January 25,2013

Is China's Old Growth Model Sustainable: a Big Bull vs. a Big Bear

By Thomas Wilkins

China's growth model propelled its economy to an average growth of 9.9% over the last 32 years, and will continue to grow, although at a slower rate, said Justin Yifu Lin, former Chief Economist at the World Bank in Washington. Yes, China's growth record is admirable but it is not sustainable, according to Dr. QIN Xiao, Chairman of the Boyuan Foundation, former Chairman of China Merchants Group, and member of the 11th Chinese People's Political Consultative Conference who earned his Ph. D. in economics at Cambridge University. He is a guest professor at the Graduate School of the People's Bank of China.

Qin and Lin  spoke at a high-level conference, organized by the National Committee on United States-China Relations, at the New York Stock Exchange in New York on January 7, 2013. Numerous think-tank speakers from China Macroeconomic Research Center, China International Capital Corporation, The Export-Import Bank of China and the China Center for Economic Research, were flown in from China for the conference sponsored by the Starr Foundation, Van Eck Global, The New York Stock Exchange Euronext and Xcoal Energy & Resources. The conference was opened by Duncan Niederauer, CEO of the New York Stock Exchange Euronext, whose roots go back to 1792 but is being acquired by Intercontinental Exchange of Atlanta, Georgia, just formed 12 years ago in the year 2000.

 Dr. QIN's remarks were in sharp contrast to Justin Yifu Lin, professor and honorary dean of the National School of Development at Peking University. Lin earned his Ph.D. in economics from the University of Chicago. He is the  authored of numerous books, including Demystifying the Chinese Economy and The Quest for Prosperity: How Developing Economies Can Take Off. Professor Barry Eichengreen of the University of California, Berkeley has said "No One knows the Chinese economy better than Justin Lin."

Despite the recent slowdown in the Chinese economy Lin argued that China can maintain its growth model.

Opposing this steady-state growth model, Dr. Qin argued that China's growth model has "reached a turning point…which means China will enter a new era of economic development." He said that China's new leaders are "aware of the inability of the current system to support sustainable economic growth."

The traditional growth model depends on large scale projects which "face constraints regarding the environment, resources and energy." Additional constraints come from the payments for exporters by buyers of Chinese exports. Also, constraining the traditional growth model is that "the era of abundant and low-cost capital and labor, thanks to a high savings rate and cheap work force provided by migrant workers, has come to an end."

The traditional growth model is also coming to an end because a "government dominated economy" is expected to change to a more "market-oriented" economy.

Dr. Qin expects this transformation of the Chinese economy will take place as the government sees its role as having a less dominating role.

On his "to-do list" are let a market prices signal supply and demand, liberalize interest rates, allow the Renminbi convertible in capital account, increase spending for social security, health care, education, and finally reduce official consumption.

Despite these problems, Dr. Qin felt that China will "surprise" the world with the above expected transformation "into a modern society."  Dr. Lin felt that China will be the world's largest economy in 15-20 years. Despite Dr. Lin's concerns about poor income distribution, wide-spread corruption, rent-seeking activity and poor quality of life/pollution issues, he feels China can maintain its growth model at 8% per annum.

Whereas Lin is a "growth bull," whose model is built on constant growth rates, Qin's analysis focuses more on the issues facing the new Chinese leaders and places more importance on the private sector being the driving force in the future rather than on a "government dominated economy" from the past.

?/span> The author is a Chartered Financial Analyst at Joseph Jekyll Advisers LLC.?/span>




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