Dr. Justin Lin Yifu, chief economist and vice president of the World Bank

Dr. Qin Xiao, chairman of the China Merchants Group

To bring new perspectives on the outlook for China in the New Year, the National Committee and the China Center for Economic Research (CCER) organized a half-day forum at the New York Stock Exchange on January 7, 2010 that featured forecast and analysis by leading Chinese economists. A capacity crowd of over 350 Wall Street professionals and over 45 journalists attended.

The program featured keynotes by Justin Lin Yifu, the chief economist and vice president of the World Bank, and Qin Xiao, the chairman of the China Merchants Group, followed by two panel discussions by other notable Chinese economists. They were welcomed by Duncan Niederauer, CEO of the NYSE Euronext, and introduced by National Committee President, Stephen A. Orlins.

Dr. Lin, who founded CCER in 1994, is the first person from the developing world to become the World Bank’s chief economist. He spoke about the success and problems of China’s economic transition from a command to a market economy. China’s economy grew at an average annual rate of 9.8 per cent for 30 years thanks to the market-oriented reforms he noted. But the reforms were carried out gradually as the state continued to protect heavy industries with pricing incentives on the factors of production – land, natural resources, capital, labor, and the environment. Those price controls are now contributing to large distortions in China’s economy, he explained.

Chairman Qin Xiao’s firm is best known for the China Merchants Bank, a subsidiary that was rated No. 1 for leadership among all publicly-traded Chinese companies by the Wall Street Journal in 2009. He presented a robust agenda for economic and political reform in China. China’s V-shaped recovery in 2009, he said, was fueled by massive bank lending, which carries the risk of creating over-capacity in the export sector and bubbles in China’s stock and real estate market. To truly rebalance the economy, China must reform the factor markets and state-owned-enterprises. He believes that China must also “liberate” the currency exchange rate from its peg to the dollar by floating the RMB within a real band against a real basket of currencies. Finally, Mr. Qin, who was a deputy to the National People’s Congress, said the government should not try to derive its legitimacy from economic growth but from the provision of public goods – education, health care, pensions, and housing for the poor.

The first panel discussion was moderated by Prof. Wu Ho-Mou, a deputy director of CCER. Professor Lu Feng gave the economic forecast: based on studies by CCER and other Chinese think tanks, he predicted that China’s economy will grow by about 10 per cent in 2010 and will surpass the size of the U.S. economy by 2025. Wang Jian-Ye, chief economist at the China Export-Import Bank, warned that with expansionary monetary policies in industrialized countries, there will be large capital inflows into China that will severely test the country’s capital control mechanisms. Both Lu and Wang indicated support for currency appreciation, but Dr. Xiao Geng, the director of Brookings-Tsinghua Center, argued that China’s exchange rate does not need adjustment. Rather, rebalancing can be achieved through inflation, which he said is natural to emerging market economies. As domestic prices rise in China, they will also cost more in dollars even with a stable exchange rate.

The second panel, moderated by President Orlins, focused on the future of China’s economic model. Professor and Deputy Director Yao Yang of CCER expressed doubt that China will be able to move away from its export-led growth model because the country’s large and productive work force make it naturally suited for labor-intensive manufacturing. Over the past decade, despite rapid economic growth and significant gains in labor productivity, workers’ wage growth has not kept pace with overall economic growth. The household savings rate has remained stable while the corporate savings has risen rapidly. With households accounting for a shrinking portion of the country’s overall economic gains, Yao says it is unrealistic to expect Chinese consumers to overtake producers as the primary drivers of economic growth.

CCER Professor Huang Yiping was more optimistic about the prospects of rebalancing. He noted that the Chinese government has been trying to rebalance the economy since 2003 but the imbalances have actually worsened. This is because the government’s administrative measures such as reducing the number of approvals for investment projects have not altered the underlying incentives that strongly favor investments in fixed assets and manufacturing. These incentives are created by distortions in the factor markets. With cheap land, capital, energy and labor, and the absence of any pollution pricing, there is no better place to manufacture than in China. In effect, he said these factor market incentives act like export-subsidies. The key to rebalancing he says is to reform the factor markets to remove incentives for over-investment.

Video and audio of the entire program as well as the speakers’ bios, PowerPoint presentations, program schedule, photos and news coverage are all available via drawer links along the right-hand side of this page.

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