Can China Cool off Its Overheating Economy?
The good news is, I think that, the most likely scenario is thatChina will continue to grow well for at least another 15 years. I’d like tocall myself a cautious optimist, because I think there is a good chance thisoptimistic scenario will play out. But I am cautious, because I basically agreewith Minshi about the diagnostic of the problem. So I think the fundamentalsare in place for China to continue to grow well. You know it has this large,rural-urban migration. It’s creating a large urban labour force. It’s very openeconomy; it’s well connected to the global market. And many Chinese citiescreated a very good investment climate where Chinese enterpreurship isgenerating a lot of private investment in innovation and development. All thosefundamentals will remain in place about 15 years. But I agree with Minshi thatthere are some very serious risks. I see the three biggest risks to be theenvironment, the social deficit and also the trade imbalance. The reason I canbe a cautious optimist is that I think the government is moving in each ofthese 3 areas. So let me just say a few words about each area, starting withthe environment.
I really do think that natural scarcity and environmentaldegradation is the single biggest challenge that China faces. It’s a naturalscarce country. The whole country has pretty serious water shortage. And thenorthern part of the country has really very acute water shortage. Almost halfof the people live in the northern part of the country. So you’ve got watershortage; you’ve got serious pollution water all around China. You also haveserious air pollution. China has 20 of the 30 most polluted cites in the world.And we’ve just worked togther with the environmental agencies in China to dothe first health cause of air and water pollution in China and the healthcauses are really quite alarming. So I think the environmental issues areserious. You read about it all the time in New York Times and other westernoutlits. Well, you may not be aware of that it’s m environmental issue that Chinamakes progress. So air pollution has improved in the majority of Chinesecities, particularly in the Southern part of the country. There is dramaticdecline in air pollution. Water pollution in the Southern part of the countryin early 1990s: Almost no river had drinkable water. Now almost 60 percent ofrivers in the South have drinkable water. So there have been clear measuresthat have been taken to try to improve and address some of these environmentalissues. So I am somewhat optimistic that trend will continue. I would say a keypart of that is pricing natural resources appropriately. Chinese has tended tohave low water and energy prices and has been gradually tried to increase theprice of water and the price of energy. And now this is one factor that leadsto the conservation and to better use. But I’d like to paint a balance pictureof pretty serious balance crisis. But progress in some parts of the country.It’s interesting that in some parts of the country. I think Chinese citiescompete with each other. They used to compete just to attract investment. Theyused to compete to attack the big polluting industries. Now I see a lot ofChinese cities are competing to make greener environment, because they realizea good living environment is part of being competitive. So you’ve got citieslike Hangzhou and Suzhou. They are working very hard to create a better livingenvironment because they want to attract engineers and top-flight talents tocomplete with the Silicon Valley.
Second key issue for Chinese is the social deficit. China hasdeveloped a very high degree of inequality, similar to the level of inequalityin United States. But the way to think about thisis that: Unbarn incomes inChina are going up about 10 -- 20 percent a year. Rural is growing about 5-6 percenta year. So that generates a lot of inequality. But I emphasize the rural realincomes are going up much more rapidly than any elsewhere in the world. Sothere continues to be very rapid poverty reduction. Just between 2001 and 2004,Chinese cut its poverty by 1/3 in 3 years. So it is true that this rapid growthis benefiting every one in the country materially. It is just benefiting peoplein the cities much more so than the people in the countryside. The best hopefor dealing with the inequality is to make it easy for people to live in thecountryside and move to cities. And we are beginning to see some evidence ofthat.
Now the third issue I mentioned briefly is the trade imbalance. Iactually think the trade deficit from the US side is not a particularly bigissue, not that important and I am happy to discuss that. But I think from theChinese side the trade imbalance is a problem. China’s trade surplus hasreached 10 percent of GDP. Quite a bit of Chinese growth comes from increasingthe trade surplus every year. Now China is a big player in the world market.They are not going to be markets, even without political interference butprotectionism, they are just not going to be markets. They can absorb big increaseyear after year. China’s still a developing country, so the 10 percent tradesurplus, the 10 percent GDP trade surplus means that China is exporting capitalof 10 percent GDP every year, which frankly just doesn’t make sense for a poorcountry. So I think addressing the trade imbalance is an important short-runchallenge for China.
Now I want to end by saying there’s very obvious policy package toaddress all three of these challenges simultaneously, if the government wouldaggressively raise the price of energy and water, and enforce environmentalstandards, they can address the environmental issues more forcefully. That byitself will tend to make Chinese people poor, following the price of gasoline doubled,price of water doubled. That would tend to make Chinese people poor. But if youlet the exchange rate appreciate 10 percent or so, that by itself tends to makeChinese people richer and also that by itself tend to be deflationary and itwould mitigate the effort of raising the price of energy and water. And thenthat would of course slow down the export machine, which is something that governmentconcerns about. So if you allowed some percentage rate of appreciation, to cooloff the manufacturing sectors, you could actually pump a lot of public moneyinto health and education, which would meet real needs and stimulate the macroeconomy. So there’s an obvious policy package that would keep China growing ina very healthy way, but addressing the environmental and social deficit muchmore forcefully than it is occuring. And then the obvious question is why are theydoing it. And then I would say that the serious leadership is gradually doingthis. So you do see increase of energy and water prices. We’ve seen a 20percent increase of government’s spending on rural health and education. Andfrom my point of view, I would like to see more rapid movement on this policypackage, but I do see movement on the policy package and if China continuesdown that path. I think they can grow successfully in a more balanced way, meettheir needs, take some of the pressure off the international imbalance and DHLcan make a lot of money by investing successfully in China. So that’s theoptimistic scenario.