around Harbin and Changchun to propel regional interaction and cooperation and industrial concentration. We should build Chongqing into an important pivot for developing and opening up the western region, and make Chengdu, Zhengzhou, Wuhan, Changsha, Nanchang and Hefei leading areas of opening-up in the inland regions. We should accelerate cooperation between regions on the upper and middle reaches of the Yangtze River and their counterparts along Russia's Volga River. We should set up coordination mechanisms in terms of railway transport and port customs clearance for the China-Europe corridor, cultivate the brand of "China-Europe freight trains," and construct a cross-border transport corridor connecting the eastern, central and western regions. We should support inland cities such as Zhengzhou and Xi'an in building airports and international land ports, strengthen customs clearance cooperation between inland ports and ports in the coastal and border regions, and launch pilot e-commerce services for cross-border trade. We should optimize the layout of special customs oversight areas, develop new models of processing trade.China in ActionFor more than a year, the Chinese government has been actively promoting the building of the Belt and Road.High-level guidance and facilitation. President Xi Jinping and Premier Li Keqiang have visited over 20 countries, attended the Dialogue on Strengthening Connectivity Partnership。