CHINA: THE NEXT TWENTY YEARS OF REFORM AND DEVELOPMENT

CHINA: THE NEXT TWENTY YEARS OF REFORM AND DEVELOPMENT

Other titles in the China Update Book Series include: 1999 China: Twenty Years of Economic Reform 2002 China: WTO Entry and World Recession 2003 China: New Engine of World Growth 2004 China: Is Rapid Growth Sustainable? 2005 The China Boom and its Discontents 2006 China: The Turning Point in China s Economic Development 2007 China: Linking Markets for Growth 2008 China s Dilemma: Economic Growth, the Environment and Climate Change 2009 China s New Place in a World of Crisis

CHINA: THE NEXT TWENTY YEARS OF REFORM AND DEVELOPMENT Ross Garnaut, Jane Golley and Ligang Song (eds) THE AUSTRALIAN NATIONAL UNIVERSITY E P R E S S SOCIAL SCIENCES ACADEMIC PRESS(CHINA)

E P R E S S Published by ANU E Press The Australian National University Canberra ACT 0200, Australia Email: anuepress@anu.edu.au This title is also available online at: http://epress.anu.edu.au/china_20_citation.html C h i n a B o o k International Co-published with Social Sciences Academic Press (China) under the China Book International scheme. This scheme supports co-publication of works with international publishers. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the publisher. Cover design by Teresa Prowse, Made by Fruitcup Cover photograph: Nikada. istockphoto, File Number: 10959874 Printed by Griffin Press This edition 2010 ANU E Press

Contents Abbreviations..................................... xiii Contributors..................................... xvii Acknowledgments................................. xxi 1. Chinese economic reform and development: achievements,.... emerging challenges and unfinished tasks................ 1 Jane Golley and Ligang Song Part I Long Term Development: Trends and Issues 2. The turning period in China s economic development: a conceptual framework and new empirical evidence......... 19 Ross Garnaut 3. China model and its future.......................... 39 Yang Yao 4. How will China s central local governmental relationships evolve? An analytical framework and its implications............................... 53 Yongsheng Zhang 5. China s metal intensity in comparative perspective......... 73 Huw McKay, Yu Sheng and Ligang Song 6. Assessing China s energy conservation and carbon intensity: how will the future differ from the past?.... 99 ZhongXiang Zhang 7. Prospects for diminishing regional disparities............ 127 Jane Golley Part II: Global Integration: Challenges and Opportunities 8. Exchange rate policy and macroeconomic adjustment...... 153 Geng Xiao 9. The real exchange rate and the renminbi............... 163 Rod Tyers and Ying Zhang v

China: The Next Twenty Years of Reform and Development 10. China and East Asian trade: the decoupling fallacy, crisis and policy challenges....................... 193 Prema-chandra Athukorala and Archanun Kohpaiboon 11. Asian foreign direct investment and the China effect..... 221 Chunlai Chen 12. The global financial crisis and rural urban migration...... 241 Sherry Tao Kong, Xin Meng and Dandan Zhang Part III: Policy and Reform: Unfinished Business 13. Avoiding economic crashes on China s road to prosperity... 269 Wing Thye Woo 14. Rebalancing China s economic structure.............. 293 Yiping Huang and Bijun Wang 15. Urbanisation with Chinese characteristics.............. 319 Cai Fang and Meiyan Wang 16. Indigenous innovation for sustainable growth........... 341 Yanrui Wu 17. China s health system and the next 20 years of reform.... 363 Ryan Manuel Index.......................................... 393 vi

Tables 4.1 Different structures of intergovernmental relationships.............. 57 4.2 Share of central and local governments in government revenue and expenditure (per cent)................................. 62 5.1 Major results from simultaneous equation estimation, 1890 2008..... 88 5.2 China s economy and steel demand per capita, 1980 2008.......... 90 5.3 UN projection of China s future development path................. 92 6.1 Consumption tax rates for cars in China (per cent)................ 104 6.2 Vehicle emission standards and the time to enter into force in China, ASEAN and the European Union....................... 106 6.3 Preliminary and final values for total primary energy consumption and coal consumption in China, 1990 2008.................... 114 6.4 Reduction in China s energy intensity: preliminary value versus final value (per cent)........................................ 115 6.5 Differentiated tariffs for eight energy-guzzling industries in China (RMB/kW.h).......................................... 117 7.1 Regional snapshot, 2007................................. 130 7.2 Per capita GDP levels and growth rates........................ 131 7.3 Industry-wide NRCs and growth rates of industrial output, 2000 07... 135 7.4 Regional NRCs and location components by sector, 2000 07........ 137 7.5 Regional shares of industrial output, 2007 (per cent).............. 139 7.6 Shift-share analysis of provincial industrial growth................ 140 9.1 Contributions to China s real exchange rate change 1997 2006 (per cent)................................... 166 9.2 The balance sheet of the People s Bank of China, ca. 2009.......... 177 9.3 Estimates of the foreign share of total assets, selected countries...... 180 9.4 Country rankings on foreign shares of total assets................ 180 10.1 Composition of manufacturing exports, 2006 07 (per cent)......... 196 10.2 Share of parts and components in manufacturing trade, 1992 03 and 2006 07 (per cent)........................... 198 vii

China: The Next Twenty Years of Reform and Development 10.3 Share of parts and components in bilateral trade flows, 2006 07 (per cent)..................................... 199 10.4 China s trade with the rest of East Asia (per cent)................ 200 10.5 East Asia China manufacturing trade......................... 202 10.6 Intra-regional shares of manufacturing trade: total parts and components and final trade, 1992 93 and 2006 07 (per cent)......... 203 10.7 East Asia: growth of total merchandise exports and imports, 2007Q1 2009Q3 (year-on-year percentage change).............. 207 10.8 China: growth of total merchandise exports & imports by trading partner countries, 2007Q1 2009Q year-on-year percentage change, current US$).................................................. 209 10.9 China: growth of merchandise exports and imports by commodity category, 2008Q1 2009Q3 year-on-year percentage change, current US$.......................................... 211 11.1 Regression results of the effects of FDI flows into China on FDI inflows into East, South and South-East Asian developing economies, 1992 2008, fixed-effects................................. 230 11.2 China s imports of raw materials from Asian economies (US$ million)....... 231 11.3 Two-way trade between China and Asian economies in electric and electronic equipment industries (HS 85).................... 233 11.A1 Appendix. Variable list of the impact of FDI inflows into China on FDI inflows into other Asian developing host economies......... 239 12.1 Summary statistics for migrant and rural samples................ 246 12.2 Employment and earnings of migrants in cities (migrant sample)...... 248 12.3 Results from the hours and hourly earnings equations for migrants in cities (migrant sample)................................. 252 12.4 Return migration, employment and earnings for rural labour force (rural sample)......................................... 255 12.5 Migration and off-farm status for a panel of individuals (rural sample)......................................... 257 12.6 Results from hours and hourly earnings equations for rural off-farm work (rural sample)..................................... 260 12.7 Per capita income comparisons across different type of households.... 262 12.A1 Appendix. Migrant survey timing distribution by survey year viii

Tables (migrant sample) (per cent)................................ 264 12.A2 Appendix. Occupational distribution of self-employed migrants by year (migrant sample)....................................... 264 14.1 Estimated cost distortions in China, 2000 08 (per cent of GDP)...... 307 15.1 Numbers and growth rates of migrant workers and the urban employed........................................ 324 15.2 Adjustments of urban minimum wages (numbers, per cent)......... 332 15.3 Duration of migrating work and mobility of migrant workers (numbers, per cent)..................................... 335 16.1 China s regional research and development statistics 2008.......... 344 16.2 Econometric estimation results............................. 349 16.3 World s top five research and development spenders 2007.......... 352 16.4 High-technology sector exports in selected economies 2007......... 355 16.5 High-technology sector research and development intensity in selected economies, 2006 (per cent)......................... 357 ix

Figures 5.1 Competing theories of metal intensity.......................... 76 5.2 Crude steel output per capita of selected economies, 1890 2008....... 84 5.3 Crude steel output and GDP, scaled by population, 1890 2008........ 86 5.4 Urbanisation ratios of selected economies, 1890-2005............. 86 5.5 Projection of steel demand per capita, extrapolating current trends...... 91 5.6 China s consumption of crude steel, 1978 2008 (million tonnes)....... 93 6.1 Energy use per unit of GDP in China, 1990 2007 (tonnes of coal equivalent per US$1000 in 1980 prices)............ 102 6.2 Comparison of fuel economy standards for vehicles................ 105 6.3 Cumulative installed wind power capacity by country, 1980 2009..... 109 7.1 Map of China.......................................... 129 7.2 Regional shares of GVIO (per cent)........................... 133 9.1 Chinese sectoral price indices, 1990 2009..................... 166 9.2 The Mainland China US real exchange rate on GDP prices........... 167 9.3 The Mainland China US real exchange rate on producer prices........ 167 9.4 China s investment saving and external balances (percentage of GDP)..................................... 170 9.5 Real wage growth in agriculture............................. 172 9.6 Dynamics of the PBOC s balance sheet: assets and liabilities as a percentage of GDP..................................... 178 10.1 Growth of merchandise trade: East Asia, developing East Asia, China and ASEAN, January 2008 November 2009 (year-on-year, per cent)...... 206 11.1 FDI inflows into China (at current prices)....................... 223 12.1 Age distribution of the sample from the migrant and rural surveys...... 247 12.2 Wage/salary workers log weekly hours worked by industry.......... 250 12.3a Wage/salary earners log hourly earnings by industry (total sample).... 251 12.3b Wage/salary earners log hourly earnings by industry (panel sample)......................................... 251 14.1 Comparison of the investment rate and consumption rate between China and the Chenery Standard, 1990 2008............ 296 xi

China: The Next Twenty Years of Reform and Development 14.2 China s current account balances, 1986 2009 (per cent of GDP)....................................... 297 14.3 China s saving and investment rate, 1978 2009 (per cent of GDP)....................................... 298 14.4 Gini coefficient among households and the urban rural income gap.... 298 14.5 Proportion of residential, firms and government income in primary distribution and the urban rural income gap.................... 299 14.6 China s annual increased loan, 2004 10...................... 301 14.7 Estimated cost distortion and structural imbalances............... 309 15.1 Changes in the ratio of physical to labour inputs in Chinese agriculture.. 323 15.2 Quantitative relationship between agricultural and non-agricultural employment.......................................... 325 15.3 Usual urban population versus non-agricultural hukou population...... 329 16.1 China s research and development intensity and personnel, 1990 2009.......................................... 343 16.2 Numbers of patents applied for and accepted, 1995 2009.......... 344 16.3 China s research and development intensity and performance, 2008... 346 16.4 China s research and development expenditure shares and sources of funds, 2008........................................ 346 16.5 Research and development intensity and per capita GDP of major economies, 2007....................................... 353 16.6 Research and development spending shares (basic and applied research) in selected economies................................... 354 16.7 High-technology sector value added (in 1995 constant prices)....... 355 17.1 Levels of healthcare provision in pre-1978 rural China............. 365 17.2 Public spending in the post-collectivisation period, 1990 2003....... 368 17.3 People declining hospitalisation in the post-collectivisation period, 1990 2003.......................................... 369 17.4 Sources of healthcare spending in the post-collectivisation period, 1990 2003.......................................... 370 17.5 Changes in tax revenues versus expenditures, 1993 2004 (per cent).. 371 17.6 Urban and rural health profession skills and ratios................ 372 xii

Abbreviations ACFTA ADB ASEAN BMCDR BMI BPCB BSH CAFE CAM CCP CDR CHIBOR CIC CIS CMS CNY COMTRADE CPI DPD EC EI EIA EU EW FAO FDA FDI FTA G20 G4 GATT GDP ASEAN China Free Trade Area Asian Development Bank Association of South-East Asian Nations Beijing Municipal Commission of Development and Reform Basic Medical Insurance bare-printed circuit boards Balassa Samuelson hypothesis corporate average fuel economy centrally administered municipality Chinese Communist Party country credit rating China inter-bank offered rate China Investment Company Commonwealth of Independent States Cooperative Medical Scheme yuan Commodity Trade Statistics Database consumer price index Development and Planning Division European Commission engineering index Energy Information Administration European Union efficiency wage Food and Agriculture Organization Food and Drug Administration foreign direct investment free-trade agreement Group of 20 nations Group of Four nations General Agreement on Tariffs and Trade gross domestic product xiii

China: The Next Twenty Years of Reform and Development GFC GR GtCO2 GW ICT IEA ILO IMF IPCC IPR ISSS ISTP IU KCS kw.h LMEs MFN MNE MOF MoHRSS MST mtce MW NAFTA NBER NBS NCMS NDRC NEA NHS NIEs NPL NRC OECD OLS PBOC PCBA global financial crisis growth rate gigatonnes of carbon dioxide gigawatts information and communication technology International Energy Agency International Labour Organization International Monetary Fund Intergovernmental Panel on Climate Change intellectual property rights Institute of Social Science Survey index to scientific and technical proceedings intensity of use Kuznets curve for steel kilowatt hour large and medium enterprises most-favoured nation multinational enterprise Ministry of Finance Ministry of Human Resources and Social Security Ministry of Science and Technology million tonnes of coal equivalent megawatts North American Free Trade Agreement National Bureau of Economic Research National Bureau of Statistics New Cooperative Medical Scheme National Development and Reform Commission National Energy Administration National Health Service (Britain) newly industrialised economies non-performing loan net relative change Organisation for Economic Cooperation and Development ordinary least squares People s Bank of China printed circuit-board assembly xiv

Abbreviations PPP PRC RMB ROO RUMiCI SAEP SASAC SC SCB SCE SCI SEZ SHI SIC SITC SOE SUR SUV tce TFP THC TSS TVE TW.h UN UNCTAD UNDP USC VAT WFDIOUT WRDP WTO purchasing power parity People s Republic of China renminbi rules-of-origin Rural-Urban Migration in China and Indonesia Project State Agency for Environmental Protection State-Owned Assets Supervision and Administration Commission supercritical power plant state-controlled bank state-controlled enterprise science citation index special economic zone social health insurance Standard Industry Classification Standard International Trade Classification state-owned enterprise seemingly unrelated regression technique sports utility vehicle tonnes of coal equivalent total factor productivity township health centre Tax Sharing System township and village enterprise terawatt hours United Nations United Nations Conference on Trade and Development United Nations Development Programme ultra-supercritical power plant value-added tax world total foreign direct investment outflows Western Regional Development Program World Trade Organisation xv

Contributors Prema-chandra Athukorala Arndt-Corden Division of Economics, Research School of Pacific and Asian Studies, The Australian National University, Canberra. Chunlai Chen Crawford School of Economics and Government, The Australian National University, Canberra. Cai Fang Division of Labour and Human Capital, Institute of Population and Labour Economics, Chinese Academy of Social Sciences, Beijing. Ross Garnaut University of Melbourne, Melbourne and The Australian National University, Canberra. Jane Golley China Economy Program, Crawford School of Economics and Government, The Australian National University, Canberra. Yiping Huang China Centre for Economic Research, Peking University, Beijing and China Economy Program, Crawford School of Economics and Government, The Australian National University, Canberra. Archanun Kohpaiboon Thammasat University, Bangkok. Sherry Kong Research School of Economics, College of Business and Economics, The Australian National University, Canberra. xvii

China: The Next Twenty Years of Reform and Development Ryan Manuel University of Oxford, Oxford. Huw McKay Westpac Bank, Sydney. Xin Meng Research School of Economics, College of Business and Economics, The Australian National University, Canberra. Yu Sheng Australian Bureau of Agriculture and Resource Economics (ABARE), Canberra. Ligang Song China Economy Program, Crawford School of Economics and Government, The Australian National University, Canberra. Rod Tyers Business School, University of Western Australia, Perth. Bijun Wang China Centre for Economic Research, Peking University, Beijing. Meiyan Wang Division of Labour and Human Capital, Institute of Population and Labour Economics, Chinese Academy of Social Sciences, Beijing. Yanrui Wu Business School, University of Western Australia, Perth. Wing Thye Woo Brookings Institution, Washington DC; University of California (Davis); Central University of Finance and Economics, Beijing. Geng Xiao Brookings-Tsinghua Centre for Public Policy, Tsinghua University, Beijing and Brookings Institution, Washington DC. xviii

Contributors Yang Yao China Centre for Economic Research, Peking University, Beijing. Dandan Zhang Research School of Economics, College of Business and Economics, The Australian National University, Canberra. Ying Zhang Business School, University of Western Australia, Perth. Yongsheng Zhang Development Research Centre of the State Council, Beijing. ZhongXiang Zhang East-West Center, Honolulu. xix

Acknowledgments The China Economy Program gratefully acknowledges the financial support for the China Update 2010 from The Australian Agency for International Development (AusAID) and the assistance provided by Rio Tinto through the Rio Tinto - ANU China Partnership. xxi