The forum opened with a keynote speech by Mr. Long Ke, followed by a panel discussion. Panelists then responded to questions from the general audience.
 

Keynote Speech: "How Much Will the Chinese Economy Grow?" (Mr. Long Ke)

• The engine for economic growth in China is investment. Generally, in developed countries, consumption constitutes about 60 percent of economic growth. In China, however, consumption is 40 percent. Investment is also 40 percent, and growing at a high rate of 27.8 percent. Since state-owned enterprises have a tendency to invest regardless of capital cost or expected rate on return on investment, the Chinese economy tends to overheat easily.
• The savings rate that supports investment is also high, at around 40 percent. People are saving for their children's education and marriage.
• As for reasons behind the overheated investment, we can mention the following: the government's economic forecast is optimistic at 7.8 percent; companies aim to expand market share; despite deflation at the downstream and inflation at the upstream, transmission of information is poor and investment proceeds unadjusted; and there is a situation in which investment attracts more investment. In addition, the Hu Jintao-Wen Jiabao administration, which succeeded Jiang Zemin and Zhu Rongji, is not so charismatic at the moment, and the overheated economy may continue for a while. That the actual interest rate is negative is also a factor for attracting investment.
• Although labor productivity is improving rapidly-in a country where labor productivity improvement until the beginning of the 1990s was due to improvements in capital productivity-from the mid-1990s onward it has been a result of a rise in the capital equipment ratio. Under this situation, capital efficiency is deteriorating, and it is hard to believe that growth will be sustainable without structural reform.
• Since the 1990s, China's basic fiscal equilibrium has deteriorated at great speed. Taking into account non-performing loans of state-owned banks and off-balance sheet liabilities, fiscal deficit can become a risk factor. The tax collection system is also weak, and the situation is such that growing expenditures are being covered by government bonds without securing revenue.
• In China, besides the horizontal income gap between provinces, the problem of the vertical income gap existing between urban and rural parts of the same province is quite serious. Since there is no functioning social security system, if high growth is not sustained, unemployment will occur and destabilize society.
• Energy and environment issues will also limit growth. Import reliance on oil is expected to exceed 40 percent in 2004. On the other hand, deforestation is taking place to increase food production. Moreover, due to discharge of residential and industrial wastewater, the Changjiang River is turning into an enormous sewer. Emissions of Sox, soot, and smoke are also showing a slightly incremental trend.
• Risks such as the problem of non-performing loans of state-owned banks and the rapid increase of financial crime are also appearing.
• Externally, the revaluation of the Chinese yuan is attracting the most attention. I believe that the ideal scenario would be not to maintain an appreciated yuan, but to shift to a flexible regime. With that accomplished, China should make adjustments in line with economic fundamentals. The two-step adjustment theory, which calls for a revaluation of 15 to 20 percent, at first, and then pegging the yuan to the three key currencies, has also been mentioned, but the fact that the Hong Kong dollar and the Chinese yuan are fixed must be kept in mind.

(Ito)

• The Chinese economy has a force similar to that of Japan's high growth in the 60s. Although there is a difference in the fact that Japan did not rely on foreign capital, the way the two economies caught up and the skill of workers in the labor market are similar. China's labor force is far larger and as long as labor mobility is treated properly, I believe China can continue its growth without wages rising much.
• Regarding currency adjustment, without adjustment there will be inflation, and if inflation is curbed the currency will appreciate. Therefore, I don't think this is a significant problem. Either way, I believe that the actual economy will keep growing.
• Risk factors that can be mentioned are limitations in energy and in labor mobility. Even if inflation is tolerated to prevent appreciation of the currency, if this goes too far, financial turmoil may occur. Fiscal deficits and an asset bubble in the coastal areas can also be mentioned.
• Recently, Asia has become intimately connected with the Chinese economy; it does not want big changes in the exchange rate with the yuan. Therefore, a strange phenomenon in which the yuan has become a key currency even though capital liberalization has not occurred is taking place.
• I think people in China who understand finance believe that it is time to increase flexibility. I think that depending on the situation, the Chinese yuan can gain flexibility at an early stage.

(Kwan)

• The National Congress of the Communist Party and the Chinese business cycle are connected. Although the average growth rate in the past 30 years has been 9 percent, the growth rate was 9.9 percent in the years that the Party Congress was held, and this rose to 10.7 percent in the following year, after which an adjustment phase started. This pattern repeats itself. If this pattern is applied currently, the economy will continue to be in an adjustment phase until 2006, and it will recover leading up to the National Communist Party Congress in 2007. Then, in 2008, when the Beijing Olympics are held, the business cycle will reach the peak of the next cycle.
• Investment affects the economy and the problem that has occurred is that greater investment is reducing capital efficiency. Krugman's warning that Asia's growth resulted not from an increase in productivity, but from an increase in the amount of input, is not distant to China today.
• Although it is believed that China's market will grow and that anything can be sold, as the income gap between rural and urban areas expands actual consumption as a whole is sluggish. If the income of rural families-60 percent of the population-does not grow, general income will not rise either.
• To rectify regional disparities, a domestic version of FTA, which aims to unify domestic markets of goods and labor, a domestic version of flying-geese pattern of direct investment from developed regions to underdeveloped regions, and a domestic version of ODA in which a redistribution of national income from the central government to local governments in backward areas exists, are necessary.
• Provinces with a higher proportion of state-owned enterprises have a lower growth rate, so there is need to reduce the proportion of state-owned enterprises. However, the privatization process must be conducted fairly, and not in a manner that allows those closer to power to gain more.

(Kinoshita)

• Although China has come to be known as "the world's workshop," and which benefits from globalization, greater reliance on oil imports means that it has become more vulnerable to international terrorism. If a terrorist attack on an oil tanker should occur in the Straits of Malacca, China's economic growth will be threatened considerably. I think that China has not given much consideration to such problems until now, but response against risk-such as securing oil reserves and sea-lanes-has become necessary. In addition, it has turned vulnerable to the risk of currency crisis, which will be brought about by capital liberalization in the future, and as a result of high reliance on American agricultural imports, which can be considered as the price of becoming a WTO member, it is also vulnerable to risk of poor harvests in the United States. Furthermore, there may be an increase in additional risk depending on the direction of future US (military) strategy against China.
• A future forecast that bears in mind a global political and economic paradigm with numerous destabilizing factors of the post-Cold War period is what is really important. Until now, prediction of growth and market size were based on past tendencies and internal and external restrictions on growth; these would turn out to be right for the most part, but large-scale economies have emerged. As a result of better living standards, the question of quality, and not only quantity, functions as a factor for determining the direction. If we are to make a long-term forecast, it would be necessary to take into account the effects of volatile and borderless movements of enormous quantities of capital, the "unipolarism" of the US, growing regionalism, deteriorating environmental problems, and changes in rules at such scenes like the WTO and the international accounting system.
• Although East Asian economies have shifted from export-led growth to internal demand-led growth, in China's case, due to a huge number of potential unemployed workers in rural areas, it is necessary to be aware of the fact that while the orientation for internal demand remains, on the other hand, as state policy it remains necessary to maintain export-led growth semi-permanently.
• Learning from Asia's history, when income per capita rises, it becomes difficult to maintain a "developmental dictatorship." In the case of China, how the future political system will evolve is an important perspective when considering its future.
• China's "capitalism" has an aspect that increases friction with developed countries, such as the delayed establishment of its legal system, negligence of corporate governance and conglomerate-type companies, and the tendency for concentrated exports to occur. On the other hand, it has an aspect that reduces friction between developed and developing countries, for example by offering an enormous import market supported by the expansion of internal demand, as well as active grants of "political" loans to countries like Myanmar and Indonesia. There is need to examine in detail which aspect will become dominant.
• Although it is difficult to predict the political and economic situation of China in 2030 at this point, if we talk about how Japan as a country should respond to China, the answer would be to respond by analyzing the situation with a cool head, and not to judge on expectation or "how it ought to be." The only way to do so would be to create probable scenarios for key issues, form a matrix for each one, examine them with facts, and respond flexibly in this way. The issue of how businessmen, academics, and individuals will deal with China (and its people) is different from the government's response.

(Kokubun)

• Thirty years ago, in the midst of the Great Cultural Revolution, nobody imagined that the Cultural Revolution would be denied and that Mao Zedong's reputation would be damaged. However, the revolutionary line did not hold, and there were some that predicted that there would be no other way but to look toward the people's living. Either way, it is difficult to make a prediction for 30 years later.
• Whether a political regime that responds to economic liberalization will be established is an issue. The economy is being liberalized in the aspects of disclosure and principle of competition. Academics and intellectuals, which were at the center of the Tienanmen Massacre, now form part of the system and move the society. Nowadays, problems are occurring not in this social class, but in a broader class of workers and farmers; this is a problem of the political system as well.
• There are three problems with China's political system that it must resolve. First is the issue of whether it can introduce a permanent democratic system that allows the direct political participation of the people. Since elections are not happening, direct methods such as demonstrations and strikes are occurring. However, if too much attention is given to the voice of "have-nots" like farmers and workers, policy that only takes into account the "have-it-alls" cannot be adopted, and this leads to the problem of slackening growth. The second point is the problem of political corruption. Since there is a market economy under one-party rule of the Communist Party, corruption occurs. The third point is the problem of the judicial system. Not only the improvement of the legal system, but the independence of a judicial power, which supervises the Party, is indispensable. Under the current legal system, whether the Communist Party or the Constitution is supreme is unclear.
• Considering the useful life of politics, the LDP lasted 40 years; the USSR lasted 70 years. The Chinese Communist Party has been in existence for 55 years and nobody can imagine what will happen in 30 years.

(Ke)

• Although it is important that risk factors are prioritized and resolved, the current economic situation is comfortable for China, and it requires courage to dare to modify the system to prevent risk. Perhaps there is no other way but for China to grow by learning from the experience of other countries and experiencing crisis at the same time.

[The Effect on Asia and the Response of Japan]

(Ito)

• There is no doubt that the Chinese economy will expand hereafter and that its presence will become greater than Japan's. Under this situation, I think that Japan can maintain its presence if it can achieve at least 2 to 3 percent growth.

(Kwan)

• Japan is weak in sectors where China is strong, but, conversely, Japan is strong in sectors where China is weak. The two economies are complementary. Japan is strong in products that require higher technology. If Japan promotes new industry and brings older industries to developing countries, high-grade industries can be promoted without the hollowing-out of industries.
• Even if China's wages are one twenty-fifths of Japan's, this is not to say that China can produce anything cheaper than Japan. Automobiles are produced locally, not because of wages, but due to high import tariffs. If some sort of agreement, such as an FTA, is concluded between Japan and China, automobiles can be exported from Japan and this could be a measure against the hollowing-out of industries.

(Kinoshita)

• The problems of China's structural adjustment tend to be hidden, since its economy is growing rapidly at the moment. However, considering the size of the country and the speed of change all over the world, structural adjustment may be more difficult than Japan, which is a mature economy. There is considerable room for Japan's cooperation, for example in environmental matters.
• As Germany and the USSR were once connected by nuclear energy and pipelines, it is important for Japan and China (and South Korea) to establish long-term relationships that do not allow decisive confrontation, by cross-holding vulnerabilities, for example, with large-scale agricultural production contracts.

(Kokubun)

• China has not emerged in the true sense in the past 150 years, so no living person has witnessed China in normal growth. Although we tend to look at China as a nation centering around Beijing, economically, it is necessary to consider it as an enormous area.
• In reality, China and Japan must live together. China's soft landing is not only an economic problem; it is also a problem of the political system. However, since nobody can interfere in internal politics, there is a limit to what Japan can do; we can only wait for China's own efforts. Meanwhile, Japan needs to analyze China thoroughly and learn how to deal with it. In present Japan, the basis for studying China is too weak.

(Ke)

• Rather than being an issue of education, I think that the recent rise of anti-Japanese sentiment in China may be caused by the fact that Japanese companies are disliked since they do not stick to performance-based pay systems, or by the fact that they tend not to recognize festivals, for example, that act as vent for social stress.

(Kwan)

• It is better not to turn to the argument that blames everything on China's socialism. China's current situation is not the primary stage of socialism according to Marx, as referred to in China's official view. It is in a phase of primitive capitalism where the working class and capitalist class are created simultaneously. What is lacking for it to become mature capitalism is an institutional shift from rule by people to rule by law, from one-party dictatorship to democracy, from public ownership to personal ownership, and from total commitment to efficiency to emphasis on fairness.

[Questions and Answers]

• Where does production capacity resulting from investment lead?
• Who is the decision-making entity for investment? Is there enough force to conduct developmental dictatorship?
• What are the effects of becoming a WTO member?

(Ke)

• Private companies have investment functions, but in the case of state-owned enterprises, there is interference, for example, from regional governments, and so investments may be made in unprofitable projects.

(Kwan)

• Becoming a WTO member has three meanings: marketization, internationalization, and improvement of legislation. For marketization, the labor market is not unified nationwide. The capital market also has many problems, for example, falling stock prices even with continued growth. Regarding internationalization, recently there are Chinese companies that are extending their businesses overseas. Concerning the improvement of legislation, the fact that fine laws were established in a short period of time should be respected, although it will take a little more time before they are put into practice.

(Kinoshita)

• Since state-owned enterprises are oriented toward mass production, the products, rather than establishing a brand, become a commodity and prices fall. Even so, to survive, regionalism encourages these companies to expand equipment and facilities in regions, and this pushes down the price even further, forming a vicious cycle. This is the cause for the increase in non-performing loans of state-owned banks. On the other hand, China's overseas investment, which is beginning to grow, is not the textbook case of spillover occurring when management resources are sufficient. In many cases, expansion overseas is in the form of M&A to acquire management resources. In such cases, failure may occur in quite a few cases. Tuition fees should, however, be taken into account.

Up

Top

Symposium, Forum

ESRI Economic Policy Forum