Spotlights on the Chinese Economy

By Yucai Yu

On October 6, 2017, George Washington University’s Institute for International Economic Policy hosted its 10th Annual Conference on China’s Economic Development & U.S.-China Economic Relations at the Elliott School of International Affairs. The Conference featured speakers from both American and Chinese universities as well as experts from research institutes and a Chinese government agency.

The Conference started with a keynote speech given by Professor Shang-Jin Wei from Columbia University. He presented research on the impact of U.S.-China trade on local U.S. labor markets from a supply chain perspective. The conclusion was counter-intuitive: following a period of “trade shock”, trade with China has actually helped U.S. employment. According to Professor Wei, this showed that people might not be fully aware of the indirect influence of the U.S.’s trade with China. He reflected that the academic community needed to do a more thorough job educating itself and the public about the whole picture.

A panel talk on the subject of infrastructure, environment, and growth followed Professor Wei’s keynote speech. Professor Shanjun Li from Cornell University presented his study on the impact of air pollution on the Chinese economy. Professor Li’s research quantified the short and medium term impact of PM2.5 (tiny particles in the air with a width of two and one half microns or less) exposure on health. With a model considering air pollution data, consumer spending data (collected via cards transactions settled through UnionPay, the counterpart of VISA in China), and meteorology data, the analysis led to the conclusion that China’s annual health costs would be reduce by 50 billion RMB (roughly 7.5 billion dollars) if average PM2.5 dropped from the current 56 μg/m³ to the World Health Organization’s standard 10 μg/m³. This health cost saving would equal around 0.45% of China’s GDP and 8% of total health spending. Professor Simon Alder from the University of North Carolina subsequently presented his research on political distortions and infrastructure networks in China in the panel talk. Based on data of geography, income, and politicians’ birthplaces, Professor Alder started with Heuristic Network Design Algorithm, an algorithm used to obtain the optimal highway network design, and compared the ideal design with actual highway network in China. He then quantified the distortions caused by politicians’ birthplaces, meaning these birthplaces more likely to be close to the actual network relative to the optimal network. While the optimal network implies a 0.75% higher aggregate net income each year, 0.1% of this income difference or 1/7 of the total distortion may be attributed to the birthplaces of politicians.

The morning concluded with a policy session discussing Chinese macro-economy in the next decade. Three speakers represent three different perspectives. Dr. Derek Scissors from the American Enterprise Institute pointed to the decline in private ownership and competition in China, which he believed were the reasons behind Chinese economy’s past waves of growth. He also cautioned the dramatic change in multiple Chinese economic data, for example, China is now three times more leveraged than the United States in respect of debt. In his opinion, the reform needs to be done right now or never. Dr. Jiyao Bi from Chinese National Development and Reform Commission presented a different view. He broke down the economic development plan proposed by the Chinese government and viewed the current status as part of the “new normal” of the Chinese economy. Current policy is focusing more on transforming the economic structure and finding new driving forces of the economy. Economic reform in China involves numerous complicated issues and the government is indeed trying to push the reform process, for example, restructuring state owned enterprises. Finally, Professor Jay Shambaugh brought out a middle ground point of view. He did examine reasons to worry about the Chinese economy, particularly the skyrocketing credit to the non-financial sector. There were different outcomes associated with similar situations in history, and a financial crisis would not be a certain result, especially in light of the unique role of government in China. The core problem is corporate leverage, and the process to solve this issue would require quick, but difficult and even unpopular political choices.

The all-day long conference also featured topics including globalization and human capital, outlook of U.S.-China trade relations, and the China model of economic development.