This special issue includes four articles that analyze the structural, environmental, and financial challenges China is currently facing.
In the article, “Profit, Accumulation, and Crisis: Long-Term Movement of the Profit Rate in China, Japan, and the United States,” Minqi Li painstakingly compiles data to measure long-term profit rates in China, the United States, and Japan. Profit rare is calculated by multiplying profit share (of output) and the capital-output ratio. According to Li’s computation, China’s profit rate averaged 20.9% from 1991–2010. The high profit rate stimulates China’s rapid capital formation and economic growth, averaging at an annual rate of 11% and 10.5%, respectively. However, China’s profit rate declined significantly after 2010 with an average annual decline of 1.6 percentage points. By 2015, China’s profit rate had fallen to 13.1%. Li asserted that the profit share and output-capital ratio would continue to decline; and as a result, China’s profit rate would continue to level off and fall below 10% in just a few years. This trend is rather alarming when compared to historical parallels— the U.S. profit rate approached 10% in the 1970s when the economy struggled with stagflation and experienced major instabilities. Japan’s profit rate has fluctuated around 10% as the Japanese economy sinks toward zero growth. Li ended with a cautionary note: the decline of profit rate could be followed by a deceleration of capital formation, culminating into a major economic crisis.
Yan Liang’s piece, “Rebalancing, Deleveraging, and Sustaining Growth in China” examines the challenges of rebalancing and deleveraging simultaneously when China’s corporate sector is greatly in debt. To rebalance the economy, investment must slow down, which inevitably reduces the aggregate profits of corporations. But in order to deleverage, corporations must be able to improve their profitability, which would in turn enhance their capacity to pay back loans and reduce their reliance on credit. Liang further analyzes the interconnections between the “real” and the financial sectors. In particular, she shows that the rise of the shadow banking worsens financial fragility of the formal banking sector and contributes to the overall indebtedness of the real sector. Based on these analyses, Liang critically reviews current deleveraging policies and proposes alternative policy options. In addition to the usual policy recommendations, such as enhancing financial regulations, Liang particularly argues for more centralized government spending to sustain effective demand while private investment continues to slow down. This would help sustain profitability of the corporate sector. From the deleveraging perspective, the central government should take on more debt in order to allow private corporations and local governments to deleverage. In short, rebalancing and deleveraging must be pursued concurrently with the central government playing a more direct and effective role.
Efficient energy uses are crucial for China’s sustainable growth. Jiang and Khan simulate China’s energy uses under different scenarios of structural changes in their article, “Structural Change and Energy Use in China: A SAM-Based CGE Analysis.” They constructed a structuralist computable general equilibrium (SCGE) model based on three productive activities— agriculture, energy, and industry. Using this model, they simulate the effects on real GDP growth and energy uses due to industrial investment demand increase, industrial wage increase, exchange rate depreciation, and government spending increase in industry. First, with an increase in industrial investment demand, the industrial employment share increases but output share declines. Industrial labor productivity increases while energy productivity declines and energy-labor intensity increases. Second, an industrial wage increase results in real GDP decline and cost-push inflation, but the contractionary effect depends on elasticities of imports and exports. What is interesting is that with an industrial wage increase, energy productivity declines and energy-labor intensity increases. Third, an increase in government spending has a similar effect as an increase in industrial investment demand, with the exception that private balance is improved while public balance is worsened. Finally, a devaluation of currency has again the similar effects as industrial investment demand increases (assuming trade elasticities of .75), except that private and external balances are improved. The authors further tested another scenario where industrial exports are insensitive to home-foreign relative prices. They found that under this scenario, devaluation becomes contractionary and wage increase also results in slight contraction in real GDP. The authors end with some policy recommendations that call for wage-led growth and improvement in energy productivity.
Finally, Chen and Xu estimate the size of informal employment in China and draw out the implications in their piece, titled “Informal Employment and China’s Economic Development.” Using the labor market approach, Chen and Xu find that informal employment share increased from 22% to 60% between 1992 and 2008 but declined to 54% as of 2014. When rural employment is included, informal employment share reached 78% to 85%, with the peak occurring in 2003–2005. Then the ratio declines to only 76% in 2014. Using the energy consumption approach, Chen and Xu estimate that the informal sector/employment stagnated for most of the time in the 1990s, but expanded in the 2000s and peaked around 2004–5 (with rural employment included) or 2008 (with rural employment excluded). Informal sector/employment has declined since the mid-2000s. Based on the findings, Chen and Xu argue that the declining trend of informal employment entails contradictory implications for China. On the one hand, a decline in informal employment indicates progress as the process of formalization often brings better income and welfare for workers. But on the other hand, the decline in the informal employment signifies the shrinking “reserve army of labor.” This suggests that labor costs are likely to continue rising, which may undercut China’s competitiveness. The authors end with some policy proposals, calling for the government to play a vital role in facilitating transition from low-wage, informal economy to high-wage, formal economy.