Atlantic Council

On October 26, the Atlantic Council's Asia Program hosted a discussion examining China’s third quarter economic performance and implications for the country's strategies to address future economic growth challenges.

Banning Garrett, Director of the Asia Program at the Atlantic Council, gave opening remarks. Peter Bottelier, senior adjunct professor at the Johns Hopkins School of Advanced International Studies, introduced the speakers and moderated the event.

Albert Keidel, non-resident senior fellow at the Atlantic Council, with a presentation that began with graphical analysis of of GDP growth annually, quarterly year-on-year, and quarter-to-quarter (seasonally adjusted) to show China’s gradual deceleration and soft landing of 9.6 percent growth rate for this past third quarter, lower than the 11 percent growth in the first half of 2010. He attributed China’s slight economic decline to dealing with its own domestic crises and financing for construction, rather than to a loss of exports. Dr. Keidel then turned to annual and quarterly year-on-year inflation values versus GDP growth to illustrate how China uses inflation to control rapid growth. The 30-year pattern China has traditionally stuck to for economic growth is one of stimulation, overheating, then tightening down, which has a negative correlation with the U.S. growth rate. In addition, he addressed other issues such as China’s recovering trade surplus to a level that makes the U.S. uncomfortable, and how its current account surplus is much larger than its trade balance. Finally, Dr. Keidel discussed reasons behind the currency noise, including political campaigns using China as a scapegoat for the poor U.S. economy, perceptions of U.S. jobs being lost to China from its undervalued currency and large export-driven economy, and misconstrued understandings that China unbalanced the world when in fact the U.S.’s fragile credit market was largely responsible, and what to keep an eye on in the coming months (Congress’s bill allowing the President to impose tariffs on Chinese goods, the Treasury’s postponed currency report, the globalization of the RMB via Yuan-denominated bonds, and the “special role” of the dollar in providing liquidity to the world, according to Treasury Secretary Tim Geithner).

Paul Cavey, Division Director and Head of China Economics at Macquarie Securities in Hong Kong, opened up with discussing China’s interest rate hikes as part of the government’s efforts to curb the asset-based bubble. He then talked about three short term risks to focus on: asset price inflation, China’s widening trade surplus, and pressure on the RMB. He then discussed structural shifts in China’s economy. Consumption is growing in China (despite it not comprising a significant proportion of GDP), but the question is ensuring that consumption is an independent drive of growth. This depends on health care reform to bring down the attractiveness of savings. Secondly, he discussed how higher interest rates in China could be used to lower its trade surplus and allow consumption to grow. Since Chinese households will save regardless, Mr. Cavey said, the PRC should reward savings with a higher interest rate indexed to inflation. The last structural change he discussed was the internationalization of the RMB.

Andrew Dougherty, China Affairs Specialist for Capital Research Group for the Beijing Capital Group, mainly discussed the political cycles in both the U.S. and China, and how transitions of the heads of leadership in both states will create domestic pressure to show their “strong hand”. Furthermore, the new 5-year plan announced by the PRC emphasizes energy conservation, a move towards higher consumption as a percentage of GDP, and income distribution. Mr. Dougherty also discussed the likely difficulty facing China in implementing policies given the upcoming political transitions in 2012 and the new 5-year plan, and the recent precedent set from President Hu Jintao and Premier Wen Jiabao experiencing some stalemates the past five years.

Peter Bottelier moderated the Q&A session, which covered a range of issues including China raising the reserve requirement; the PRC’s use of bill sales along with reserve requirements as tools; the liberalization of financial sector elements; the internationalization of China’s currency; and China’s reacting to domestic pressures that will move the RMB more quickly. Dr. Bottelier made extended comments on the importance of focusing on the exchange rate in real terms rather than in nominal terms. U.S. Treasury Secretary Geithner emphasized this during the G-20 financial leaders’ meeting last weekend, and his effort should be applauded so that more meaningful debates on this issue can take place.

Event Media - Audio [mp3, 1:24:50)

About the Presenters:

Albert Keidel

Dr. Albert Keidel is a Non-Resident Senior Fellow at the Atlantic Council, and an independent researcher with over 25 years' experience analyzing China's economy.

Dr. Keidel was a Senior Fellow at the Carnegie Endowment for International Peace from 2004 to 2009, after serving as acting director and deputy director for the Office of East Asian Nations at the U.S. Department of the Treasury.  His work at the Endowment focused on issues relating to China’s economic system reforms, macroeconomy, regional development and poverty reduction strategy.

Earlier in the decade he was acting director and deputy director of the U.S. Treasury Department's Office of East Asian Nations after first serving briefly as Treasury's China desk officer. Before joining the Treasury in 2001, he covered economic trends, system reforms, poverty and country risk as a senior economist with the World Bank office in Beijing.  Dr. Keidel has worked in China, Japan and Korea and taught graduate economics courses on China, Japan and economic development.

Paul Cavey

Paul Cavey has been a professional economist covering Asia for twelve years. He started out working in the London-based Asia team of the Economist Intelligence Unit’s London office in 1997. In 2000 he moved to Asia, first to study Chinese in Taiwan, and then rejoined the EIU in Hong Kong in 2002 as chief China economist. In 2005 Paul joined Macquarie, where he is now a Division Director and head of China economics. Paul received a 1st class bachelor’s degree in economics and politics from the University of Bristol, and graduated with distinction from the Master’s programme of the School of Oriental and African Studies. He has written extensively about economic issues in Greater China, including opinion pieces that have appeared in publications such as the Wall Street Journal and Financial Times.  He has travelled widely in China, Taiwan and Hong Kong, and is fluent in Mandarin Chinese. 

Andrew Dougherty

Andrew Dougherty is the China affairs specialist for Capital Research, with responsibility for conducting China macroeconomic and political research and assisting in operational initiatives by The Capital Group in China. Mr. Dougherty joined the firm in 2004 as a participant in "The Associates Program" (Capital's two-year investment management rotational program). He earned a BA (summa cum laude) in economics and international affairs from George Washington University, and an MPhil in Modern Chinese Studies from Cambridge University, and is proficient in Russian and Mandarin.

Pieter Bottelier

Dr. Pieter Bottelier is an Economist and China Scholar, and has been a Senior Adjunct Professor at SAIS since 1999. He has been a Senior Advisor on China for the Conference Board since 2006, and a Visiting Scholar at the Carnegie Endowment for International Peace since September 2009. He has written numerous articles and book chapters on China’s economy. 

Dr. Bottelier’s career includes serving at the World Bank from 1970-1990.  His experience at the World Bank includes time on various assignments as a desk economist for East and West African countries; serving as the resident Chief Economist in Jakarta, Indonesia; Division Chief for Mexico; Consecutive directorships for Latin America and North Africa; Chief of the World Bank’s Resident Mission in Beijing; and Senior Advisor to the Vice President for East Asia.

He has served as a research fellow at the Brookings Institute, and was a Harkness Fellow of the Commonwealth Fund in New York for study in the US.  He has degrees from the University of Amsterdam in 1962 and was a Guest Scholar at MIT 1962-63.