Prof. Lawrence Lau is the former Vice-Chancellor of The Chinese University of Hong Kong (CUHK) and currently served as the Ralph and Claire Landau Professor of Economics at CUHK. He specialises in economic development, economic growth, and the economies of East Asia, including that of China. Prof. Lau has authored, co-authored, or edited seven books and published more than 190 articles and notes in international professional journals. On his recent publication The China-U.S. Trade War and Future Economic Relations, Prof. Lau will share his insights on the economic relationship between mainland China and the United States at the conference. Prof. Lawrence Lau, Ralph and Claire Landau Professor of Economics, Lau Chor Tak Institute of Global Economics and Finance, CUHK

1. Chinese Economic Reform:
Past, Present and Future
Lawrence J. Lau
Ralph and Claire Landau Professor of Economics, The Chinese Univ. of Hong Kong
and
Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University
CUHK Business School Global Alumni Forum
The Chinese University of Hong Kong
Hong Kong, 29 June 2019
Tel: +852 3943 1611; Fax: +852 2603 5230
Email: lawrence@lawrencejlau.hk; WebPages: www.igef.cuhk.edu.hk/ljl
*All opinions expressed herein are the author’s own and do not necessarily reflect the views of
any of the organisations with which the author is affiliated.

2. Outline
 Introduction
 Economic Reform and Opening in the Past
 Economic Reform at Present
 Economic Reform for the Future
 Projections of the Future
 Concluding Remarks
2

3. Introduction
 The Chinese economy has been growing without any interruption at an average
annual real rate of almost 10 percent since 1978, even though it has slowed down
to an average rate of growth of around 6.5 percent in more recent years. Chinese
GDP grew from US$358 billion in 1978 to US$13.1 trillion in 2018 (in 2018 prices
and exchange rate), almost 37 times, to become the second largest economy in the
world, with almost two-thirds of the GDP of the largest economy, the United
States.
 Chinese real GDP per capita grew from US$372, approximately equal to the
United Nations minimum subsistence level of US$1 a day, in 1978 to US$9,415 in
2018 (in 2018 prices), at an average annual rate of over 8 percent, without any
interruption, achieving a more than 25-fold increase. Even then, China as a country
still only ranked below seventieth in terms of real GDP per capita in the world.
And its real GDP per capita was still only 15% of the U.S. real GDP per capita of
US$62,609 in 2018.
3

4. Chinese Real GDP and Its Annual Rate of
Growth (trillion 2018 US$ and %)
-28
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
24
28
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Percent
US$trillions,2018prices
Rate of Growth of Chinese Real GDP, % (right scale)
Chinese Real GDP (trillion 2018 US$)
4

5. Chinese Real GDP per Capita and Its Annual
Rate of Growth (thousand 2018 US$ and %)
-28
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Percent
US$thousands,2018prices
Rate of Growth of Chinese Real GDP per Capita, % (right scale)
Chinese Real GDP per Capita (thousand 2018 US$)
5

6. Economic Reform and Opening in the Past
 From 1953 to 1978, China was a completely centrally planned
economy with mandatory sector-, industry-, enterprise-, village-
and farm-household-specific production targets, and was
essentially closed to the rest of the world, except for the former
Soviet Union and the Eastern European socialist countries before
the Sino-Soviet dispute around 1960.
 The economic reform in China which began in 1978 consisted of
two major components—the introduction of free markets for
goods in the Chinese economy (coupled with conditional
autonomy for the producers, including the agricultural
households) and the opening of the Chinese economy to
international trade and inbound cross-border direct investment.6

7. Economic Reform and Opening in the Past
 It is well known that there can be significant inefficiencies in centrally
planned economies, with the economy operating well within the
interior of its set of production possibilities—that is, far away from
the frontier. As economic reform and opening proceeded successfully
in China, the economy became progressively more efficient, and the
point of operation of the economy began to move from the interior of
the set of production possibilities to its frontier. During this process,
the real output of the economy could be increased through increased
efficiency alone without any increase in its inputs.
 Thus, with the introduction of enterprise and household autonomy,
output could increase much faster than inputs. How much slack was
actually there in the Chinese economy before its economic reform in
1978? Lau and Zheng (2017) have estimated that the real output of
the Chinese economy as a whole in 1978 could have been 50 percent
higher if it were operating efficiently.
7

8. Movement of the Production Possibilities
Frontier versus Movement to the Frontier
8

9. Economic Reform and Opening in the Past
 It was in Xiaogang Village, Anhui Province, that the “household contract
responsibility system” in the Chinese agricultural sector was first
introduced, spontaneously, in December 1978, setting in motion the
agricultural economic reform in Anhui Province initially and then in the rest
of China.
 The contract responsibility system basically divided up the responsibility of
the commune to deliver fixed quantities of agricultural output and pay fixed
amounts of taxes to the government among the individual households of the
commune. As long as an individual household had delivered its quota of
output and paid its share of taxes, it could produce whatever it wanted to
produce, and sell any such additional output on the free markets, and retain
all the proceeds for itself.
 The commune itself, which no longer had any production responsibilities,
began to organise other productive activities, forming what were known as
“Township and Village (T&V)” enterprises, producing whatever goods that
were needed with resources available to the commune, and selling the
outputs on the free markets.
9

10. Economic Reform and Opening in the Past
 Under the “contract responsibility system”, the commune’s
obligation to sell a fixed quantity of output at a fixed plan price
and to pay a fixed amount of taxes to the government remained
unchanged, so that the government was no worse off.
 The commune administration was also no worse off as individual
households continued to be responsible for the deliveries of their
allotted quotas of output deliveries and the payments of their pro-
rata shares of the taxes to the commune.
 The households of the commune were also no worse off because
after they fulfilled their same pre-existing obligations, they could
do anything else they wanted to do and retain any income they
managed to earn. They could also do nothing extra, but they
would not be worse off. It was therefore a “reform without
losers”, one that no one should or would oppose.
10

11. Economic Reform and Opening in the Past
 The contract responsibility system was subsequently extended to the
urban non-agricultural sector in a gradual manner beginning in the
early 1980s, province by province. Shanghai was the last to
implement the contract responsibility system in the non-agricultural
sector, in 1992.
 Throughout this early reform period, the mandatory central plan
continued to be enforced. The autonomy of the producers was
conditional on first fulfilling their responsibilities under the
mandatory central plan.
 Typically a non-agricultural enterprise would continue to receive its
allotted inputs under the central plan at fixed plan prices and would
continue to sell the assigned quota of outputs to the planned
recipients, also at fixed plan prices. However, after fulfilling these
obligations, the enterprise would be free to produce whatever it
wanted to produce and bear any profit or loss therefrom.
11

12. Economic Reform and Opening: Transition
from a Centrally Planned to a Market Economy
 This is referred to as the “dual-track” approach, that is, with the
mandatory central plan continuing in force and the establishment
of free markets coupled with producer autonomy in parallel.
China did not adopt the ‘“big bang’” approach in its transition
from a centrally planned economy to a market economy.
 Under the dual-track approach, every individual, collective and
enterprise is free to participate in the free markets provided that it
has fulfilled all its obligations under the mandatory central plan.
 One of the most important consequences of the “dual-track”
approach is that no losers are created by the introduction of the
free markets and producer autonomy, since everyone’s rights
(and obligations) under the mandatory central plan continue to be
enforced. 12

13. Economic Reform and Opening: Transition
from a Centrally Planned to a Market Economy
 In fact, a distinguishing characteristic of Chinese economic
reform is its emphasis on assuring that there are no losers.
Indeed, “reform without losers” was what made Chinese
economic reform so successful and the economic transition so
smooth. It maximised public support and minimised opposition.
 In carrying out economic reform, China also frequently applied
the “grandfathering principle”, that is, the principle of “new
people, new way; old (existing) people, old way (新人新辦法，
舊人舊辦法)”.
13

14. Economic Reform and Opening: Transition
from a Centrally Planned to a Market Economy
 Moreover, as Lau, Qian and Roland (2000) have shown, the
“dual-track” approach, with full enforcement of the pre-existing
mandatory central plan, also results in full economic efficiency of
the economy.
 As a result, China underwent a very smooth transition to a
market economy, without experiencing any decline in GDP in
either aggregate or per capita terms or hyper-inflation, as almost
all of the former Soviet Union and formerly socialist Eastern
European countries did.
 Eventually the value of the economic activities outside the
mandatory central plan grew to be much bigger than those within
the plan. The plan was then gradually phased out and became
merely indicative and no longer mandatory (with the exception of
environmental and poverty alleviation targets).
14

15. Economic Reform and Opening in the Past
 Another major new economic initiative adopted by the Chinese
Government in 1978 was opening the economy to both
international trade and inbound cross-border investment.
Machinery, equipment and raw materials which could not be
produced in China at the time would be imported. In order to
have the foreign exchange to pay for these imports, China would
have to promote exports as well as inbound cross-border direct
investment.
 Opening the economy to international trade always increases
aggregate welfare of the economy, as the following chart
illustrates. (However, even though the economy benefits in the
aggregate, both winners and losers are created in the process.)15

16. Opening the Economy Enhances Domestic
Economic Welfare
16

17. Economic Reform and Opening in the Past
 The international trade embargo against China that began with
the Korean War was continued even after the fighting ended with
an armistice in 1953. There was little international trade between
China and the rest of the world, with the exception of the
essentially barter trade between China and the former Soviet
Union and the formerly socialist Eastern European countries,
which dwindled beginning in the 1960s because of the then Sino-
Soviet dispute.
 However, with the secret visit of U.S. Secretary of State Henry
Kissinger to China in July 1971, and the subsequent visit of U.S.
President Richard Nixon in February 1972, international trade
between China and the U.S. and other Western countries began to17

18. Economic Reform and Opening in the Past:
Export Promotion
 The promotion of exports and the attraction of cross-border direct
investment required the setting of an internationally competitive exchange
rate for the Renminbi, the Chinese currency. From the early 1950s to late
1971, the Renminbi exchange rate stood at a constant 2.46 Yuan per US$
(see the following chart).
 During the period 1971-1978, the Renminbi exchange rate actually
appreciated, reaching its highest level vis-a-vis the US$ of 1.46 Yuan in
1980, partially driven by capital inflows. Then China began to undertake a
series of explicit or implicit devaluations of the Renminbi, which reached
8.7 Yuan per US$ at the beginning of 1994, when China unified its multiple
exchange rates and adopted current-account convertibility.
 The Renminbi then appreciated slightly to 8.3 Yuan per US$ until the East
Asian currency crisis of 1997-1998, during which the Renminbi exchange
rate held steady and remained unchanged with respect to the US$ even as all
of the other East Asian currencies with the exception of the Hong Kong
Dollar and the Japanese Yen underwent significant devaluations. 18

19. Economic Reform and Opening in the Past:
Export Promotion
 Then beginning in mid-2005, because of China’s large and
growing current account surplus, the Renminbi began to
appreciate significantly. However, this appreciation came to a
halt in late 2008 because of the global financial crisis triggered
by the collapse of Lehman Brothers in the United States and did
not resume until 2010. Since then, the Renminbi exchange rate
has fluctuated within a relatively narrow band between 6 and 7
Yuan per US$.
 The Renminbi no longer follows the US$ but appears to be
following the value of a trade-weighted basket of the currencies
of its major trading-partner countries, in effect, keeping its
exchange rate approximately constant vis-a-vis the average
trading-partner country, and maintaining the average purchasing-
power of the Renminbi abroad.
19

20. Nominal Exchange Rate of the Renminbi Since
1957, Yuan/US$, End of Month
1
2
3
4
5
6
7
8
9
Jan-57
Jan-58
Jan-59
Jan-60
Jan-61
Jan-62
Jan-63
Jan-64
Jan-65
Jan-66
Jan-67
Jan-68
Jan-69
Jan-70
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
20

21. The RMB Central Parity Exchange Rate and
the CFETS Index, 29/12/2017 to the Present
95
96
97
98
99
100
101
102
103
104
105
106
107
108
29-Dec-17
12-Jan-18
26-Jan-18
09-Feb-18
23-Feb-18
09-Mar-18
23-Mar-18
06-Apr-18
20-Apr-18
04-May-18
18-May-18
01-Jun-18
15-Jun-18
29-Jun-18
13-Jul-18
27-Jul-18
10-Aug-18
24-Aug-18
07-Sep-18
21-Sep-18
05-Oct-18
19-Oct-18
02-Nov-18
16-Nov-18
30-Nov-18
14-Dec-18
28-Dec-18
11-Jan-19
25-Jan-19
08-Feb-19
22-Feb-19
08-Mar-19
22-Mar-19
05-Apr-19
19-Apr-19
03-May-19
17-May-19
31-May-19
14-Jun-19
The Central Parity Rate and the CFETS Index, 29 Dec. 2017 = 100
Index of CFETS Currency Basket (Yuan/Currency Basket)
Index of Central Parity Rate (Yuan/US$)
21

22. Economic Reform and Opening in the Past:
Export Promotion
 In addition to setting a competitive exchange rate and making the Renminbi
current-account convertible, China also applied to join the World Trade
Organisation (WTO) as part of its export promotion strategy. It finally acceded to
the WTO in 2001, after prolonged negotiations with the U.S. and other countries.
 The growth of Chinese international trade since 1978, and especially after its
accession to the WTO in 2001, was in great contrast to what happened in the pre-
reform period (see the following chart). Since 1978, Chinese international trade
grew almost every year until very recently, except in 1982, 1998 (the East Asian
currency crisis), and 2009 (the global financial crisis). In particular, it grew by
leaps and bounds since its accession to the WTO in 2001. China has become the
second largest trading nation in goods and services combined in the world, just
after the U.S. and the largest trading nation in terms of goods only.
 The rate of growth of Chinese international trade has slowed down significantly in
the past few years and a tariff war has broken out between China and the U.S. in
2018 and has yet to be ended. 22

23. Chinese International Trade in Goods and Its
Annual Rate of Growth (US$ trillion and %)
-25
-15
-5
5
15
25
35
45
55
65
75
85
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
US$trillions
Rate of Growth of Chinese International Trade in Goods, % (right scale)
Chinese International Trade in Goods (trillion US$)
Percent
23

24. Economic Reform and Opening: The Relative
Insulation of the Chinese Economy
 China, as a large continental economy with a huge domestic
market, has a relatively low degree of export dependence, and
has always been relatively immune to external disturbances.
 During the past four decades, while the rates of growth of
Chinese exports and imports of goods have fluctuated like those
of all other economies, the rate of growth of Chinese real GDP
has remained relatively stable, and in fact has always stayed
positive (see the following charts which display the quarterly
rates of growth of exports, imports and real GDP of selected
Asian economies from 1997 to the present, with China being
represented by the red line).
24

25. 25
Quarterly Rates of Growth of Exports of
Goods: Selected Asian Economies since 1997
25

26. 26
Quarterly Rates of Growth of Imports of
Goods: Selected Asian Economies since 1997
26

27. 27
Quarterly Rates of Growth of Real GDP, Y-o-
Y: Selected Asian Economies since 1997
27

28. Economic Reform and Opening in the Past
 Moreover, over the past ten years, Chinese dependence on
exports has been declining. The share of exports of goods in
Chinese GDP has fallen from a peak of 35.3% in 2006 to 19.5%
in 2018. The share of exports of goods to the U.S. in Chinese
GDP has also fallen by half, from a peak of 7.2% in 2006 to
3.6% in 2018. (See the following charts.)
 During this same period, the growth of Chinese exports to the
world and to the U.S. has also slowed significantly. Chinese
exports to the world grew at an average annual rate of 23.5% in
the decade 1998-2007, but slowed to only 5.9% in the following
decade, 2008-2018. Similarly, exports to the U.S. grew at 23.7%
per annum in the decade 1998-2008, but slowed to less than 6.6%
per annum in the most recent decade. Exports is no longer the
engine of Chinese economic growth.
28

29. Chinese Exports of Goods and Services and
Goods Only as a Percent of Chinese GDP
0
5
10
15
20
25
30
35
40
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Percent
Exports of Goods and Services as a Percentage of GDP
Exports of Goods Only to the World as a Percentage of GDP
29

30. Chinese Exports of Goods and Services and
Goods to the U.S. as Percent of Chinese GDP
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Percent
Exports of Goods
Exports of Goods and Services
30

31. Economic Reform and Opening in the Past
 Other reforms, such as the introduction of a value-added taxation
system, the establishment of a commercial banking system, and
the introduction of a stock market, were also initiated and
implemented during this period.
31

32. Economic Reform and Opening in the Past:
Crossing the River by Feeling the Stones
 However, it would be wrong to think that there was an overall
comprehensive blueprint for Chinese economic reform from the
very beginning. As Mr. Deng Xiaoping, the late Chinese
paramount leader, famously said, the process of Chinese
economic reform was like “crossing the river by feeling the
stones underneath (摸着石头过河)”. There was a great deal of
uncertainty as to the right path. It was also not at all clear what
would be found on the other side of the river. What was clear
was that staying on the then existing side was not a viable option.
 In Chinese economic reform, trial and error was the norm—there
were many pilot experiments; pragmatism was the guide; and
adaptability would be widely practiced. 32

33. Economic Reform at Present
 The Chinese economy today faced a number of important challenges.
 First, there is excess production capacity in almost every major
traditional industry—steel, cement, plate glass, ship-building, solar
panels, you name it, and excess residential housing units in almost
every city with the possible exception of the three or four first-tier
cities. There must be supply-side structural reform to reduce the
excess capacity and to re-train and re-employ the affected workers.
 Second, the forty years of rapid economic development has resulted in
serious environmental degradation in the quality of air, soil and water.
 Third, income disparity has increased dramatically. China today has
reportedly the highest number of known US$ billionaires in the world,
more than 600.
 Fourth, the working-age population has begun to decline and the
Chinese population has begun to age.
 All of these are in addition to the on-going anti-corruption campaign,
which is critical for letting the market play the decisive role. 33

34. Economic Reform at Present
 The excess production capacities in the different industries are
being gradually reduced.
 The “one-child” policy has been replaced by a “two-child” policy
a few years ago. In the long run it is probably best to aim at a net
reproduction rate of one, that is, on average, each couple will
have two children. This will result in a more or less constant
level of population in steady state. However, in order to achieve
a net reproduction rate of one, it will be necessary to have a
“more than two child” policy. One possibility is to abolish
restrictions on the number of children altogether. It is rare for
any couple to want three or more children these days, especially
in the cities. 34

35. Economic Reform at Present: Increase Energy
Efficiency and Reduce Pollution
 One measure of energy efficiency is the energy used per unit real
GDP. In the following chart we compare the energy/GDP ratio of
China, Japan and the United States in terms of million joules per unit
real GDP in 2010 U.S. Dollars. (The Joule is a unit of energy and is
equal to the more familiar 0.000948 BTU (British Thermal Unit)). It
is clear that China has been improving its energy efficiency over time,
which implies that overall carbon emission per unit real GDP is being
reduced. However, it still has significant room to improve.
 Another measure of the quality of economic growth is the quantity of
PM 2.5 particles in the air. Here we can also see from the data on
Beijing the gradual improvement. As the quality of air has become a
mandatory key performance indicator in the Thirteenth Five-Year
Plan, it will likely continue to improve over time. 35

36. Final Energy Consumption/GDP Ratio for China,
Japan and the U.S. (Million Joules/2010 US$)
0
5
10
15
20
25
30
35
MJ/USDin2010prices
Final Energy Consumption / GDP Ratio for the U.S., Japan and China
(MJ/ constant 2010 US$)
China
Japan
United States
36

37. The Incidence of PM2.5 in Beijing:
Daily Data from 2013M2 to 2018M11
0
50
100
150
200
250
300
350
400
450
500
2013/12/2
2014/1/1
2014/1/31
2014/3/2
2014/4/1
2014/5/1
2014/5/31
2014/6/30
2014/7/30
2014/8/29
2014/9/28
2014/10/28
2014/11/27
2014/12/27
2015/1/26
2015/2/25
2015/3/27
2015/4/26
2015/5/26
2015/6/25
2015/7/25
2015/8/24
2015/9/23
2015/10/23
2015/11/22
2015/12/22
2016/1/21
2016/2/20
2016/3/21
2016/4/20
2016/5/20
2016/6/19
2016/7/19
2016/8/18
2016/9/17
2016/10/17
2016/11/16
2016/12/16
2017/1/15
2017/2/14
2017/3/16
2017/4/15
2017/5/15
2017/6/14
2017/7/14
2017/8/13
2017/9/12
2017/10/12
2017/11/11
2017/12/11
2018/1/10
2018/2/9
2018/3/11
2018/4/10
2018/5/10
2018/6/9
2018/7/9
2018/8/8
2018/9/7
2018/10/7
2018/11/6
The Incidence of PM2.5 in Beijing
37

38. Economic Reform at Present: Share Prosperity
 The poverty headcount rate of China has been declining
continuously since the economic reform began in 1978.
According to the 2010 standard of poverty, over 95% of the
Chinese population was below the poverty line in 1978. Today
that share would be below 5%. It is expected that by 2020,
poverty according to the 2010 standard will have been
completely eradicated.
38

39. Poverty Headcount Rate of China, 1978-
present
0
10
20
30
40
50
60
70
80
90
100
Percent
Poverty Headcount Rate of China, 1978-present
1978 Standard
2008 Standard
2010 Standard
39

40. Economic Reform for the Future
 There are three major directions:
 Continuing to strengthen the role of the market in the allocation
of resources;
 Enhancing the quality of growth and de-emphasizing the quantity
of growth;
 Opening the economy further to international trade and cross-
border direct and portfolio investment, both inbound and
outbound. This is especially important because China cannot
afford to become isolated in the world, given the ongoing trade
war and economic and technological competition with the U.S.
40

41. Economic Reform for the Future: Letting the
Market Play the Decisive Role
 Implementation of the “rule of law”.
 Improving the social safety net.
 Reform of the income taxation system.
 Reform of the pension system.
41

42. Letting the Market Play the Decisive Role:
The Goods and Services Market
 The efficiency of the market system depends on both free entry
and effective competition. Free entry requires openness and
effective competition requires a level playing field for all
enterprises. It is the responsibility of the government to ensure
that there is sufficient effective competition in every market.
This means the enforcement of anti-monopoly and anti-unfair
competition laws, which are already on the Chinese law books.
Local protectionism should be actively forbidden. A level
playing field can be achieved by the elimination of subsidies and
implementing national treatment for all enterprises.
42

43. Letting the Market Play the Decisive Role:
The Goods and Services Market
 It is also possible for the government to be more pro-active in creating the
appropriate infrastructure. A concrete example is the national oil and gas
pipeline system that China is in the process of creating out of the existing
pipelines of the three major Chinese oil companies--China National
Petroleum Corporation (CNPC), China Petroleum and Chemical
Corporation (Sinopec), and China National Offshore Oil Corporation
(CNOOC)--that will serve all users on an equal basis. While the pipeline
network itself will be a monopoly, and will have to be regulated as a public
utility, its creation should minimise wasteful duplications and lower
transportation and transaction costs to all users, thereby greatly reducing the
costs of entry into the oil and gas industry by both upstream and
downstream firms.
 For example, an independent shale-oil explorer and producer can sell its oil
to any refinery or any petrochemical processing plant in the country through
the pipeline network. Thus, exploration, production, refining, petrochemical
manufacturing and distribution can all become more competitive and many
smaller enterprises can enter the oil and gas industry.
43

44. Letting the Market Play the Decisive Role:
The Goods and Services Market
 The same effects are also true of the national electricity grid and
of a network of wireless communication base stations (for
example, for 5G). In a broader sense, a national network of
public highways also serves the same purpose of facilitating
market competition and reducing local monopoly power.
 National standardization and quality assurance and certification
will also enhance competition in the goods and services markets.
44

45. Letting the Market Play the Decisive Role:
The Capital Market
 Increase equity financing to replace debt financing and thus
reduce the overall leverage in the economy.
 Mandate cash dividends for profitable state-owned enterprises to
encourage investors to hold equity long-term. This should also
decrease corporate leverage, improve governance, decrease
wasteful investment, enhance government revenue as a major
shareholder, reduce volatility of the stock market and provide
automatic market support for the stocks. This should also put
pressure on privately-owned enterprises to pay cash dividends to
their shareholders. The payment of cash dividends will also
make it very difficult to falsify accounts credibly.
 This should also provide Chinese households reliable and safe
investment instruments. 45

46. Economic Reform for the Future: Enhancing
the Quality of Growth
 Survival is no longer a problem for the Chinese people. By
2020, absolute poverty according to current standards would
have been completely eliminated. Altogether an estimated 740
million Chinese people have been lifted out of poverty since
1978.
 The focus is on the preservation, protection and restoration of the
environment, on blue sky, green mountains and clear waters, and
other public goods such as education, health care and elderly
care.
 Chinese people are also taking much more leisure—the average
number of work hours has been declining continuously and life
expectancy has increased significantly. Conventionally
measured GDP cannot reflect these improvements in welfare.46

47. Economic Reform for the Future: Opening the
Economy Further
 Reduction of tariff and non-tariff barriers to international trade in
goods and services.
 Facilitation of cross-border direct and portfolio investment, both
inbound and outbound.
 Further and fuller opening-up is also about the introduction and
adoption of new institutions, new processes, new systems and
new ways of doing things in China.
 “The Three Zeros Strategy: zero tariffs, zero barriers and zero
subsidies”.
 Internationalisation of the Renminbi by maintaining a stable
exchange rate on average.
47

48. Facilitation of Cross-Border Direct Investment,
Both Inbound and Outbound
 A new foreign investment law has been passed by the Chinese
National People’s Congress. Market access by foreign direct
investors will be considerably improved, with a substantially
shortened “negative” list, the elimination of the requirement of a
fifty-fifty Chinese joint-venture partner, and national treatment
for all enterprises irrespective of ownership in the open sectors.
48

49. Is “Reform without Losers” Still Possible?
 In 1978, China was extremely poor, and there were no significant
vested interests. In any case, the vested interests were adequately
protected, for example, by the dual-track system.
 Today, there are many significant vested interests and reform without
losers has become much more difficult, if not impossible. China is
not unlike the developed economies, in which economic globalisation
and innovation create both winners and losers. The free market on its
own cannot compensate the losers.
 Chronically uncompensated losers will eventually turn against the
establishment in frustration and anger. This is what has happened in
the U.S. and in Western Europe (the U.K., France, Germany, Italy,
etc.).
 In China, income disparity has also increased significantly. However,
most Chinese people still remember how bad things were in 1978, and
realise how much improvement there has been. But in another decade
or two, another generation with no memory of the hard times may
decide to vent their anger and frustration more openly.
49

50. Projections of the Future
 It is assumed that the Chinese economy will continue to grow above 6% per annum
for a few more years, declining gradually to between 5% and 6%, and that the U.S.
economy will grow at an average rate of 3% per annum between now and 2050.
 In 2018, the Chinese economy grew 6.6%. The 2019 target growth rate for the
Chinese economy is between 6% and 6.5%. In 2019Q1, the Chinese economy
grew 6.4%, despite the China-U.S. trade war. The target rate of growth of the
Chinese economy for 2019 is a range between 6.0 and 6.5%, indicating the
confidence and resolve to achieve at least 6%.
 In 2018, the U.S. economy grew at 2.9%. But both the U.S. Federal Reserve Board
and the U.S. Congressional Budget Office expect 2.3% growth for 2019. 3% per
annum has been the long-run rate of growth of the U.S. economy.
 It may be thought that the Chinese economy will be unable to sustain an average
annual rate of growth of between 5% and 6% for such a long time. Experience
shows that the rate of growth of an economy declines as its real GDP per capita
rises. But given the still relatively low level of real GDP per capita in China, and
the low level of its capital per unit labour, such a rate of growth should still be
possible for at least a couple of decades (see the following chart in which the
experiences of China, Japan and the U.S. are compared.)
50

51. Growth Rate vs. Level of Real GDP per Capita
(2017 tril. US$): China, Japan and the U.S.
-30
-20
-10
0
10
20
30
0 10 20 30 40 50 60
Percent
Real GDP per Capita, thousand USD, in 2017 prices
Rate of Growth of Real GDP vs. Real GDP per Capita (in 2017 US Dollars)
China USA Japan
51

52. Projections of the Future
 The Chinese national savings rate is very high, which enables a very
high investment rate. The tangible capital stock of China will therefore
continue to grow rapidly. The capital-labour ratio of the Chinese
economy is still very low compared to both the U.S. and Japan. There is
a great deal of room for it to rise and to raise the productivity of labour.
 In addition, there is still significant surplus labour in the Chinese
economy. The share of employment in the primary sector is just below
30% whereas the share of GDP originating from the primary sector is
below 10%.
 The Chinese manpower problem can be alleviated by increasing the
mandatory retirement ages from their current 55 for women and 60 for
men.
 China has significantly increased its investment in human capital and
Research and Development. It already has the largest number of internet
users in the world. Moreover, it still has significant room to grow.
52

53. Chinese National Saving and Gross Domestic
Investment as Percents of GDP
10
15
20
25
30
35
40
45
50
55
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Percent
Chinese National Savings and Gross Domestic Investment as a Percent of GDP since 1952
Savings Rate Investment Rate
53

54. Comparison of National Savings Rates:
China, Japan and the U.S.
10
15
20
25
30
35
40
45
50
55
Percent
The United States
China
Japan
54

55. Comparison of Capital-Labour Ratios:
China, Japan and the U.S.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
US$,in2016prices
The United States China Japan
55

56. The Distribution of Chinese GDP by Sector
Since 1952
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
The Distribution of Chinese GDP by Originating Sector Since 1952
Primary Sector Secondary Sector Tertiary Sector
56

57. The Distribution of Chinese Employment
by Sector Since 1952
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
The Distribution of Employment by Sector since 1952
Primary Sector Secondary Sector Tertiary Sector
57

58. Scatter Diagram between the Shares of
Employment and GDP of the Primary Sector
0
10
20
30
40
50
60
70
80
90
0 5 10 15 20 25 30 35 40 45 50 55
ThePercentageofthePrimarySectorinNationalEmployment
The Percentage of the Primary Sector in GDP
China
Taiwan, China
South Korea
Japan
58

59. The Number of Internet Users in Selected
Economies
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
millionpersons
The Number of Internet Users in Selected Economies, million persons
China
United States
Japan
India
Germany
Korea, Rep.
Taiwan
59

60. The Number of Internet Users as a Percent of
the Population in Selected Economies
0
10
20
30
40
50
60
70
80
90
100
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Percent
The Number of Internet Users as a Percent of the Population in Selected Economies
China
United States
Japan
India
Germany
Korea, Rep.
Taiwan
60

61. Projections of the Chinese and the U.S.
Economies
 In his work report to the Nineteenth National Congress of the Communist
Party of China, President XI Jinping identified several Chinese development
milestones at 2020, 2035 and 2050.
 The first milestone is to become a moderately well-off society by 2020. Our
projections show that by 2020, Chinese real GDP per capita (in 2018 prices)
will exceed US$10,582 (compared to US$65,541 for the U.S.).
 Our projections also show that by 2033, Chinese real GDP will surpass U.S.
real GDP (US$32.7 trillion versus US$31.9 trillion), making China the
largest economy in the world. However, in terms of real GDP per capita,
China will still lag behind significantly, with US$22,088 compared to
US$89,363 for the U.S.
 By 2050, Chinese real GDP will reach US$83 trillion compared to US$53
trillion for the U.S. In terms of real GDP per capita, China will reach
US$53,408, still below the current (2018) level of U.S real GDP per capita
of US$62,609, compared to US$138,693 for the U.S.
 It will not be until the end of the 21st Century for the Chinese real GDP per
capita to catch up with the U.S. real GDP per capita.
61

62. Actual and Projected Levels and Growth Rates
of Chinese and U.S. Real GDP (2018 tril. US$)
-3
0
3
6
9
12
15
18
21
24
-5
0
5
10
15
20
25
30
35
40
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Percent
USDtrillions,2018prices
Actual and Projected Chinese and U.S. Real GDPs and Their Rates of
Growth (trillion 2018 US$)
Rates of Growth of U.S. Real GDP (right scale)
Rates of Growth of Chinese Real GDP (right scale)
U.S. Real GDP, in 2018 prices
Chinese Real GDP, in 2018 prices
62

63. Actual and Projected Chinese and U.S. Real GDP/Capita
and Their Annual Rates of Growth (1,000 2018 US$ & %)
-4
-2
0
2
4
6
8
10
12
14
16
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
percent
USDthousand,2018prices
Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of
Growth (thousand, 2018 US$)
Rates of Growth of U.S. Real GDP per capita (right scale)
Rates of Growth of Chinese Real GDP per Capita (right scale)
U.S. Real GDP per Capita, in 2018 prices
Chinese Real GDP per capita, in 2018 prices
63

64. Actual and Projected Levels and Growth Rates
of Chinese and U.S. Real GDP (2018 tril. US$)
-3
0
3
6
9
12
15
18
-20
-10
0
10
20
30
40
50
60
70
80
90
100
110
120
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
Percent
USDtrillions,2018prices
Actual and Projected Chinese and U.S. Real GDPs and Their Rates of
Growth (trillion 2018 US$)
Rates of Growth of U.S. Real GDP (right scale)
Rates of Growth of Chinese Real GDP (right scale)
U.S. Real GDP, in 2018 prices
Chinese Real GDP, in 2018 prices
64

65. Actual and Projected Chinese and U.S. Real GDP/
Capita and Their Rates of Growth (1,000 2018 US$)
-4
-2
0
2
4
6
8
10
12
14
16
-40
-20
0
20
40
60
80
100
120
140
160
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
percent
USDthousand,2018prices
Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of
Growth (thousand, 2018 US$)
Rates of Growth of U.S. Real GDP per capita (right scale)
Rates of Growth of Chinese Real GDP per Capita (right scale)
U.S. Real GDP per Capita, in 2018 prices
Chinese Real GDP per capita, in 2018 prices
65

66. Projections of the Future: Technological
Competition with the U.S.
 Technological competition with the U.S. is motivated by national
security considerations as well as commercial considerations.
 No individual or firm will want to give away or sell its core
competence. In old China, masters typically do not teach their
apprentices everything, unless they are male lineal descendants.
It should therefore not be surprising that nations will protect their
core competences.
 In the case of the atomic bomb—the former Soviet Union
developed it independently; China developed it independently,
without any foreign assistance; the U.K., France, India, Pakistan
and even North Korea developed their nuclear bombs
independently. 66

67. Projections of the Future: Technological
Competition with the U.S.
 China will have to continue to develop its own advanced
semiconductor, artificial intelligence, and aircraft industries as it
may not be able to import the best available from other countries.
 The U.S. restrictions on U.S. enterprises in their trade with
Huawei is a Sputnik moment for China, just as the successful
launch of the Sputnik satellite by the former Soviet Union in
1957 spurred scientific and technological developments in the
U.S. which finally won the race of putting the first man on the
moon. China will have to accelerate its indigenous R&D.
67

68. Concluding Remarks
 China will continue in its efforts to further its economic reform and
open its economy. It should be win-win for both China and the world.
 Based on its economic fundamentals, the Chinese economy should be
able to achieve a real rate of growth of at least 6% in 2019 even
though the level of its exports may decline. In the long run, it should
be able to continue to grow at between 5% and 6% per annum for at
least a couple of decades.
 The competition between China and the U.S. for economic and
technological dominance, whether friendly or unfriendly, can be
assumed to be an ongoing and long-term one. It is the “new normal”.
The trade dispute is only a symptom of the potential possible conflicts
between the two countries.
 However, this competition/rivalry is not existential, unlike the rivalry
between the former Soviet Union and the U.S. China has no intention
of promoting its political and social system in other countries as the
former Soviet Union did. 68

69. Concluding Remarks
 It is likely that the China-U.S. trade negotiations will be stretched out,
perhaps with an interim “understanding”, and that the U.S. tariffs on the
remaining approximately half of Chinese exports of goods to the U.S.
(US$290 billion in 2018 according to U.S. data) will be put on hold. I
believe a complete rupture of the China-U.S. relation is unlikely as the U.S.
still needs Chinese cooperation on such issues as North Korean
denuclearization and large U.S. corporations still have significant interests
in the large and growing Chinese market. China also needs the U.S. to
supply critical semi-conductors and semi-conductor manufacturing
equipment.
 To reduce the probability of an armed conflict between China and the U.S.
down the road, China-U.S. relations must be carefully managed going
forward. Both countries should promote greater mutual economic
interdependence, to make their relations win-win, so that a war between
them would be unthinkable, just as another war between France and
Germany, which fought three wars between them, in 1870, 1914 and 1939,
is not possible today.
69