Transcript
PROFESSOR HE FAN
Thank you. It's a great honour to be invited here, and share some of my personal views with all of you on what is happening in China. We'll talk about the structural change in China before and after the global financial crisis. The main message I want to convey is that there is already some encouraging sign of structural reform in China. We have to wait and see, we don't know whether it will become a real trend or it will disappear all of a sudden.
Let me first, very briefly, talk about this imbalance in China. In the last three decades we saw a very rapid increase of the Chinese economy; but a faster growing economy is always unbalanced, as is the case in China. There are a lot of problems that China is facing, and one is the very low consumption and the very strong investment; so investment is increasing rapidly, but at the same time consumption is dropping.
The main reason why is because the saving rate is very high, and why the saving rate is very high is, if you look at the householders it's mainly because of lack wealth in our social safety network, people have to save for their future; so the precautionary saving of the household is very high. Then saving rate is also very high for the [unclear] sector, mainly the state owned enterprises, they had some profit, but didn't give the money to the government, they kept it for re-investment in specific sectors.
Also, the consumption is very low because of the under-development of the financial system because of this financial repression; we do not have enough channels to convert the saving to investment opportunities. In China you have a very competitive manufacturing sector, but at the same time it's a highly protected service sector. The manufacturing sector is very competitive because of the free entry; most of the private capital flows into the manufacturing sector, and they are aiming at the overseas market. The government cannot intervene in the international market; so if you want to survive in the international market you have to be very competitive, it is sink or swim, the government will not bail you out.
The domestic sector is another story, the paler service sector represents healthcare, education, telecommunication, transportation; it's either directly monopolised by the government, or heavily regulated by the government. The supply is insufficient, the quality is lousy and the price is bloody expensive. This is why the consumption of service is extremely low in China, and the result is the heavy reliance on the foreign demand; we have this Pro Export and Pro FDI strategy.
One result is we've accumulated more than US $3 trillion [unclear] in reserve; and we've invested heavily on the US [unclear]. Imagine a poor country like China is lending money to a rich country like the United States with almost zero [unclear] and also with the risk of losing money forever. I just cannot understand what the meaning is of doing this. This highlights the urgency for China to make the move to make this structural reform.
Before the American financial crisis some investment bank tried to sell their theory of the de-coupling, saying that for an emerging country like China the growth can still remain robust even though the developed countries are in recession. It turned out to be a joke, so China also felt the negative impact of the American financial crisis, and in the year 2008 the Chinese Government announced a huge stimulus package of four trillion. What is this four trillion stimulus package? Some people say this is [unclear] policy. No, it's not true, because the investment of the central government only accounts for something like one quarter of this four trillion stimulus package coming from investment from local government. Local government doesn't have money, local government doesn't have enough revenue from taxation, and according to the Chinese legal system, local government cannot issue local bond. The only way that they can get the money is they borrow money from a commercial bank. The result is what we see today, and there's [unclear] local government debt and the increasing of non-government loans in the banking system.
This stimulus package has some positive impact, it's stimulating the growth immediately, and at the same time it is pushing up the commodity price, especially the iron and coal prices, which is really good news for Australia, because China becomes the only buyer of iron and coal after the American financial crisis.
Then we have the slight problem of over heating and inflationary pressure, and the government have tried to tighten this macro policy. Gradually the growth rate in China has dropped, and people are saying this is a hard landing or a softer landing; hard or soft landing, we have to land anyway.
This stimulus policy of the Chinese Government after the global financial crisis doesn't help much in pushing forward, in facilitating this structural reform. It makes things even worse, because most of this investment flows into infrastructure building, and, even worse, some of them flow into the housing market, and that's created a housing bubble.
You can see that after the crisis investment in China further increased, and there's also some other problems like the share of state owned enterprises increased. People are saying, China is now becoming a state capitalist. That's the result of this stimulus package, and we can see there's a further deterioration of this structural imbalance.
The good news is, some silent revolution has happened recently, there is a sign of improvement of the Chinese re-balancing; and this cannot be credited to the government policy. I think it is mainly driven by more fundamental changes in the Chinese economy. If you look at the pattern of investment, investment in the manufacturing sector is dropping; but, at the same time, investment in the service sector, investment in the high technology sector is increasing. If you look at the pattern of investment in different regions, the less developed area, the Western and the middle area, outsized that in the Coastal Eastern area for the first time in Chinese history.
Consumption is increasing, the official data for the consumption is the total of the retail sale of the consumable goods. If you look at that data the consumption in China is sluggish. We are re-calculating the data, we are using the consumption expenditure per capita. If you ask the householder in the urban area, and the rural area, how much money do you spend and then you'll see a different picture. This disparity of these two figures comes from the total retail sales of consumer goods; they include both the public consumption and the private consumption. If you ask the householder you only count the private consumption.
For the total retail sales they only calculated manufactured goods, but the consumption for services is increasing dramatically. You cannot increase the consumption; we are talking about stimulated consumption of the Chinese people, but you cannot stimulate, you cannot move the consumption of manufactured good. If you visit a middle income Chinese family you can see that they already have everything; we have our own colour TVs, refrigeration, air conditioner and automobile, so what else should we buy? The room for improvement of consumption is not in the manufacturing sector, but in the service sector; it's happening.
The reason why there's this structural change, I think there are some short-term factors like the government are trying to encourage the investment in some high technology sectors. More fundamentally I think that it is because on the one hand the external demand is still sluggish; the manufacturing sector in China realises that they cannot repeat the same rapid
growth as in the past, so they have to change their business model.
Domestically, because of the huge change of the demographic profile the labour costs has increased at an annual speed of 15 to 20%. In this situation even those enterprises in the labour intensive sector are investing eagerly in capital goods to replace the labour. The are striving to use less commodity, less workers, and to upgrade their products.
This structural change is only at a very early stage; the reason why we need to wait and see is because we still haven't seen a very significant policy from the government to support these changes. These promising changes can be destroyed even by a wreckless step, and needless to say, if you want to choke it with an axe. If the government puts too much emphasis on growth, and the most convenient way is to use the traditional way, to further invest in heavy industry and further investment in infrastructure, and that will destroy all these encouraging structural changes that have happened in China.
The implication, in the long run, is the growth rate in China will drop inevitably because of the change of these fundamentals. The growth rate is now below 8% and people say, this is very risky. And who told to you that 8% growth rate is a recession, and unless we have massive unemployment, which will lead to social instability, that will be real challenge for the government. Unless we see massive unemployment, we can live with this growth rate of around 8%; but for a 1% growth drop of a huge economy like China it would have a very significant impact on the global economy.
At the same time, I think it's safe to predict that the trader surplus in China will gradually shrink, and then some other stronger investment will happen in the service sector rather than the traditional manufacturing sector.
What's the implication for Australia? I have both good news and bad news; and bad news first. The bad news is the strong demand for the commodity is not sustainable in the long run. The demand for the iron and the steel will continue to be slack in the future because of what has happened, the structural change in China.
The good news is it's the right time for Australia to end this speedy economy. Because on the one hand they demand the commodity to decrease, but at the same time with urbanisation, with this changing demographic profile, and with the increase of the income of Chinese people and there will be a huge demand for high end agricultural produce, high end of manufactured products, a service, a decent quality of service, education, tourism, healthcare, finance, you name it.
Australia is in the right position to [unclear] on this structural change happening in China; but the problem is there's no low handling of freight any more; for export of minerals, no one can compete with Australia. But then in the service sector it's a different story; I'm sure a success story will happen for some niche industries that can find their niche in the Chinese market. Generally speaking, the service sector will face a fierce competition with other countries. Yes, it's true that the quality of education in Australia is far better than that in China; it's true that the financial sector in Australia is the most advanced in this region, in Asia.
But then imagine that ANU has to compete has to compete with Harvard or Stanford, or ANZ has to compete with Goldman Sachs, City Group or whatever. Even Australia geographically is closer to the Asian market, but in the service sector it's your competitive edge, it's not geography that matters. I think this is the reason why even this structural change in China is still at a very early stage, but Australia has to be forward looking and be well prepared for the future.
If Australia takes it for granted that this rapid growth in China, and huge appetite for the minerals will continue, you better have a second thought. I'll stop here so that we can have more time for Q&A. Thank you.