China's Imbalanced Growth Policy

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China’s Imbalanced Growth Miracle at the Expense of Households
Min Jung Chey
1000092808

999 Words
Advanced English Writing
Mr. Ballentine
6 May 2013
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Rough Draft Outline
THESIS: China’s imbalance is a symptom of distorted and unsustainable domestic policies that transfer wealth from households to the government. I. The significant lag in China’s wage growth compared to the growth in productivity, effectively transferred wealth from workers to employers, contributing to the over-investment and under-consumption growth model. -China’s wage growth is significantly slower than the growth in productivity. -Examples of Hukou and unionization policy.

-Underpriced wage directly impacts the relationship between laborers and employers transferring household’s real income into producers’ investments. II. The undervalued RMB policy also cuts the household’s purchasing power and strengthens the distortion of the domestic economy. -How RMB is undervalued.

-How the undervalued currency creates distortions.
III. Financially repressive policies played a key role in orchestrating the unprecedentedly wide spread of interest rates, turning households’ wealth over to domestic investments. -Financially repressive policies dramatically repress interest rates.

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-Policies allow manufacturers to finance their investment at a lower rate, by cutting the household depositor’s interest income

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Rough Draft
China’s Imbalanced Growth Model and Domestic Distortions
China in recent years has generated what is probably the largest trade surplus as a share of GDP in history. Although many analysts, as is argued by conservative macro analyst Kenneth Austin, describe this as evidence of a very successful growth model in which the trade surplus derives from good planning and fundamental strengths within the Chinese economy (159), China’s economy, as defined as investment driven economy, the imbalances and instability dwell deeply within the growth model. China’s imbalance is a symptom of distorted and unsustainable domestic policies that transform wealth from households to the government. Wage Growth

First, China’s wage growth is constrained to well below the growth in worker productivity. There are other policies targeted particularly on restraining wage growth. First, workers are not allowed to organize except in government sponsored unions that more often see things from the employer’s point of view than from the workers’. Second, migrant workers are also unable to get residence permits, called hukou, and without hukou what limited protection workers may have is sharply reduced because living in an urban area without the proper hukou is tolerated but technically illegal. From the growth model perspective, lagging wage growth in China represented a transfer of wealth from workers to employers. An increasing share of goods workers produced accrued to employers, and this effective subsidy allowed employers to generate transferred profit or to cover real losses. The Fact that productivity grew much faster than wages acted like a growing tax on workers’ wages, the proceeds of which went to subsidize Chey iv

employers. The hidden tax impacts the relationship between GDP growth and household income growth. By effectively subsidizing employers at the expense of workers, it boosted the compatibility of businesses, and increased overall production, while constraining household income, and with it, household consumption. Undervalued Currency

The second mechanism also common among Asian development model countries for transferring income from households to manufacturers is an undervalued exchange rate. John Ross, analyst in China’s Ministry of Finance reported in 2009 that “after the massive devaluation of the renminbi in 1994, followed by soaring productivity which increased the real undervaluation of a currency, the renminbi was seriously undervalued for much of the past two decades” . Even though it...
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