Outlook of China’s Economy --- An Introduction to CCER China Economic Observer

Feng LuChina Center for Economic Research

Peking University

January 2010, New York

CCERChina Economic Observer (CEO)

• Quarterly symposium started in 2005 under the leadership:

• Prof. Justin Lin, the founding director of CCER,

• Prof. Guoqing Song, the best macro-economist in China,

• Prof. Qiren Zhou, the current director of CCER.

• 19 symposium have been held so far.

Langrun Forecast• Cutting-edge issues on China’s economic growth and ref

orm policies are regularly discussed in the event. • Langrun Forecast, quarterly projection on China’s macro

economy is released in the event.

• Langrun Forecast is named after the beautiful Langrun Garden in the Peking university campus, now used as office space by CCER.

24 participating institutions now

• New participating institutions are welcomed!

Bank of China International Securities Essences Securities

Bank of Communications Guotai Junan Securities

Blue Oak Capital HSBC

BNP Paribas Industrial and Commercial Bank of China

China Center for Economic Research, Peking University

Institute of Quantitative & Technical Economics,

Chinese Academy of Social Scieneces

China Galaxy Securities Merrill Lynch

China International Capital Corporation Limited Morgan Stanley

China Merchants Securities Nomura Securities

China Securities Co., Ltd Shenyin Wanguo Securities

Citibank Standard Chartered Bank

CITIC Securities UBS

Department of Economic Forecasting, the State Information Center Unirule Institute of Economics

9 Macro-economic indicators are projected regularly

Institutions GDP CPI IVA FAI Resale Export Import Interest rate X rate

BNP 10.6 1.4 16.0 30.7 15.4 -8.3 12.5 2.25 6.83

ICBC 10.2 0.4 15.2 35.0 15.8 0.0 30.0 2.25 6.83

SIC 10.0 -0.1 16.0 30.0 15.5 -10.0 -8.0 2.25 6.82

Guotai Junan 10.8 0.7 14.0 35.5 15.6 0.0 18.5 2.25 6.82

Citibank 10.4 0.8 15.1 30.0 15.5 -7.5 10.0 2.25 6.80

HSBC 9.9 0.1 13.0 30.0 15.0 6.0 8.0 2.25 6.80

BOC 10.0 0.5 13.5 34.0 15.5 -3.1 2.3 2.25 6.82

Blue Ork 11.1 0.3 16.1 42.1 .. -13.8 5.9 2.25 6.84

Merrill Lynch 11.3 0.5 17.6 33.5 16.3 -7.4 13.2 2.25 6.83

Morgan Stanley 11.6 0.6 15.5 30.0 16.2 -4.3 9.6 2.25 6.80

UBS 10.0 0.4 14.0 31.0 15.0 -1.4 6.7 2.25 6.80

CASS 9.9 0.2 15.3 32.0 15.5 -11.0 -7.0 2.25 6.80

Shenyin Wanguo 10.5 0.3 14.3 37.0 16.8 -5.2 17.8 2.25 6.82

Nomura 11.0 1.2 18.0 35.0 15.3 -8.1 11.3 2.25 6.70

China Galaxy Securities 10.2 -0.2 16.0 35.0 16.0 -10.0 -0.1 2.25 6.77

China Merchants Securities 11.2 0.0 18.0 36.0 17.0 -4.0 15.0 2.25 6.75

CICC 10.1 -0.1 15.0 32.0 15.7 0.0 0.0 2.25 6.83

CSC 10.6 0.7 15.9 34.7 15.6 6.2 25.5 2.25 6.81

CITIC 11.1 0.6 18.5 32.8 16.5 1.3 21.5 2.25 6.82

BOC Internatioanl 11.0 0.9 14.2 31.0 15.5 5.9 21.0 2.25 6.83

CCER 10.9 0.0 17.2 30.0 15.5 -9.0 12.0 2.25 6.82

Average 10.6 0.4 15.6 33.2 15.8 -4.0 10.8 2.25 6.81

According to 11 participating institutions,China’s economy will grow nearly 10% in 2010

Institutions 2010 GDP Releasing date

Chinese Academy of Social Sciences 9.1 Dec 2009

CICC 8.8 Dec 2009

Essences Securities 10.1 Dec 2009

CCER (GSGH, Goldman Sachs) 11.4 Dec 2009

Bank of Communications 10.0 Nov 2009

J.P. Morgan Chase 9.5 Oct 2009

Merrill Lynch 10.1 Nov 2009

Morgan Stanley 10 Dec 2009

Standard Chartered Bank 10 Dec 2009

State Information Center 8.5 Dec 2009

CITIC 10.1 Dec 2009

Average 9.78

Review on the BRICs projection• The BRICs Report projected that China’s economy size

will surpass USA in 2041. It may be reviewed in light of actual situation since 2003 when the report released.

Time table for BRICs taking over G6

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2

3

4

5

6

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

UK Germany Japan USA

China

India

Russia

Brasil

BRICs

Italy France Germany Japan

Italy France Germmany

Italy France Germany

G6

Surpassing in 2041: China: $ 28.003 trillion. USA: $27.929 trillion.

Factual evidence: Relative growth of China vs. USA (2003-2008)

• China annual GDP growth was higher than USA by 8.7% and 12.2% in real and nominal terms in domestic currency.

• Allowing changes of RMB exchange rate, China’s annual growth in USD was higher by 16.3%, ie., “China’s converging rate vs. US ” was 16%.

Cumulative Per annum Cumulative Per annum Cumulative Per annumReal GDP growth 171 11.3 112 2.4 152 8.7GDP deflator 135 6.3 116 3.0 117 3.2Nominal GDP growth 231 18.3 130 5.4 177 12.2Exchange rate 119 3.6 100 0.0 119 3.6GDP growth in USD 276 22.5 130 5.4 211 16.2

China USA China/USA

What will happen if China continues “the 16% converging rate”?

• China’s GDP of 34 trillion yuan in 2009 converts into $ 4.98 trillion, about 35.6% of US economy. Now US economy is 2.8 times as large as China.

• If China continues “the 16% annual converging rate” in next 10 years, the current ratio of China’s economy to US will be more than quadrupled (1.16^10 = 4.4).

• In the assumed case, China’s economic scale will surpass US in 7 years (1.16^7 = 2.82).

More realistic scenarios!

• China is unlikely to continue “the 16% annual converging rate”.

• Assuming “a much lower annual converging rate of 10%”, the extend of accumulative change will be 285% and 314% in the coming 11 and 12 years.

• With the assumptions, China’s total economic size will surpass US by 2021-2022.

The undated projection!• In view of the recent actual situation, China wi

ll probably surpass USA in the early next decade, and almost certainly before 2025.

• The surpassing point will come 15-20 years earlier than the BRICs Report’s projection released 7 years ago.

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2

New projection: bofore 2025

China economic size surpasses US: Revised projection

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3

4

5

6

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

UK Germany Japan USA

China

USA

Old projection: by 2041

It should be noted:

• With the projected Chinese per capita GDP equivalent to about 20%-25% of Americans, China will still be a poor country relative to US in the next decade, even the revised projection turns out to be true!

Many challenges faced by China!

• 1) Reform in land system, household registration system,

• 2) Reduce income inequality and increase consumption；

• 3) Environmental protection and emission controls;

• 4) Population aging problems and continued poverty alleviation agenda；

• 5) Reform in RMB exchange rate and interest rate policies to improve macro-management system;

• ……

A few final remarks on China’s macro-economic policy

reforms!• One reason for China not continuing

“the 16% converging rate” is that the annual nominal growth rate of 18.3% is sustainable.

• It implies that China may not badly lack domestic demand, neither necessarily need fast growth of trade surplus to assure the desirable aggregate demand.

China needs to improve open macro-economic policy system!

• China may need a more flexible exchange rate regime to adjust external demand and imbalance.

• China also needs a deregulated interest rate regime to adjust domestic demand and monetary shocks to assure more stable growth.

• To improve demand management regime better serving the rapidly evolving open macro- environment is an urgent task for China.