Yang Yao
Leading Chinese economist Yang Yao sat down with Senior Fellow Richard C. Longworth on the sidelines of The Chicago Council's international conference on the global economy to discuss China's current and future growth.
05.23.12
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Overview
Perhaps no topic on the global agenda is more important than China and its growth, its goals, its prospects, and how its increasing strength impacts the U.S. economy and the rest of the world. One of the most respected students of the Chinese economy is Yang Yao, who spoke at The Chicago Council’s recent international conference on “Searching for Strategies to Restore Global Economic Stability and Growth.” Yao is professor and director of the China Center for Economic Research and deputy dean at the National School of Development at Peking University. He also edits the Center’s journal, China Economic Quarterly, in addition to publishing widely around the world in Chinese and English. In 2009, he won the Sun Yefang Economics Award, the highest economics award in China. Yao received his bachelor’s and master’s degrees from Peking University and his Ph.D in development economics from the University of Wisconsin in Madison. He regularly publishes books on the Chinese economy.
Yao spoke at the opening session of the Chicago conference and then joined me for an interview on the present and future state of the Chinese economy.
Q:
Richard Longworth
Here in the Midwest we have lost a lot of jobs to outsourcing, including to China. Now we hear that Chinese wages are rising. Wages here are falling, raising hopes that Midwest workers may soon be able to compete with Chinese workers. You have written that this may be too optimistic from an American point of view—that Chinese wages really aren’t going up that much. Is this true? If so, why?
A:
Yang Yao
Well, in the last two years, wage rates increased quite a lot. Yet still the average wage rate for migrant workers, the bulk of the Chinese workforce, is about 2,000 yuan per month, which comes to a little bit over $300 per month. That is still way below American levels. I think American workers receive at least $2,000 per month. That is still a huge gap, so I don’t think the jobs would easily go back to United States. To create American jobs, it might be much better for the United States to increase exports to China.
You actually never know what kind of products the United States can export to China. There’s one interesting story in National Geographic about a company in South Carolina, I think, making chopsticks to export to China. The problem, of course, is that China still puts high tariffs on imports, especially on consumer goods. Hank Greenberg has called for a U.S.-China Free Trade Agreement, which I think is a wonderful idea.
We also did a simulation study on that. If you believe our figure, in five years' time the U.S.-China trade deficit will come down by 75 billion dollars to about one-third of current American trade deficit with China.
Q:
Richard Longworth
But the exchange—Chinese household appliances and Chinese airplanes coming here, American chopsticks going there—doesn’t sound like a good…
A:
Yang Yao
No, no, not just chopsticks. You have lots of things that you can export to China. Construction materials, for instance. Do you know what the largest export is from the United States to China? It is actually waste materials, like paper. Used paper. That’s a surprise to many people.
Q:
Richard Longworth
You’ve said that China’s growth will depend on exports for another 10 to 15 years. This implies an American trade deficit with China going on another decade or so. Why does China’s export growth continue for another ten years, while our trade imbalance is a more or less permanent? Is an American deficit inevitable?
A:
Yang Yao
Well, look at China’s labor force. In 2010 we began to have a deceleration of labor growth. But we have to wait until 2020 or a little bit later than that to see workforce stabilization, which means, between now and then, we still are going to have a lot of growth in our labor force.
Q:
Richard Longworth
You mean the people still in the countryside—the peasants—are still waiting to join the urban labor force?
A:
Yang Yao
Not just for that. For total labor force. And we also have this structural change of people moving from the countryside to the city, many of whom are very young. Most of them are in their early 20s. So I think that’s a fundamental force over there. China has only had this trade surplus for ten years. For such a large country, I don’t think this surplus is going to go away very quickly. Not in ten years’ time. I look at Great Britain and the United States—both countries experienced a long period of surplus, basically because they grew faster than other countries. And they saved more in that period of time. And today with China, you know, China is growing faster, and China saves more. So that’s what I want to say the world has to be prepared. After China there will be India, definitely. Then probably, after that, there will be African countries.
Q:
Richard Longworth
China’s been growing at 10 percent a year, then 8 percent, and now it's coming down to 7 percent, which is still very, very fast. We often hear that this is too fast, and that many factors could cause a slowdown: environmental damage, political protest, poorly constructed infrastructure, a water shortage. Are these legitimate fears or is this just wishful thinking on the part of the rest of the world? Do you see anything on the horizon that could dramatically slow China’s growth?
A:
Yang Yao
Well, if the world slows down again, of course China’s economy is going to slow down. We’re not going to see this huge investment drive in 2009, 2010, so that’s a big risk over there. If there were to be a prolonged disintegration in the Chinese economy, then China would slow down.
Q:
Richard Longworth
Is that possible?
A:
Yang Yao
Well, you never say it’s not possible. It has happened in history before, but the chances are very small—one in a hundred years or more than a hundred years or something like that. Still, it’s kind of a risk over there. But those risks are very, very small.
Q:
Richard Longworth
Along that line, you’ve written that a big problem in China is local government debts—many of them non-payable. To a foreigner, this sounds like a combination of ambitious projects probably connected with corruption in local government, which the central government does not have under control. I’m tempted to think that this might be a factor in the Chongqing scandal now. Is this an attempt by Beijing to bring local governments, led by Chongqing, under more central control?
A:
Yang Yao
Certainly I have to say that is one of the factors, yes. The central government just cannot bear a local government official taking this kind of bold action. But it’s always hard for the central government to control local governments. China is a strange country in that sense, you know. It has one-party rule, but, in the meantime, if you look at the society and also the economy, the country is still quite fragmented. Even with this Chongqing case closed, I don’t think the central government will have a full hold on local governance.
Q:
Richard Longworth
And what are the potential problems with that?
A:
Yang Yao
I think China has to find new ways to govern the country. The current system has been working but is increasingly clumsy. So I think some kind of deep reforms have to be taken to resolve this problem.
Q:
Richard Longworth
This has been going on for maybe 20 or 25 years, so not very long. It sounds like China is really a country in transition.
A:
Yang Yao
Well, if you look at the trends of history, there is always a problem between, say, the emperor and those local officials. There is always this tension in this huge country of how the central government can govern effectively. This is always a question over there.
Q:
Richard Longworth
One of the big tensions between our two countries concerns the huge surpluses in China and the huge deficits here. There’s a lot of pressure for balanced budgets, for getting rid of the deficits. But you’ve written that these surpluses and deficits are simply part of the system. We have manufacturing-based countries automatically running surpluses, countries like the United States, where the financial sector dominates, always running surpluses. To American ears, this sounds like just an argument that China can’t do anything about its surpluses so it shouldn’t try. I wonder if you could explain this a bit more.
A:
Yang Yao
Oh, there is quite a large body of literature in economics arguing that the financial sector is one of the very important drivers for growing [inaudible]. Similarly, the United States has a very efficient financial sector, so money always flows into the United States. If there is a risk outside, say, in Europe, then people quickly move money to the United States. This is a safe haven for many people, right?
But before the crisis, there was a sense that United States was growing, right? We were growing. That’s why we run deficits. People say this is natural for us to consume more today, because look at the asset prices, look at our housing prices. So this is what Bernanke calls the savings glut—when savings from the rest of the world flows to the United States, driving down the interest rate. Everyone felt he or she was rich, right? So, naturally, they consume more than they should. I think now that’s quite a standard argument in economics.
Q:
Richard Longworth
Do you see this changing? I mean, we probably should reduce the dominance of the financial sector and consume less. China should probably build up its financial sector and consume more. But is this going to happen?
A:
Yang Yao
On the U.S. side, to be honest, I’m a little bit disappointed. I think the American government should regulate its financial sector more. On the China side, we have a big experiment in Wenzhou. It’s the most capitalist city in China. And hopefully, we are going to spread that experiment to the whole country. Then we will have a more efficient financial sector, a more inclusive financial sector. Currently the financial sector is pretty much dominated by state-owned banks. Reform is going to allow private capital to enter this sector.
If we can do that, we’re going to encourage domestic consumption and also encourage bank loans to small and medium enterprises (SME). That’s going to change quite a lot.
Q:
Richard Longworth
Any change here is going to be opposed by very powerful lobbies. What about in China?
A:
Yang Yao
In China, yes, those state-owned banks were opposed. But now it seems we are reaching a breaking point because there was kind of a miniature crisis in Wenzhou at the end of last year, so the government was extra alert. I think we’re building momentum. And I think that the next government will pretty much do something to the financial sector, because almost everyone except those state-owned banks is complaining.
Q:
Richard Longworth
The manufacturing sector will certainly…
A:
Yang Yao
Be happy. They would be happy to see this financial sector open up, because in China, SMEs consist of the large bulk of the economy. They cannot get bank loans easily. So if the bank sector is opened up to private equities, it’s going to benefit them.
