CHINESE ECONOMIC DOWNTURN

Transcription

1 CHINESE ECONOMIC DOWNTURN THE END OF THE MADE IN CHINA ERA Clara de Ros Blanquerna Ramon Llull University School of Communications and Internaitonal Relations Degree in International Relations International Economy and Development Research Project, June 2016 Diego Muro

2 Abstract Focused mainly on export and investment-led production, China has emerged as the second world largest economy. For that reason, it has often been considered as a success story and a role model for other emergent economies. After analysing three possible explanations that could lay behind the recent slowdown that the country is suffering, this research concludes that the Chinese economic model of the last 15 years is far from being satisfactory. The Asian country has based its growth in an unbalanced structure characterized by high levels of investment and low levels of consumption and the actual deceleration is not accidental or temporary but a structural change of the whole economy. Demographics and financial crisis spill-overs may be accelerating and reinforcing the deceleration but they are not the main causes. On the other hand, even that it can not be claimed that the Chinese government policies have had an impact on today s economic downturn, Government s role in the coming years will be crucial for avoiding the entrance of China in the Middle Income Trap. 2

3 TABLE OF CONTENT 1. INTRODUCTION LITERATURE REVIEW THEORETICAL FRAMEWORK THEORETICAL APPROACH CASE STUDY: CHINESE DECELERATION EXHAUSTION OF LABOUR SUPPLY EFFECTS OF THE FINANCIAL GLOBAL CRISIS THE WAY TOWARDS THE NEW NORMAL CONCLUSIONS

4 Figure 1: Migration flows Figure 2: Chinese active population Figure 3: Age Composition of the Chinese population Figure 4: Unemployment Rate Figure 5: Evolution of employment composition Figure 6: Daily wage of workers (yuan/day) Figure 7: Labour input per unit (day) Figure 8: Total capital input (billion yuan) Figure 9: Capital-labour ratio (yuan/day) Figure 10: China s trade flows with the EU (euros) Figure 11: Chinese trade flows with the EU from 2005 to Source: World Bank Figure 12: china s trade flows with the US (US dollars) Figure 13: Chinese exports and imports with the US Figure 14: US FDI in China Figure 15: Total FDI in China (billions of US dollars). Source: World Bank Figure 16: China s GDP growth. Source: World Bank Figure 17: Chinese per capita Income and household consumption Figure 18: Consumption, investment and savings of 9 countries (percentages) Figure 19: China s FDI by industry Figure 20: China s GDP Composition Figure 21: Exports as percentage of GDP Figure 22: Industrial and Retail sales progression

5 1. INTRODUCTION Since the beginning of the 90s, China s reforms have transformed the Asian giant from a povertystricken country into an economic powerhouse. Focused mainly on export and investment-led production, China has emerged as the second world largest economy. For that reason, it has often been considered as a success story and a role model for other emergent economies. Chinese products were consumed all over the globe and China was considered the factory of the world. However, on January 14, 2016 suspicions that the world s second-largest economy was slowing down were confirmed. Official data from Beijing showed that China s GDP grew by 6,9 percent in 2015, the slowest rate of annual growth since Even that maintaining two-digits growth for a long term has proved to be unlikely and slowdowns occur in all kind of economies, deeper insight in the structure of the Chinese economic model shows that it is far from being satisfactory. The rapid economic growth that China has experienced during the first decade of this century is based in an unbalanced development characterized by high investment and low consumption. 2 The objective of this research is to find out the main reasons behind the economic downturn that the emergent economy is experiencing. In order to do so, I ll part from three possible explanations or hypothesis that will be analysed with the aim of understanding the role that each plays in determining the economic slowdown. The first hypothesis is based on the idea that the financial global crisis has badly affected the Chinese economy, which is highly dependent on exports and FDI. The second is focused on how demographic structure and a possible exhaustion of labour supply may have led to an economic deceleration. The third and last hypothesis would consider that government s policies addressed to reduce exports and FDI stand behind China s new economic scenario. Existing literature advocates exclusively for one of the three explanations proposed or mentions some of them without clarifying which weight has each in triggering the slowdown. In this research study, I will combine the three and try to clarify the extent to which each of them contributes to the slowdown. After having analysed all the necessary data to test each hypothesis, I also expect to be able to answer 1 Mark Magnier, China s Economic Growth in 2015 is the slowest in 25 years, The Wall Street Journal, (January 16, 2016), accessed April 25, 2016, Available at: 2 Lin Yue, Causas y consecuencias del desequilibrado crecimiento de China, , Available at: nto_de_china 5

6 the question on whether China has entered in the Middle Income Trap or not as well as if it is the end of China s story as a big exporter. Since China is one of the best examples of emerging economies and it comprises most of the characteristics of a large developing country, analysing its economic performance will be useful to understand slowdowns in other emerging countries. Henceforth, this research will try to identify the main causes of the Chinese downturn with the ultimate goal of reaching conclusions that can be useful For doing this research I will use a deductive method; starting from an hypothesis and trying to verify it trough the collection and analysis of qualitative data. I will use both secondary sources (previous The conduction of this research will be done trough an empirical mixed method; qualitative and quantitative data, both secondary and primary, will be collected with the aim of finding empirical evidences that prove or reject the hypothesis. The structure of this paper is divided into three more chapters. Chapter 2 contains the literature review, in which I will analyse the existing literature on the topic and I will give special attention to two theories; the theory of the Middle Income Trap and the theory of the unlimited supply of labour exposed by W.A Lewis. Chapter 3 is divided in three parts corresponding to the three raised hypothesis. In each section, I will collect and analyse the data I consider relevant for measuring each aspect. Finally, I will expose the conclusions of the analysis in chapter 4. 6

7 2. LITERATURE REVIEW Even that China s slowdown is a relatively recent event, economists and political scientists have long been looking at the superpower economic trends. Before analyzing the causes of the Chinese downturn and more specifically the role of demographics, labor surplus and government reforms in such downturn it is necessary to look at other academic works whose conclusions might be relevant to this investigation. As a middle-income country, China has some particular features and its growth deceleration should be analysed taking into account those characteristics. Before establishing causal relations between facts and the economic downturn, it is necessary to understand if what is going on in China is not new but a repetition of what usually happens to emerging economies. In this regard, when it comes to talk about declines in growth paths, it is necessary to mention the concept of middle-income trap, defined by Aiyar, Duval, Puy, Wu and Zhang (2013) as the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries. As they highlight in their work Growth Slowdowns and the Middle-Income Trap, middle-income countries are more likely to experience slowdowns, ahead of low and high income ones. According to them, there are 42 variables that explain economic growth and they can be divided into seven categories: (i) institutions, (ii) Demography, (iii) Infrastructure, (iv) Macroeconomic Environment and Policies; (v) Economic structure, (vi) Trade structure and (vii) other. From those seven categories exposed, I think that it is interesting to highlight two main aspects that can be linked to China s case. First, in terms of demography, it is necessary to note that age distribution of the population is considered to have an important impact on growth since while workers save and dependants do not, a large share of working age population contributes to higher saving rates. Secondly, in terms of Macroeconomic environment and policies it is interesting to bear in mind that while capital inflows have always been associated with growth, sudden stops can lead to severe repercussions. A reduction in Gross Capital inflows/gdp is associated with a higher probability of a growth slowdown and the higher the initial level of gross capital inflows, the higher the probability of a growth slowdown. 3 Since China is one of the major recipients of FDI, it is necessary to take this fact into account. Finally, in terms of Economic Structure, as it will be developed below, it is essential to talk about the idea that migration of labor from agriculture to manufacturing leads to economic development and growth, which was first exposed by Harris and Todaro (1970) and lately elaborated in depth by W.A Lewis 3 Aiyar, Shekhar, Romain Duval, Damien Puy, yiqun Wu and Longmei Zhang, (2013), Growth Slowdowns and the Middle-Income Trap, IMF Working Paper, Available at: 7

8 (1979). 4 All this general considerations regarding emerging economies downturns are crucial for understanding until which point Chinese downturn is normal or at least the natural path to follow for any developing country. Looking at the general cases can be useful in order to understand the particularities of the one studied. When it comes to assess the impact that the financial crisis had on Chinese economy, it is interesting to look at the reports done by Deutshe Bundesbank in July As they stress, at first glance it would appear accurate to consider that industrial countries were holding back the emerging market economies via the foreign trade given that those economies export a major share of their output to the advanced economies. However, no pattern proves that theory and a more likely explanation is that the path of potential output has flattened out. Potential output is determined by supply-side factors such as the economy s labour supply and fixed assets. Total economic output is determined by the factors of production (labour and capital) along with a productivity component known as total factor productivity (TFP). The Deutsche Bundesbank report notes that in the case of China, the rise of labour productivity has experienced a marked decline in recent years while the process of migration of rural agricultural labour to urban areas has slowed of late. According to the Bundesbank report, the number of migrant workers rose by only 2% over the past four years compared with an increase of 4% between 2004 and The exhaustion of the rural labour reserve is exposed by the Deutsche bank experts as the main reason behind this trend. 5 China s cheap labour resulting from its large pool of labour surplus has been its main source of comparative advantage. For that reason, the debate on whether China as reached the Lewis Turning Point has emerged after the publication of some recent reports showing labour shortages in some areas of China. However, no consensus has been reached on the question of China s labour supply. Since wages in the urban sector have experienced a sustained increase in recent years, literature looking at the demand side answer yes to the question as to whether the Lewis Turning Point has been reached. On the other hand, literature looking at the supply gives a no as answer arguing that there s still a large amount of rural surplus labour. As Goelley and Meng (2011) expose in their work Has China run out of surplus labour?, a range of methods and data have been used to claim that China has already reached the turning point in economic development, yet a range of methods and data have also 4 Harris, J., and M. Todar, 1970, Migration, Unemployment and Development; A two-sectors Analysis, American Economic Review, Vol 60, No., pp , Available at: 5 Slowdown in growth in the emerging market economies, 2015, Deutsche Bundesbank Monthly Report, 15. Available at: _07_slowdown.pdf? blob=publicationfile 8

9 been used to claim that it has not. 6 As a result, we find that China hosts a problems of co-existence of migrant labour shortage and rural labour surplus. As Knight, Deng and Li (2011) stress, the constraints on rural-urban labour migration (such as the Hukou system) lead to a situation in which even that rural laborers are in surplus, they cannot easily move to urban areas where laborers are in short supply. 7 In his work A China Paradox; Migrant Labor Shortage Amidst Rural Labor Supply Abundance, Chan explains how many labour supply curves exist in a real economy and that for instance, in China there is a structural mismatch of young and old workers; while China s urban sector needs young workers who are in short supply, old workers who have stayed in rural areas are in surplus. _ Taking this considerations into account, Garnaut (2010) states that it should be necessary to think in terms of a turning period instead of a turning point. 8 When looking closer to labour supply and wages in China it is worth mentioning how Cai and Wang (2008) found that wages of unskilled urban labour had experienced a significant increase and used this fact to imply labour shortages in the rural sector and therefore predict the reaching of the Lewis Turning point. However, other studies contradicted those studies of wage patterns by showing that China still has a large pool of underutilised labour in the countryside. _ According to Kwan (2009), 166 million people (52% of total rural labour) can be classified as surplus labour in the Chinese agricultural sector since they not have enough work to do in the rural sector. Indeed, rapid growth of real wages does not necessarily mean labour scarcity. Other reasons such as labour efficiency or labour market segmentation due to constraints on rural-urban labour migration or structural mismatch of young and old workers can also be behind wage increasings. 9 This considerations regarding the Lewis model of unlimited supply of labour and the possibility of an exhaustion of labour supply in China are crucial for understanding the different points of view and analysis that have already been done on the issue. As it has been said, there is no consensus on the topic and the relation between wage increase and end of labour supply is more complex than what Lewis (1979) and Harris and Todaro (1970) initially exposed. For that reason, more investigation in this regard is needed. Finally, it is necessary to move on from the question on labor supply and focus on the variable of the 6 Goelly, Jane. and Xin Meng, 2011, Has China run out of surplus labour? China Economic Review, 22 (4); , Available at: 29_meng_xin_presentation.pdf 7 Knight, John, Quheng Deng and Shi Li, 2011, The PUzzle of Migrant Labour Shortage and Rural Labour Surplus in China, China Economic Review. 22 (4): , Available at: 8 Cai, Fang and Meiyan Wang, 2008, A Counterfactual Analysis on Unlimited Surplus Labor in Rural China, China & World Economy, 16 (1); Available at: 9 Kwan Fung, 2009, Agricultural Labour and the Incidence of Surplus Labour: Experience from China during Reform, Journal of Chinese Economic and Business Studies, 7 (3), Available at: agricultural-labour-incidence-of-surplus-labour.pdf 9

10 government s action. As Michal Meidan, Amrita Sen and Robert Campbell stress in their report China: the new normal, the growth decline of 2014 characterized by a Chinese oil demand of 0,27 mb/d (the slowest pace of expansion in the past two decades), is not a blip but a harbinger of things to come as the government moves to rebalance the economy. The new normal of Chinese growth, as stressed by President Xi Jinping suggests slower economic growth rates and less dependance on exports and investment. The new macroeconomic trajectory will maintain the actual sensibly lower growth rates. 10 China s economic growth has gone from 7.7% in 2013 to an expected 6.3% this year, according to the IMF. The question on wether it is a sign of maturity or a cause of concern is one of the main questions of this research. The purpose is to find out which are the main causes of the Chinese slowdown and to which extent labour supply and government policies play a crucial role. Knowing if the downturn has been a direct result of government deliberate policies is, therefore, essential. According to China s President Xi Jinping, the current slowdown is not a cause of concern but a healthy development and a sing of maturity. Slower growth is the new normal, which according to the IMF it is a safer and more sustainable growth. As noted in September 2015 by America s Council of Foreign Relations, The Chinese government is in the midst of a decade-long effort to shift its economic model from one dominated by heavy industry and investment (growth based on exports) to one in which the consumer and service industries play a much bigger role (growth led by domestic consumption) For some time, market participants have been sanguine -perhaps overly so- about China s ability to manage these challenges while continuing to be a driver of global growth. However, while the attempted shift in emphasis may have been deliberate, the council admitted that some events moved beyond the control of the authorities and their attempts to reassert control have not always been compelling THEORETICAL FRAMEWORK Since the development model of W.A. Lewis and the concept of Lewis Turning Point will be constantly used in this research, it would be interesting to clearly define what it is. The model of Lewis is based in a simple dual economy in which there are two sectors; the agricultural and the industrial sector. Labour in agricultural sector is abundant and it has a zero or extremely low marginal productivity while industrial sector has a positive marginal product. The income gap between the two sectors provides surplus labour in the rural areas with an incentive to migrate to the urban ones. This unlimited supply of labour makes possible the maintenance of low wages in the urban sector, 10 Michael Meidan, Amrita Sen, Robert Campbell, 2015, China: the new normal, The Oxford Institute for Energy Studies, Available at: 11 James Saunders Watson, 2015, China Slowdown: cause for concern or the new normal?, J.P Morgan, Asset Management, available at: 10

11 giving place to capital accumulation and a consequent quicker economic transformation to a modern economy. When the unlimited labour supply gets finished, wages in the urban sector start to increase and the country has reached the Lewis Turning Point. At this point, the traditional sector starts to compete for labour with the modern sector at a rate that is determined by neoclassical demand and supply principles. 2.2 THEORETICAL APPROACH The theoretical approach used to verify the research questions and hypothesis is the orthodox theory of economic development, which is based in neoclassical economic theory. This theory equates economic growth with development and considers that the path to development consists in the transformation of countries from traditional, pre-industrial, agrarian societies to modern and industrial ones. Development is calculated on the basis of gross domestic product per capita. Since this research is based in the analysis of economic data in the framework of economic development, orthodox theory has been the theoretical approach applied. 11

12 3. CASE STUDY: CHINESE DECELERATION The following section will be devoted to test the three hypothesis previously exposed. The first hypothesis analysed will be the exhaustion of labour supply, followed by the impact of the financial crisis and the role of the government. 12

13 3.1 EXHAUSTION OF LABOUR SUPPLY In order to understand the reasons behind the Chinese economic downturn, it is necessary to understand which factors have been behind the unprecedented levels of growth that the country has experienced during 30 years. The first phase of W.A Lewis model of growth, which refers to the growth that developing countries experience thanks to its unlimited supply of labour, perfectly fits the case of China. However, it is necessary to assess whether the deceleration of growth also responds to an exhaustion of the labour supply, as the model proposes. For doing so, it would be useful to look at migration, employment, labour input and wages. In this section, data will be collected mainly from the world Bank databases and China statistical yearbooks. I will also look at the report written by Steve Wiggins and Sharada Keats on Rural wages in Assia and the report on Chinese Internal Migration written by Kam Wing Chan. When looking at labour and capital input, I will constantly make references to the book written by Yiping Huang and Fang Cai on the rise of labour cost and the fall of labour input and I will use some of their graphics. According to Lewis theory, developing countries with unlimited supply of labour experience a longterm dual economic development process during which the agricultural sector has numerous surplus labourers and a marginal productivity of labour that is negligible, zero or even negative. As a consequence, modern sector can absorb numerous labourers from the agricultural sector with unchanged wage rates and labour supply is higher than labour demand. 12 Wages in the modern sector are not determined by the productivity but by the wages of the rural sector, which at the same time, are not determined by marginal labour productivity of the sector but by the subsistence level. Since wages in the modern sector are determined by the subsistence level, labour input is low and revenues are high. The capital obtained is reinvested favouring economic growth based in capital accumulation. When labour demand in the modern sector exceeds labour supply from the agricultural sector, wages start to increase and revenues decline. Transition period from stagnated wage to rapid wage increase is called the Lewis Turning Point (LTP). Before LTP is achieved, marginal labour productivity in the 12 Yiping Huang, Fang Cai, Debating the Lewis Turning Point in China (2014), available at: +of+labor+cost+and+the+fall+of+labor+input+has&source=bl&ots=fqci3lozpi&sig=ucc7oe f7wk0457ckfkbhjrc2rbo&hl=es&sa=x&ved=0ahukewjyncp7klmahwojhokhwtrb1sq6aeinjad#v=onepage&q=the%20rise%20of%20labor %20cost%20and%20the%20fall%20of%20labor%20input%20has&f=false 13

14 agricultural sector is very low and therefore, the decline in labour input is not likely to cause a consequent decline in agricultural output. However, after LTP, the agricultural output declines with the continuous outflows of rural labourers and marginal labour productivity becomes positive. Reaching LTP means changes in various expects related to the agricultural sector such as the decline of agricultural employment, rise of labour cost in the agricultural sector, wage increases for agricultural employment fall of labour input and increase of marginal labour productivity among others. Before analysing those aspects, it is necessary to pay attention to the labour migration that China has been experiencing since the 80s, which is an essential part of Lewis model of economic development. 13 The story of success of the years of double-digit growth in China is intrinsically linked with the story of migrant workers working for subsistence wages to produce for exports. 14 Since the late 1980s, an unprecedented labour migration from rural to urban areas has been the key source of China s economic growth. The total stock of rural migrant labour, was estimated to be about 155 million in 2010 and accounted for 70 to 80 percent of the labour force of some export-oriented cities such as Shenzhen and Dongguan. In the case of cities such as Beijing and Shanghai, rural migrant labour contribution was estimated at about 30 and 31 per cent in 2007, respectively. Measuring China s migration flows, thought, is not an easy task since the underlying concepts used in China to measure migrations are different from those used in other countries. The household registration system of China (hukou) hinders the collection of data reflecting reality. Migration in China is highly regulated and people seeking to change residence permanently or formally have to obtain approval from the local authorities for hukou change. While changes within rural areas or within urban areas are easily granted, moves from rural to urban areas are strictly regulated. Only hukou migration is considered official migration, other types of moves are considered renkou liudong (floating population), implying a temporary move to a destination where the person is not supposed to stay permanently. Until recently, the annual population statistics only reported the hukou population. 15 Some United Nations researchers have called the floating population of China as the invisible residents, who where statistically invisible. Such conditions, may limit the ability to analyse the effects of migrations on the debated Lewis Turning Point. Despite the complexity of the Chinese household system and the difficulties to find reliable data, there s no doubt regarding the fact that China has been host to one of the biggest ruralurban migration flows. The table below, obtained from the report on Internal Migration from the 13 Ibid. 14 Kam Wing Chan, China, Internal Migration, University of Wahsington, p. 1, Available at: 15 Ibid. 14

15 University of Washington, shows how the total millions of rural migrants increased from 9.2 to 38 millions from to Figure 1: Migration flows. Source: China, Internal Migration, University of Wahsington,: However, according to Cai Fang, vice-president of the Chinese Academy of Social Sciences (a thinktank that advises the government), the growth rate of migrant workers between 2005 and 2010 was 4 percent, and in 2014 it was only 1.3 per cent. A reduce of the migrant workers seems likely to occur in the coming years, a fact that could be considered as a sign of the exhaustion of labour supply. Migrations from rural to urban areas are decelerating and at the same time, total labour force is also growing less than what it grew 10 years ago. The following table, constructed with World Bank data, shows how labour force keeps growing but if we look at the numbers, we can see how growth is lower than it used to be. 9 Active population ( persons) Figure 2: Chinese active population, Source: World Bank Open Data. h 15

16 The decrease in active population growth is directly linked with the increase of the dependent population. The so called demographic dividend, which consists in a decline in the dependence ratio combined with the growth of the working age population, was key for the maintenance of the large pool of economic active population. However, as a result of China s one child policy and low mortality, the proportion of elderly citizens will continue to grow in the coming years. Figure 3 shows how China is reaching the point with the highest active population, which will start to decrease from now on. The growth of the working age population and the decline in the dependence ratio (the ratio of the dependent population to the working age population) are over. 120 Age Composition of the Chinese population Above 65 Figure 3: Age Composition of the Chinese population, Source: World Bank From 1990 to 1995, active population grew in 46 million people. Between 1995 and 2000, it grew in 34 million and after a growth of 33 million between 2000 and 2005, active population grew just in 19 million from 2005 to Between 2010 and 2014 it experienced an upturn and it grew in 25 million. Economically active population (labour force) are those persons who are either working (or employed) or seeking or available for work (or unemployed). A decrease of the labour force would fit in the schemes of the Lewis Model since it implies a decrease of the labour supply. A decrease of labour surplus means more people employed and therefore, a decrease of unemployment rates. Figure 4 constructed with data from the World Bank, shows a decline of the unemployment rate from 1996 to The subsequent increase in 2007, has been linked with the global crisis but according to the IMF, it is expected to decrease again. 16

17 UNEMPLOYMENT RATE UNEMPLOYMENT RATE Figure 4: Unemployment Rate. Source: World Bank, Labour turning point is defined by the time when labour surplus runs out. Labour supply is, therefore, the key to be discussed for identifying the LTP. In the case of China, though, when trying to analyse it we find the so called China paradox ; while 3 waves of labour shortage took place in 2002, 2004 and 2009, estimates suggest that there s still a considerable volume of relatively unskilled labour in the agricultural sector. 16 According to Zianzhou Zhao, labour supply is not decreasing but has continued to rise in recent years. Shortage of migrant labour is a consequence of mobility costs of labour such as job search costs and the cost of losing jobs. In order to have a clear idea of whether there is labour shortage in China or not, it is necessary to look at the working-age population in rural China, the needs of labour force in the agricultural sector and the demand of labour coming from the urban sector. If the difference between the working-age population in the agricultural sector and the need of labour force in such sector is lower than the demand of labour of the modern sector, China will be suffering labour shortage. 17 However, collecting labour data is not easy since many different methods are used in order to conduct the previous calculations. For that reason, different studies have 16 Andong Zhu and Wanhuan Cai, The Lewis Turning Point in China and its Impacts on the World Economy, Augur Working Paper, February 2012, Available at: pacts_lh3.pdf 17 Xianzhou Zhao, Some theoretical issues on Lewis Turning point, Economist, (2020), No. 5, 75-80, Available at: 17

18 arrived to different results depending on the method and data used. For instance, the researcher Jiadong Tong 18 estimated that the volume of agricultural surplus labour (ASL) in 2007 was 100 million, whereas Fang Cai estimated 58 million for the same year. 19 Since the calculation of the labour supply is dubious and gives huge disparities among the results, focus will be paid in employment. According to the model, when approaching the Lewis turning point, labour demand will increase and unemployment rate will fall after the LTP. Also, the proportion of rural labour to the total labour force tends to decrease first at an accelerated rate and then, after the LTP, at a reduced rate. According to Jin Wang and Xiaohan Zhong 20, LTP emerges when GDP per capita reaches somewhere between 3,000 and 4,000 dollars. Chinese GDP per capita suprased 4,000 dollars in 2010 at reached 7,590 dollars in However, the proportion of rural labour remains much higher than the one of other countries that have reached that GDP. This fact implies that there s still potential for rural labour transfer in China. In the following two tables, based in data obtained from the China Statistical Yearbook, we can see how since 1995, when rural employment almost tripled urban employment, urban employment has increased until almost the same level than rural employment. The proportion of rural employment has been reduced but it was Evolution3of3employment3composition Urban3area Rural3area Figure 5: Evolution of employment composition. Source: Statistical Yearbook 18 Tong Jiadong & Zhou Yan, Dual economy, Lewisian turning point and the foreign trade development strategy of China. Economic Theory and Management. (2011) No. 1, pp Available at: The_Lewis_Turning_Point_in_China_and_its_Impacts_LH3.pdf 19 Ibid. 20 Wang Jin, Zhong Xiaohan, Has The Lewis Turning Point arrived in China? (August 2012), available at: The_Lewis_Turning_Point_in_China_and_its_Impacts_LH3.pdf 18

19 still a bit higher than the urban employment on Furthermore, since total employment has increased, rural employment is still high in absolute terms. After looking at employment, it is necessary to analyse wages. As pointed out before, both rural and urban wages experience a marked increase when the LTP is reached. In China, rural wages have increased by 92% between 2003 and According to Fang, between 2003 and 2008, the annual growth rate of monthly wages in real terms was 10,5 percent in manufacturing, 9,8 percent in construction and 10,2 percent for migrant workers. The daily wages of paid agricultural workers rose 15,1 in grains, 21,4 in larger pig farms and 11,7 in cotton. In fact, there s an official policy requiring the raise of minimum wages. The 12 th Five-year Plan targets an annual increase in the minimum wage level of no less than 13 percent. 21 Wage for hired workers has been increasing since the beginning of the new century and there has been a significant jump in Daily wage of workers (yuan/day) Figure 6: Daily wage of workers (yuan/day). Source: Compilation of National Farm Cost-Benefit Figure 6 shows how daily wage for family workers in agriculture also reflects the agricultural labour cost increasing. The trend of family workers is similar to that of hired workers; until 2004 it experiences a slow rise and after 2004, it increases very rapidly. In 2004, family workers received Steve Wiggins and Sharada Keats, Rural wages in Asia, October 2014, Available at: 22 Yiping Huang, Fang Cai, Debating the Lewis Turning Point in China,. 51, Available at: abor+cost+and+the+fall+of+labor+input+has&source=bl&ots=fqci3lozpi&sig=ucc7oef7w K0457cKFkBhJRC2rbo&hl=es&sa=X&ved=0ahUKEwjyNCp7KLMAhWOJhoKHWTRB1sQ6AEINjAD#v=onepage&q=the%20rise%20of%20labor%2 0cost%20and%20the%20fall%20of%20labor%20input%20has&f=false 19

20 yuan per day and in 2008 they received 17.6 yuan, which means an increase of 35%. After LTP, unskilled labour becomes finite and wages of unskilled workers suffer a significant and rapid increase. The previous tables shows an increase of hired and family worker s wages, which suggests that China is getting close to the Lewis Turning Point. As a consequence of the rise of agricultural wages (rise of labour cost in the agricultural sector), labour input would fall and capital input would increase since both factors are normally substituted. For analysing if China has experienced a fall of labour input in the agricultural sector, it is convenient to look at the three major grain corps in the country; rice, corn and wheat. The following table, obtained from Huang and Cai book and based in the data from China Rural Statistical Yearbook, reflects that the total labour input of those three grain crops has been falling rapidly since Figure 7: Labour input per unit (day). Source: Fang Cai, Debating the Lewis Turnint Point in China. 23 Yiping Huang, Fang Cai, Debating the Lewis Turning Point in China, 51, Available at: abor+cost+and+the+fall+of+labor+input+has&source=bl&ots=fqci3lozpi&sig=ucc7oef7w K0457cKFkBhJRC2rbo&hl=es&sa=X&ved=0ahUKEwjyNCp7KLMAhWOJhoKHWTRB1sQ6AEINjAD#v=onepage&q=the%20rise%20of%20labor%2 0cost%20and%20the%20fall%20of%20labor%20input%20has&f=false 20

21 Figure 8: Total capital input (billion yuan). Source: Fang Cai, Debating the Lewis Turnint Point in China. On the other hand, as the following table shows, capital input per unit of each of those grain corps increased from1990 on and in the case of wheat, it has been fluctuating since 2000 to Since capital input grew and labour input decreased, the capital-labour ratio in the agricultural sector increased for rice, corn and wheat, which together meant the 77% of the sown area of grain crops and the 53% of all farm crops. The wheat has the highest capital-labour ratio and this is due to the fact that the mechanization of wheat production is much easier compared to that of rice and corn production. In terms of farm machinery, it is worth mentioning that it also increased. According to the China Statistical yearbook, the number of large and medium-sized tractor-towing farm machinery, for instance, went from 0.97 million to 4,35 (8,67% of annual growth). The number of small tractor-towing farm machinery increased from 6,49 million to 27,95 million (annual growth of 8,45%). Figure 9: Capital-labour ratio (yuan/day). Source: Fang Cai, Debating the Lewis Turnint Point in China. 21

22 In conclusion, regarding labour input, capital input and the labour-capital ratio, China s evolution coincides with the evolution that Lewis proposes for those countries reaching or approximating the LTP. Finally, it is necessary to look at the marginal labour productivity of the rural sector since it is one of the main indicators showing whether an economy as reached or not the LTP. As it has been said before, labour marginal productivity in rural areas is negligible or even zero. This means that the change in output that results from employing an added unit of labour is really low or zero. When the marginal productivity of the rural sector increases, the country has reached or is near the LTP. In their work, Huang and Cai calculate the marginal labour productivity of rice, which is the grain crop that has experienced the most significant changes in terms of labour and capital input. After applying the Cobb- Douglas production function, based in that output is determined by capital input, labour input and technological progress, Cai and Huang saw a big increase of marginal labour productivity in agriculture Yiping Huang, Fang Cai, Debating the Lewis Turning Point in China, p. 51, Available at: abor+cost+and+the+fall+of+labor+input+has&source=bl&ots=fqci3lozpi&sig=ucc7oef7w K0457cKFkBhJRC2rbo&hl=es&sa=X&ved=0ahUKEwjyNCp7KLMAhWOJhoKHWTRB1sQ6AEINjAD#v=onepage&q=the%20rise%20of%20labor%2 0cost%20and%20the%20fall%20of%20labor%20input%20has&f=false 22

23 3.2 EFFECTS OF THE FINANCIAL GLOBAL CRISIS The Global Financial Crisis and the recent slowdown of China s growth have given rise to questions on the sustainability of China s growth. The argument is that China is too dependent on external demand that is too exposed to global economic shocks. From that point of view, global financial crisis badly affected the Chinese economy by reducing the demand of manufactured Chinese goods and the FDI. In the following section, trade and FDI trends between China and the EU will be examined in order to identify possible connections between them and growth rates evolution. Exports and FDI have been the engine of Chinese economic growth during the last three decades. In order to analyse the extent to which China has been suffering the spill-overs of Western financial crisis, it would be necessary to look at possible declines in the amount of imports of the US and the EU from China. The following graph, constructed with data obtained from a European Commission report, shows the evolution of China s trade flows with the EU. As it can be appreciated, China s exports suffered a considerable decline on 2008 and two softer declines in 2012 and China's trade flows with the EU(euros) exports imports Figure 10: China s trade flows with the EU (euros). Source: European Comission. After 13,6 per cent drop in 2009, exports experienced the highest increase the following year (31,9 per cent). They fell by 1 per cent in 2012 and by 4,1 per cent in 2013 but they grew again in 2014 and 23

24 reached the highest point in 2015, with an amount of 350,424 million euros. On the other hand, Chinese imports have been increasing every year since 2005, being the year of the highest increase. In 2009, 2012 and 2013, the years when exports decreased, imports grew at lower rates. PERIOD EXPORTS GROWTH IMPORTS GROWTH ,008 51, , , , , , , , , , , , , , , , , , , , , Figure 11: Chinese trade flows with the EU from 2005 to Source: World Bank. After analysing China s exports to the EU, it is important to look at the evolution of China s exports to the US, the other country most hard-hit by the financial crisis. In this case, data has been obtained from the United States Census Bureau and growth rates have been calculated based on the same China's trade flows with the US (US dollars) Serie1 Serie2 Figure 12: china s trade flows with the US (US dollars). Source: United States Census Bureau, 24

25 As can be noted, exports experienced a 12% decline from 2008 to However, the following year they increased and surpassed pre-crisis levels. Since 2011, growth rates have decreased but exports have reached 481,800 million dollars. PERIOD EXPORTS GROWTH IMPORTS GROWTH , , , , , , , , , , , , , , , , , , , , , ,186-6 Figure 13: Chinese exports and imports with the US. Source: United States Census Bureau. In the initial stages, financial channels were the most important channels through which crisis spread. In terms of FDI, official statistics from China s Ministry of Commerce (MOFCOM) show how FDI from the US in China decreased from 2010 to 2011 but increased again from 2011 to 2012 and kept growing since then. 25 PERIOD US FDI IN CHINA (BILLIONS OF US$) Figure 14: US FDI in China. Source: China s Minestry of Commerce

26 The graph and the table below, created with data from the World Bank, reveals how overall FDI in China decreased in 2009 from 171,534 to 131,057 billion US$. In 2010, tough, it increased again and surpassed 2010 levels reaching an amount 280,072 billion US$ in After decreasing again in 2012, it registered an increase in 2013 and reached 290,928 billion dollars. China was ranked as the second largest destination country for FDI in Total FDI in China (billions of US dollars) PERIOD FDI IN CHINA (US$) , , , , , , , , ,097 Figure 15: Total FDI in China (billions of US dollars). Source: World Bank. Regarding EU investment flows in China, official statistics from China s Ministry of Commerce show stable inflows despite mounting concerns over growth and financial market stability. According to MOFCOM, utilized FDI into China added up to 68$ billion in the first half of 2015, up 8% from the 26

27 first half of 2014 and an amount that meant the highest inflow ever recorded in the first six months of a year. 25 The stable FDI level shows that the country is still an attractive destination for foreign investments. Although the Chinese economy is slowing down, it is still a significant market in absolute terms and new opportunities are arising from increased consumer consumption, industrial restructuring and urbanization. Service sector attracted 66.2 billion US$ in 2014, up 7.8 per cent year-on-year. As a result, since 2012, services take up a greater share of FDI than the manufacturing sector and since 2013, they mean more than half of the whole FDI. In 2014, the service sector in China continued to grow as a share of China s overall GDP and FDI patterns exhibited a similar shift. 26 Once FDI and trade movements have been assessed, GDP growth trends need to be examined in order to judge whether direct linkage between global financial crisis and Chinese economic growth can be established. Figure 16 displays the evolution of GDP since As it can be perceived, growth had been above the line of 10 per cent since 2003 and reached the highest point in 2007, with a 14.2% of GDP growth. PERIOD GDP GROWTH China's2 GDP2growth Figure 16: China s GDP growth. Source: World Bank From 2008 to 2009, coinciding with the year of the decline in overall FDI and the fall in exports to the US, China experienced a decline in GDP growth from 9.6 to 9.8. From 2010 on, GDP growth has been 25 RHodium Group, EU-China FDI Monitor, 2q 2015 Update: Public Version, Available at: 26 KPMG, China Outlook 2015, Available at: pdf 27

28 decreasing until attaining 6.9 per cent in The theory that global financial crisis triggered the Chinese downturn contends that the decline of exports and FDI in China are the reasons of the Chinese deceleration. Nevertheless, statistics have effectively proved that there is no such correlation. While exports and FDI have rebounded over the last 4 years to pre-crisis levels, growth has been declining until reaching its lowest rate in 25 years. According to the data examined, the theory of an exportinduced slowdown stemming from the global financial crisis, would seem false. However, as the Professor Lin Yue stressed in an interview exclusively conducted for this research, hypothetic effects of the financial crisis on the Chinese economy won t be felt immediately after the crisis. Since those effects could be yet to come, this hypothesis cannot be categorically neglected THE WAY TOWARDS THE NEW NORMAL The third possible explanation holds the idea that Chinese downturn is a consequence of the government new policies addressed to achieve a structural change. Those policies seek to reduce Chinese dependence on exports and FDI by boosting domestic demand. This new model has been named the New Normal by the Chinese political leaders and is focused on transforming the economy into a more sustainable model similar to that of Japan or the United States; large economies whose growth is primarily driven by domestic demand but which are at the same time among the largest traders in the world. 28 In 1990, China was closer to the structure of such economies in that exports accounted for 12.9 percent of GDP and around seven percent in the US and Japan. However, the success of the open door policy increased exports until they accounted for 56 percent of Chinese GDP in In that year, then-premier Wen Jiabao highlighted the need to rebalance the economy from an investment-led and export-driven economy towards a consumption-oriented economy. According to him, the biggest problem in China s economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable these are all pressing issues that need to be addressed as soon as possible or they will threaten China s economic growth The government must boost domestic demand, open markets and promote technological innovation Lin Yue, Professor of the Universidad Autónoma de Madrid, Semistructured Interview conducted in May Linda Yueh, China s strategy towards the Financial Crisis and Economic Reform, Available at: 29 Sharmin Mossavar-Rahmani, Jiming Ha, Maziar Minovi, Matheus Dibo, Walled In: China s Great Dilemma, Goldman Sachs, Investment Management Division, January Available at: 28