The Future of China – IMF F&D
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Bibliographic details
- Authors: DAVID DOLLAR, YIPING HUANG, YANG YAO
- Published: June 1, 2021
Overview and central thesis
- China set a long-term goal in 2012: build China into a fully developed and prosperous country by 2049, 100 years after the founding of the People’s Republic.
- Given past success since 1978, the transformation is possible but “difficult and not guaranteed.”
- The article emphasizes that China’s long-term success will depend primarily on addressing internal challenges: an aging population, a rural-urban divide, an underdeveloped financial system, insufficient innovation, and reliance on carbon-based energy sources.
- External economic relations have become contentious, with growing trade and investment barriers in both directions.
- The authors’ book, China 2049, examines policies to help achieve the 2049 goal.
Demographics: an older population
- Total fertility has dropped to 1.7 births per woman, below the replacement rate of 2.1.
- Relaxation of the one-child policy did not produce more babies.
- China’s working-age population has already started to decline; the elderly population is expected to increase dramatically in the next few decades.
- The over-65 cohort will more than double to 400 million people by 2049.
- The “old-old,” 85 and over, will more than triple to about 150 million people, surpassing their peers in the United States and Europe combined.
- The only working-age bracket that will increase is the 55- to 64-year-olds.
- Policy implications and needs:
- Increased resources for health care, long-term care, and assisted living.
- Socialization of costs previously privately borne as smaller families may leave elders with no one to rely on.
- Strengthening the health care system, especially in rural areas.
- Labor force policies: raising retirement age gradually (current examples: male civil servants can retire at 60, female civil servants at 55).
- Family-friendly policies to sustain and enhance female labor force participation.
- Recognition that even some increase in fertility would not affect the labor force for 20 years.
Urban-rural divide
- Urbanization trends: urban population increased from 20 percent at the beginning of reform to 60 percent today, rising by about 1 percentage point a year.
- More than 200 million urban migrant workers remain registered as rural residents under the hukou household registration system.
- By 2007, urban workers were making 3.14 times as much as those in rural areas; more recently the ratio is 2.71 times.
- China has about one-fifth of the world’s population but only 7 percent of its arable land, constraining rural living standards for 500 million people.
- Urbanization is low relative to per capita income and population density compared with fast-growing Asian economies (example: South Korea had urbanization closer to 80 percent at a similar stage).
- Social consequences of hukou restrictions:
- Migrant workers face constraints in bringing children or parents to cities due to limited access to education, health care, and pensions.
- Resulting family structures: parents in cities working while grandparents maintain family farms and raise children left behind.
- Policy recommendations:
- Fully scrapping internal migration restrictions to improve social access (education, health care, pensions) for migrants.
- Facilitating migration would help meet needs of the growing elderly population and maintain the urban workforce.
Financial system, productivity, and innovation ("More bits, fewer bricks")
- China is characterized by significant financial repression based on factors such as ownership of banks, regulation of interest rates, intervention in credit allocation, and control of cross-border capital flows.
- China ranks as one of the most financially repressed among major economies, similar to India; moderately more repressed than Russia and South Africa; considerably less liberalized than advanced economies.
- Financial liberalization progressed until about 2000 but stalled thereafter.
- Initial liberalization effectively channeled high savings into export-oriented manufacturing and housing, aided by lending practices relying on physical collateral.
- The golden age of growth was between WTO accession in 2001 and the global financial crisis in 2008.
- After 2008, to maintain demand, China invested massively in infrastructure via lending to local governments and upstream sectors (such as steel) and channeled more resources into state enterprises.
- The surge in lending to local governments and state enterprises caused overall indebtedness to grow at an alarming rate, indicating poor capital allocation.
- Total factor productivity (TFP) trends:
- Early 2000s: TFP grew 2.6 percent a year.
- Later part of the past decade: TFP accelerated to 3.9 percent.
- Between 2015 and 2019: TFP grew only 0.2 percent a year.
- Innovation inputs and weaknesses:
- China spends 2.4 percent of GDP on research and development.
- China has millions of scientists, engineers, and software developers graduating every year and gradually improving intellectual property protection.
- Innovation output is inconsistent: strong in fintech and artificial intelligence, weak in aggregate productivity.
- The state still channels many resources to state enterprises, whereas most patents are generated by private firms.
- Policy implications:
- Need for a diversified, competitive financial system that funds dynamic start-ups based on intellectual property rather than favoring state enterprises and traditional assets.
- As China fine-tunes its next five-year plan, focus on strengthening the innovation ecosystem, including financing mechanisms rather than supporting particular industries and technologies.
- Innovation is key to meeting environmental goals, particularly the target of zero net carbon emissions by 2060.
Trade and investment: global integration vs. fragmentation
- Continued integration into global trade and investment is important for catching up in GDP per capita.
- China became the world’s largest trading nation and, in the previous year, the largest recipient of foreign direct investment.
- Current international environment: China’s push for leadership in specific technologies worries partners, leading to trade and investment restrictions on Chinese tech firms and a risk of technological decoupling.
- The “dual circulation” program emphasizes domestic demand and national innovation and could encourage inward orientation.
- Countervailing integration steps:
- Membership in Regional Comprehensive Economic Partnership with Asia-Pacific countries.
- Membership in the Comprehensive Agreement on Investment with the European Union.
- Dialogue with Trans-Pacific Partnership members about potential future membership, which would require reforms (limits on state enterprises and subsidies, opening up sectors to foreign investment).
- Overtures to the Biden administration about reducing trade and investment barriers.
- Policy recommendation:
- Continue opening the economy and negotiating trade and investment agreements in all directions to avoid inward-looking decoupling that would harm both China and global productivity growth.
Conclusions and policy priorities
- China is at an inflection point in external economic relations; success depends primarily on addressing domestic challenges.
- Interlinkages highlighted:
- Aging population and rural-urban divide: greater integration can help address elderly needs and support the urban labor force.
- Financial reform and innovation policy: move away from targeted industrial policy toward general support for innovation, enabled by a diversified financial system that does not favor state enterprises.
- Innovation is essential for eliminating carbon emissions without compromising productivity or living standards.
Authors
- DAVID DOLLAR — senior fellow in the John L. Thornton China Center at the Brookings Institution.
- YIPING HUANG — Jinguang Chair Professor of Economics and Finance at the National School of Development and director of the Institute of Digital Finance at Peking University.
- YANG YAO — Cheung-Kong Scholar and Liberal Arts Chair professor at the China Center for Economic Research and the National School of Development, Peking University.
The Future of China — IMF F&D, June 2021.
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