Louis Kuijs's blog

How China’s current account surplus will evolve in the coming years is one of the key questions on the economic outlook, both for China itself and for the global economy. China’s increasingly competitive manufacturing sector will continue to power ahead, to expand exports and to gain global market share. At the same time, China’s domestic economy should continue to grow rapidly, thereby drawing imports. However, how this will on balance play out with regard to the current account surplus is less certain. It will largely depend on how much progress is made with rebalancing the economy.

China’s export volumes have continued to rise very rapidly in recent years.An increasing array of manufacturing sectors is becoming more competitive internationally, including many types of machinery and equipment. Competitiveness is boosted by technological catch up, movement up the value chain, and economies of scale as well as by traditional strengths such as infrastructure and the business climate. Reflecting these factors, labor productivity growth in manufacturing has remained solid, thus helping containing unit labor costs despite respectable wage growth.

Some have argued that China is losing its competitive edge because its export prices are rising. However, that is an incorrect inference. Higher raw commodity prices mean export prices are rising all over the world—not just in China. Prices of US imports from China are now rising at the same pace as those of US imports of manufactured goods from developed countries. But those of US imports of manufactured goods from other emerging markets and developing countries are rising faster. On this price metric, the most we can say is that China’s competitiveness is improving at a slower pace than before.

(Originally posted in English)

这是我在为撰写新一期《中国经济季报》重新审视中国近期经济发展、前景展望和政策寓意之后写的第一篇博文。在这篇概要之后，过几天我还会写一篇博文探讨关于相对价格的某些有趣的中期趋势以及外贸对中国经济的相对重要性（本期《季报》也讨论了这些问题）。

“正常化”这个词在最近讨论经济增长结构和宏观经济政策立场时大量出现，在中国也一样。但这是难以避免的。在2010年期间，中国的增长结果开始趋向“正常化”，这出现在2009年的投机风潮过后，大规模的政府主导的内需大幅增加抵消了出口的巨大收缩。2010年下半年，宏观经济政策立场也开始回归“正常化”。我猜我们许多人都用“正常化”这个词来形容或者建议采取一种与“正常化”的经济前景相一致的宏观政策立场，而不是采取一种特别紧缩的立场。

(Available in Chinese)

This is the first blog post I write after revisiting China’s recent economic developments, the outlook, and policy implications as part of writing our latest China Quarterly Update. After this general overview I will in a few days write one on some interesting medium term trends on relative prices and the relative importance of external trade in China’s economy (they are also discussed in the Quarterly).

The term “normalization” has been used a lot lately in relation to the composition of growth and macroeconomic policy stance, also in China. But it is hard to avoid it. During 2010, China’s composition of growth started to “normalize”—as in look like it typically does—after the spectacular developments in 2009, when a massive government-led domestic demand surge offset a huge contraction in exports. Later in 2010, the macroeconomic policy stance also started to “normalize”. I guess many of us use the word “normalization” to describe or prescribe a macro policy stance that would be in line with the “normalized” economic outlook, as opposed to a particularly tight stance.

(Originally posted in English)

食品价格近来备受关注。关注的焦点是近期动态及短期走向，这一点可以理解，但在本文中，我尽力回顾一些长期趋势，以便作出进一步分析预测。

本世纪初以来，食品相关价格趋涨（见图1）。2000年以来，农业附加值平减指数继上世纪九十年代中后期下滑之后年均上涨了8%。从生产价格指数看，食品价格（出厂价）涨幅要小得多，原因是食品加工业其它投入的价格涨幅较小，同时食品加工生产率迅速提高抑制了食品原材料价格上涨的传递。 

(Available in Chinese)

Food prices have received a lot of attention recently. Understandably, much of the attention is on recent developments and short term prospects. But in this blog post I try to look back at some longer term trends, in order to look further ahead.

Since the early 2000s, food related prices have trended up (Figure 1). The deflator of agricultural value added has risen 8% per year on average since 2000, after falling during the second half of the 1990s. Producer Price Index (PPI) food prices (factory gate) have risen much less because prices of other inputs into the food processing industry have gone up less and rapid productivity growth in food processing has dampened the transmission of higher raw food prices.

The recent rise in China’s inflation has grabbed attention of the public and policymakers alike. Consumer price inflation rose to 5.1% in November. This is higher than we are used to in China, although it is modest in an emerging market perspective. To determine the best policy response to the rise in inflation it is important to know its cause and how much inflation we should expect in the coming 12 months. It is also good to decide what an acceptable rate of inflation is for a country like China.

As we were wrapping up the work on our new China Quarterly Update (of which I am the main author), looking at our main conclusions and messages on economic developments in China, prospects, and the key policy challenges and tasks, I noticed that, despite lots of new data and all the headlines about changes, likely changes and risks, our overall conclusions and views have not changed all that much since June, when we released the last one. Noticing this was sobering but also somehow comforting.

For a while, after the global crisis broke out, we were all preoccupied with short term prospects and developments. More recently, it has become clear that China’s economy is actually growing quite well, helped initially by a massive policy stimulus but with growth having become more broad based recently. At the same time, the global outlook is more subdued now than before the crisis. In all, this is a good time to extend the perspective and revisit medium and longer term economic prospects.

I recently wrote a working paper that discusses a medium term scenario building exercise. The objective was to get a sense of how the pace and composition of growth may develop, both from the production (supply) side and the expenditure (demand) side; whether the outlook has changed because of recent events and what the key implications of the outlook are; and how China’s living standards and the size of the economy may compare internationally in 2020.

I would of course prefer it if everybody diligently read the whole paper (526kb pdf). But, if you have better things to do in the summer during the World Cup Football, here are the key take aways.

The World Bank released its latest Quarterly Update on China’s economy on Friday (for disclosure's sake: I’m the lead author). At the press launch, there were a lot of questions about the recent wage hikes in several foreign-owned manufacturing companies and the possible concerns these have triggered among many about possible loss of competitiveness and/or a wage-inflation spiral. There were also, as usual, quite a few questions about the exchange rate.

Meanwhile, the People’s Bank of China over the weekend announced the plan to re-introduce more flexibility in the exchange rate regime, after almost 2 years of a de facto peg to the US dollar. This is likely to set the stage for a stronger exchange rate over time.

In this blog post I summarize our main conclusions and views, including our fairly sanguine views on the implications of the wage increases and our quite positive assessment of developments and prospects generally. I would argue that the timing of the move on the exchange rate suggests that China’s authorities broadly agree that, overall, the outlook on exports, growth, and competitiveness in China is fairly good.

In a later post, coming out in a few days, I will focus on the medium term scenario that we did as background work for this quarterly.

China’s massive stimulus spending has raised widespread concerns about local government finances. Local governments have ramped up infrastructure spending since late 2008, while they are also under pressure to spend more on health, education, and social security, for which they are in large part responsible. With monetary conditions likely to become tighter this year and land revenues possibly slowing down or even declining, local government finances may become strained.
At the heart of the concerns are local government investment platforms. These are state-owned-enterprise (SOE)-type entities set up to finance infrastructure construction and urban development—sometimes also called Urban Development and Construction Companies. Set up in part to circumvent rules prohibiting local governments from borrowing, their investment activities are mainly financed by land sale revenue and bank financing, often using as collateral land requisitioned from local residents.