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A Close Observation of China’s Economy: Problems and Measures

Apr 18-2013   



 

—On the 8th CCER China’s Economy Observation Seminar

On February 4th, 2007, the 8th CCER “China’s Economy Observation” Seminar was successfully held at Langrun Garden in Peking University. At this seminar, the professors from CCER and BiMBA announced the Langrun Forecast on the macro economy of the first quarter of 2007, and made further discussion of issues like RMB valuation and its exchange rates, current macroeconomic policies, global liquidity, and reform of medical system.

 

Rethinking and Empirical Analysis of Theories on RMB Exchange Rate

Since the float exchange rate was adopted, the question how far the RMB appreciation will eventually go has caught wide and intense attention. In regard to this issue, Professor Justin Yifu Lin deemed that the view holding RMB “seriously undervalued” was theoretically baseless. 

Currently, there are two major arguments to support the view that RMB has been undervalued. First, in recent 10 years, the labor productivity of the trading sector has been growing faster than that of the non-trading sector, and the relative speed has also been faster than that of developed countries. According to the Hypothesis of Balassa-Samuelson Effect, the materialization of real exchange rate demands radical rise of nominal exchange rate. Second, the huge trade surplus requires RMB to respond to the pressure from the trading partner countries. As for the first reason, since the 1990s, the labor cost in the manufacturing industries has declined with an accelerated speed, while the case with the service industry has been just the opposite, which has effectually disabled the “Hypothesis of Balassa-Samuelson”. As for the second reason, though the absolute value of China’s current trade surplus is very high, its relative value of trade surplus, or surplus-GDP ratio, is far lower than that of many nations whose currency has not been “seriously undervalued”.

In fact, the theory on undervalued RMB did not originate in the academic community. In 2003, the government of Japan claimed that RMB was undervalued and Chinese exports were excessively under-priced, and China had thus caused international deflation. Later, the United States declared that the abnormally low exchange rate of RMB had enabled China to export massively to its market and had thus snatched its employment opportunities. Actually, the total volume of China’s international trade in 2003 accounted for merely around 1% of the world total, so it was obviously impossible for China to “cause international deflation”; in terms of export structure, China and the United States were mutually complementary, so it was baseless to say that China had “snatched its employment opportunities”.

Professor Guoqing Song from CCER has conducted empirical research of foreign trade statistics. First, as for the increase of foreign exchange income, more than 60 billion dollars was absorbed by commercial banks in China in last year. Against the backdrop of RMB appreciation, attention should be paid to the question how the commercial banks can bear the cost of foreign exchange. Second, as for trading status, the export index of China has continued its rise in the last two years, which means that the actual volume of export has undergone changes though the export proportion has stayed unchanged. Finally, appreciation of RMB for 5% can basically end the trend of surplus increase, but there will still substantial increase of foreign exchange reserves. The status of exchange rate as the principal tool for control should still be emphasized.

 

Macroeconomic Policies: Views of Government and Analysis by Experts

About macroeconomic situations, Professor Gang Yi, Assistant President of People’s Bank of China and Mr. Haizhou Huang, Chief Economist of Barclays Bank Greater China reached the same conclusion through separate analyses.

Professor Yi first introduced to the participants some current indexes of the macro economy of China. Since1978 when the reform and opening-up campaign started, the labor productivity and all-factor productivity have both risen remarkably; the rate of return on capital has remained around 20%; the CPI index began to rise in 2002. Between 2003 and 2006, the foreign exchange reserve of China increased by 77.99 billion dollars, and the country provided a total of 6400 billion yuan of basic currency, of which 4000 billion has now been recovered by the central bank.

Professor Yi pointed out that factors like construction of legal system, public security and order, environment protection and population quality were all indirectly linked to foreign trade and therefore should also be taken into consideration. In policy choice, on the one hand, China should make full use of international experiences, and on the other, the country should continue to resort to multiple mechanisms for macro control. Measures like stimulating consumption, opening up the service market, and advancing urbanization should all be adopted to promote and guarantee the development of macro economy.

The view of Mr. Huang was more international. First, in view of the global market, the newly industrialized nations have played an ever-bigger role in world economy, and have begun to assume the role as capital exporters. Second, the strategy of China to invest its foreign exchange excessively into U.S. dollar should be adjusted as quickly as possible. Additional flexibility should be given to the exchange rate of RMB to make it more international. There are two ways to develop economy: planting trees and cutting trees. China should make efforts to convert its economy into the “planting tree” mode and attach importance to sustainability of development.

Professor Lu’s report was based on the findings of the “CCER China Economy Observation” research group. The rate of return on capital in China has been climbing, having overtaken that of Japan and approaching the American level. One of the reasons lies in the radical decline of management expenses, labor cost and interest cost, together with the rise of lucrative capital. As the return of investment is larger than the economic cost of investment or the interest cost, the high rate of return on capital can account for the rapid growth of domestic investment. In Professor Lu’s opinion, due to the rise of return on capital in the past 9 years in China, current growth of investment has substantial microeconomic basis, so the macroeconomic policies of further deregulation, easier market access and expanding domestic demands should be adopted to make it possible to realize the goal of “good and fast” development.

 

Medical System Reform: Rethinking from the Height of System

Today, though China is witnessing numerous and fast system reforms, the medical system reform has attracted more and more attention. One of the reasons might be the unsatisfactory progress against the gradual successes in many other reforms. Professor Qiren Zhou of CCER announced his viewpoints based on his elaborate study of the issue.

Professor Zhou pointed out that the increase of domestic medical resources was the root of difficulty to see doctors and exorbitant hospital charges. One direct cause of the problem is the unreasonable system. At present, the policy permits private capital to enter the medical sector. However, the private hospitals should either be a non-profitable organization or a profit-making one. The former type is exempted from taxes, while the latter is confronted with value-added tax and income tax. Due to such system arrangement, added by the sophisticated procedures, the private capital seldom invests in the medical sector.

Judging from the actuality, the domestic medical system is far from being a market-driven one. At present, most medical resources are controlled by state-owned enterprises; the leaders of most hospitals are appointed by government; medical licenses are controlled and approved by government; the government “invests little money but commands much power”, and the hospitals gradually become something like the government hostels; the profit of hospitals is utilized to support the welfare of government officials.

The waste resulting from disrespect to medical human resources has been an important cause of medical backwardness. It is very difficult for medical graduates to find a job, which has been caused by insufficient hospitals and the low efficiency of the system. The discussion in this regard has never received the deserved attention, and the medical system reform has basically ignored the improvement of the personnel system. All in all, “monopolizing but not delivering” on the part of the government is the root cause for the low-level mobilization of the medical resources in China.

A Close Observation of China’s Economy: Problems and Measures

Apr 18-2013   



 

—On the 8th CCER China’s Economy Observation Seminar

On February 4th, 2007, the 8th CCER “China’s Economy Observation” Seminar was successfully held at Langrun Garden in Peking University. At this seminar, the professors from CCER and BiMBA announced the Langrun Forecast on the macro economy of the first quarter of 2007, and made further discussion of issues like RMB valuation and its exchange rates, current macroeconomic policies, global liquidity, and reform of medical system.

 

Rethinking and Empirical Analysis of Theories on RMB Exchange Rate

Since the float exchange rate was adopted, the question how far the RMB appreciation will eventually go has caught wide and intense attention. In regard to this issue, Professor Justin Yifu Lin deemed that the view holding RMB “seriously undervalued” was theoretically baseless. 

Currently, there are two major arguments to support the view that RMB has been undervalued. First, in recent 10 years, the labor productivity of the trading sector has been growing faster than that of the non-trading sector, and the relative speed has also been faster than that of developed countries. According to the Hypothesis of Balassa-Samuelson Effect, the materialization of real exchange rate demands radical rise of nominal exchange rate. Second, the huge trade surplus requires RMB to respond to the pressure from the trading partner countries. As for the first reason, since the 1990s, the labor cost in the manufacturing industries has declined with an accelerated speed, while the case with the service industry has been just the opposite, which has effectually disabled the “Hypothesis of Balassa-Samuelson”. As for the second reason, though the absolute value of China’s current trade surplus is very high, its relative value of trade surplus, or surplus-GDP ratio, is far lower than that of many nations whose currency has not been “seriously undervalued”.

In fact, the theory on undervalued RMB did not originate in the academic community. In 2003, the government of Japan claimed that RMB was undervalued and Chinese exports were excessively under-priced, and China had thus caused international deflation. Later, the United States declared that the abnormally low exchange rate of RMB had enabled China to export massively to its market and had thus snatched its employment opportunities. Actually, the total volume of China’s international trade in 2003 accounted for merely around 1% of the world total, so it was obviously impossible for China to “cause international deflation”; in terms of export structure, China and the United States were mutually complementary, so it was baseless to say that China had “snatched its employment opportunities”.

Professor Guoqing Song from CCER has conducted empirical research of foreign trade statistics. First, as for the increase of foreign exchange income, more than 60 billion dollars was absorbed by commercial banks in China in last year. Against the backdrop of RMB appreciation, attention should be paid to the question how the commercial banks can bear the cost of foreign exchange. Second, as for trading status, the export index of China has continued its rise in the last two years, which means that the actual volume of export has undergone changes though the export proportion has stayed unchanged. Finally, appreciation of RMB for 5% can basically end the trend of surplus increase, but there will still substantial increase of foreign exchange reserves. The status of exchange rate as the principal tool for control should still be emphasized.

 

Macroeconomic Policies: Views of Government and Analysis by Experts

About macroeconomic situations, Professor Gang Yi, Assistant President of People’s Bank of China and Mr. Haizhou Huang, Chief Economist of Barclays Bank Greater China reached the same conclusion through separate analyses.

Professor Yi first introduced to the participants some current indexes of the macro economy of China. Since1978 when the reform and opening-up campaign started, the labor productivity and all-factor productivity have both risen remarkably; the rate of return on capital has remained around 20%; the CPI index began to rise in 2002. Between 2003 and 2006, the foreign exchange reserve of China increased by 77.99 billion dollars, and the country provided a total of 6400 billion yuan of basic currency, of which 4000 billion has now been recovered by the central bank.

Professor Yi pointed out that factors like construction of legal system, public security and order, environment protection and population quality were all indirectly linked to foreign trade and therefore should also be taken into consideration. In policy choice, on the one hand, China should make full use of international experiences, and on the other, the country should continue to resort to multiple mechanisms for macro control. Measures like stimulating consumption, opening up the service market, and advancing urbanization should all be adopted to promote and guarantee the development of macro economy.

The view of Mr. Huang was more international. First, in view of the global market, the newly industrialized nations have played an ever-bigger role in world economy, and have begun to assume the role as capital exporters. Second, the strategy of China to invest its foreign exchange excessively into U.S. dollar should be adjusted as quickly as possible. Additional flexibility should be given to the exchange rate of RMB to make it more international. There are two ways to develop economy: planting trees and cutting trees. China should make efforts to convert its economy into the “planting tree” mode and attach importance to sustainability of development.

Professor Lu’s report was based on the findings of the “CCER China Economy Observation” research group. The rate of return on capital in China has been climbing, having overtaken that of Japan and approaching the American level. One of the reasons lies in the radical decline of management expenses, labor cost and interest cost, together with the rise of lucrative capital. As the return of investment is larger than the economic cost of investment or the interest cost, the high rate of return on capital can account for the rapid growth of domestic investment. In Professor Lu’s opinion, due to the rise of return on capital in the past 9 years in China, current growth of investment has substantial microeconomic basis, so the macroeconomic policies of further deregulation, easier market access and expanding domestic demands should be adopted to make it possible to realize the goal of “good and fast” development.

 

Medical System Reform: Rethinking from the Height of System

Today, though China is witnessing numerous and fast system reforms, the medical system reform has attracted more and more attention. One of the reasons might be the unsatisfactory progress against the gradual successes in many other reforms. Professor Qiren Zhou of CCER announced his viewpoints based on his elaborate study of the issue.

Professor Zhou pointed out that the increase of domestic medical resources was the root of difficulty to see doctors and exorbitant hospital charges. One direct cause of the problem is the unreasonable system. At present, the policy permits private capital to enter the medical sector. However, the private hospitals should either be a non-profitable organization or a profit-making one. The former type is exempted from taxes, while the latter is confronted with value-added tax and income tax. Due to such system arrangement, added by the sophisticated procedures, the private capital seldom invests in the medical sector.

Judging from the actuality, the domestic medical system is far from being a market-driven one. At present, most medical resources are controlled by state-owned enterprises; the leaders of most hospitals are appointed by government; medical licenses are controlled and approved by government; the government “invests little money but commands much power”, and the hospitals gradually become something like the government hostels; the profit of hospitals is utilized to support the welfare of government officials.

The waste resulting from disrespect to medical human resources has been an important cause of medical backwardness. It is very difficult for medical graduates to find a job, which has been caused by insufficient hospitals and the low efficiency of the system. The discussion in this regard has never received the deserved attention, and the medical system reform has basically ignored the improvement of the personnel system. All in all, “monopolizing but not delivering” on the part of the government is the root cause for the low-level mobilization of the medical resources in China.