China Unbalanced

Topics: Economic growth, Currency, People's Republic of China Pages: 100 (11867 words) Published: February 26, 2015
For exclusive use at Great Lakes Institute of Management (GLIM), 2015

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REV: MARCH 30, 2012

DIEGO COMIN
RICHARD H. K. VIETOR

China “Unbalanced”
We urgently need to transform the pattern of economic development,” pronounced Premier Wen Jiabao in March 2010. “We will work hard to put economic development on the track of endogenous growth, driven by innovation.

— Premier Wen Jiabao, March 20101
Since the early 2000s, the success of China’s export-led growth strategy had been alienating major trade partners—especially Europe and the United States. By 2005, China’s trade surplus had reached $134 billion, of which $114 billion was with the United States alone. Foreign-invested firms accounted for more than half of this amount. 2 In the U.S., organized labor and various pundits and politicians increasingly blamed China for the loss of as many as 3.5 million manufacturing jobs.3 U.S. Senator Chuck Schumer (D-NY) became a leading voice calling for punitive tariffs if China did not allow its currency, the yuan, to appreciate.4 When China did allow the yuan to appreciate beginning in May 2005, the yuan grew by almost 21% over the next three years, from 8.3 to 6.8 yuan per dollar. However, in October 2008, China once again froze the exchange rate. By then, China's trade surplus with the United States had grown to $258 billion, while its overall current account surplus reached $426 billion.

Although political complaints about China’s export-led growth model achieved limited traction, the global financial crisis brought the problem to light. In the fourth quarter of 2008, China’s exports shrank for the first time since 1978. In the first quarter of 2009 they dropped by 25%. Chinese savings stood at 51%, with consumption at 36%. As thousands of processing and assembly plants were forced to close, laying off as many as 20 million workers, it now became absolutely clear to China’s leadership that the growth model was flawed—excessive savings and export-investment, with little domestic consumption, worsening income distribution between East and West, inadequate health care and non-existent pensions—leveraging off of low-wage exports to rich countries. “High-speed growth,” observed a high-ranking Chinese official, “based on very high-speed consumption of resources—natural and labor—with a cost to the environment has created a situation of export dependency . . . [T]his is not sustainable. We need to change our model to get sustained growth in the future.”5

A $586 billion spending package designed to stimulate domestic consumption and investment provided a start—but only a start. After growing at 9.4% annually for more than three decades, and ________________________________________________________________________________________________________________ Professors Diego Comin and Richard H. K. Vietor prepared this case with assistance from Juliana Seminerio. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsement s, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2010, 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

This document is authorized for use only in Understanding emerging markets by Prof. Girish, at Great Lakes Institute of Management (GLIM) from January 2015 to July 2015.

For exclusive use at Great Lakes Institute of Management (GLIM), 2015 711-010

China "Unbalanced"

with a population of more than 1.3 billion, China had become the second-largest economy in the world (adjusted for purchasing power parity) and...
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