One key aspect of the current system is that while migrants can come as workers, they cannot bring families or truly become citizens of the cities. Reforming the hukou system would affect rebalancing in several ways. Quite a bit of measured productivity growth at the aggregate level comes from the reallocation of labor from low productivity to higher productivity activities often from farming to urban manufacturing and service employment.
Easing up on restrictions on mobility should lead to higher productivity growth, higher incomes for those now registered as rural, and greater government expenditure on services. One of the reasons that local governments have resisted hukou reform is that they worry they will lack sufficient fiscal resources to fund the greater social services for migrant families.
China overall has ample fiscal resources, but there is a mismatch in which the central government collects most of the revenue, while local governments bear most of the expenditure responsibilities. First are measures to bolster local government revenue: this could include a nationwide property tax, which could become a stable source of finance for local governments, and also discourage the hoarding of apartments that is one aspect of excess investment in China.
Second, China is planning to collect more dividends from its state enterprises.
If this happens at both the local and the central level, it would reduce some of the bias towards investment and help ensure resources for government services. A third aspect of fiscal reform would be allowing municipalities to issue bonds to fund their infrastructure projects, rather than relying on shorter term bank loans.
The final aspect of fiscal reform may be the hardest: local officials are generally rewarded on their ability to provide investment and growth. While the system has been successful at that, it has been less successful at meeting other objectives, such as clean air, food safety, and quality education and health services. Changing the incentives of local officials to align with rebalancing is a key institutional reform. Real interest rates that are close to zero amount to both a tax on household savers and a subsidy to investment by firms and local governments able to borrow from the banking system.
Almost everywhere in the world has had zero real interest rates in recent years, but China is unusual in that such rates go back more than a decade. The government has taken some initial steps to raise deposit and lending rates, as well as to allow a shadow banking system to develop with better returns to savers and higher-rate loans to riskier clients. The problem with the current arrangement is that most shadow-banking wealth products are marketed by commercial banks and treated as low-risk by households.
Total shadow banking lending has grown at an explosive rate in recent years and, not surprisingly, some of the funded investments are starting to go bad. The first corporate bond default occurred earlier this year, and that result should help ease the moral hazard that has built up in the system. The announcement of the formal introduction of deposit insurance this year is another important step in the separation of a cautious commercial banking sector from a risky shadow banking sector.
Central Bank Governor Zhou Xiaochuan recently announced that interest rate liberalization would be completed within one to two years. Recent moves to liberalize the bond and stock markets, so that private firms can more easily go to the capital markets, are also in the right direction, as are moves to increase the flexibility of the exchange rate. Finally, opening up the capital account should be the last step in this process of reform. The modern service sectors are the domain in which state-owned enterprises continue to be dominant: financial services, telecom, media, and logistics—to name a few.
The rebalancing from investment towards consumption means that, on the production side, industry will grow less rapidly than in the past, while the service sectors expand. China will need more productivity growth in the service sectors, which is hard to achieve in a protected environment. Successful rebalancing will create both challenges and opportunities for other developing countries. Compared to a business-as-usual scenario, rebalancing is likely to lead to more growth slowdown in the immediate future, as wasteful investment is reined in.
Over time, the rebalancing scenario is likely to lead to a modestly faster growth rate for China, because it will alleviate the diminishing returns that are the problem with the old growth model. Each surge in Chinese investment has driven metals prices higher, with a short lag. Reining-in investment in China is already leading to softer commodity prices. The World Economic Outlook base case assumes moderate rebalancing in China and projects moderate declines three to four percent per annum in energy and materials prices.
While it is notoriously difficult to predict commodity prices, more aggressive rebalancing in China is likely to have sharper price effects.
The power is now in your (nitrile gloved) hands
The fact that U. Hence, it is losing its comparative advantage in labor-intensive activities such as garments, footwear, and electronic assembly. There is now an opportunity for lower-wage developing countries to step in and take some market share from China, either by exporting directly to final markets in the United States and Europe, or by exporting to China as part of a supply chain. This transformation is already taking place; it should be a powerful incentive for nearby developing countries to improve their investment climates and maintain sound macroeconomic policies, so that they gain maximum benefit.
On the services side, Asian developing countries are dramatically increasing their export of tourist services to China. Last year million Chinese tourists traveled abroad. But one could easily imagine a scenario several years down the road in which China has a current account surplus whose counterpart is net outflow of FDI.
Europe and China : strategic partners or rivals?
China is rapidly emerging as a major source of FDI. Initially much of its investment was in the energy and mineral sectors, where it is a large importer. But the recent trend is for Chinese outward investment to expand in different directions—both sectorally and geographically. Some of the connection to Chinese supply chains will certainly come via outward investment by Chinese manufacturers.
The Competitive Advantage of Nations
Compared to OECD countries, Chinese outward investment is more targeted towards developing countries. A world without Chinese rebalancing, on the other hand, is likely to be more volatile. But most commentators think it is unsustainable to invest 50 percent of GDP: the diminished returns already evident become more and more acute. The downside scenario is that investment drops sharply in China and the growth rate also slows sharply. Commodity prices would fall more steeply than in a rebalancing scenario.
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This is also a scenario in which a market-driven Chinese exchange rate might depreciate: if investment drops sharply without a commensurate rise in consumption, then the tendency would be for the exchange rate to depreciate and the trade surplus to widen. China would then hang on to its labor-intensive manufacturing exports, rather than opening this space up for other countries. The United States made a mild effort to dissuade some allies from joining, and was then caught flat-footed when European and Asian allies chose to join.
The United States should be pleased that China is shouldering some global responsibility. With nearly 60 countries joining the AIIB, it is likely to have governance and standards similar to existing MDBs, and may well be able to improve on their efficiency through competition. Rather than a challenge to the American-led system, the AIIB is likely to be a useful complement to the existing system. Over the past few years the agenda and the role of the actors, and also the content and format of discourse have changed dramatically.
Therefore the history of contacts between the two sides will be considered especially in the light of some EU publications, while China will be outside our primary area of focus. Unlike many studies on economic cooperation between EU and China, our paper will accentuate the political component of the relationship. We shall try to demonstrate that, beginning with , Europe has been partly losing its status as the driving force in the EU-China dialogue.
We will conclude by addressing the problem of adequate understanding of Chinese political texts, without which no political communication of Europe with China can be successful. A critical analysis of a recent document prepared by the EU eliminates some problematical points within the united Europe, which affect the effectiveness of its Chinese policy.
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Our method can be described as eclectic in the sense that it borrows arguments from a variety of political research techniques and terminologies discourse analysis, historical institutionalism, engagement and stakeholder theories , as well as from sinological by which we understand the analysis of Chinese texts in the cultural perspective and historical approaches. Fox J. Godement F. Haass R. Laursen F. Pan Z. Shambaugh D. Sandschneider E. Shambaugh E. Staines J. Vogt R.