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Li Zhe:discuss forefront topics of macroeconomics research


I am very grateful and very honored to be here to discuss forefront topics of macroeconomics research. Professor Harald Uhlig gives the five key macro issues facing the China's economy during the post-crisis era, and I want to speak about my understandings on some of the issues. First of all, on the issue of economic growth and capital accumulation, Bai, Hsieh and Qian in 2006 found that after 1998, the average return on capital was about 20%, which of course is good news, because China's capital return rate is not lower than the rest of the world. However, Hsieh and Klenow (2009) proposed a serious capital mismatch in China's manufacturing industry. If the capital mismatch was corrected, China's manufacturing productivity would increase by 20%. Brant, Tombe, and Zhu (2013) also found similar evidence. In addition, the mismatch of capital they noticed was mainly existed between state-owned enterprises and private enterprises. Song and Wu (2015) identified similar degree of capital mismatch with data from Chinese enterprises. The idea of capital mismatch between state-owned enterprises and private enterprises was also the theoretical framework of Song, Storesletten, and Zilibotti (2011)’s article Growing Like China on Chinese-style growth. In this article, they proposed that higher productivity will be released through solving capital mismatch, which can be seen as a driving force for China's economic growth.


To answer Harald Uhlig’s question on whether China has accumulated too much capital. The answer is both yes and no. As we mentioned, since the existence of asset mismatch, there are some capital surplus in some industries and enterprises, while others may still in the lack of capital investment, which is a structural problem in China. This morning, Professor Tian Guoqiang also mentioned the improvement of the efficiency of resource mismatch is ultimately depends on the design of institutional mechanisms, and even the legal system. There is another mismatch that is similar to the mismatch of capital. The M2 growth rate of China’s broad money was very high, especially after 2009. The blue line on this figure represents money supply M2, which showed an inflection point in 2009 and ascended rapidly. Such a rapid growth caused worries among world’s economists for potential inflation. The black line refers to China’s inflation rate, which was not very high and was controlled at about 2% over 2012 and 2016. If we look at the PPI index, the PPI was even negative during a certain period of time at the same period. Therefore, it is possible that the mismatch of money and loans may also exist. There is another view believing that much of China’s capital has flowed into the housing market and the property market.


What is the response of the Chinese government to the structural issue caused by the assets mismatched? One of the important policies is the great “One Belt One Road” initiative. This Belt and Road policy aims to remove the shadow of financial crisis and output the over-capacity of declining industries to realize industrial upgrading. Let’s take a brief look at the effect of this policy. In 2015, Chinese enterprises made direct investment in the 49 “belt and road” countries and regions, achieved a year-on-year growth of 18.2%. The total value of service outsourcing contract signed with “belt and road” countries totaled 17 billion US dollars, with the yoy growth rate reached to 42.6%. By the end of the first half of 2016, total import and export to “belt and road” related European countries also reached to 17 billion US dollars. Here comes the question, without a specific analysis model, how to know what these numbers stand for and how the belt and road initiative impact China’s economic development and structural transformation.


We also discussed China's financial crisis and volatility but found few relevant research. One of the main reasons is the limited number of data on economic volatility in China—only data after 1992 or even later. After the financial crisis in the United States, a number of new theories on the forefront of economic research emerged to understand the driving factors that lead to the crisis. In an article (2014), Christiano and other professors put forward that the risk of fluctuation may be the most important driving impact on the business cycle. Here, the risk of fluctuation refers specifically to investment risk. They found that investment risk can explain 90% of GDP fluctuations in the United States. My student Luo also wrote a relevant paper. We found that the situation in China is different. Although it is important, the risk of fluctuation only explained less than 50% of GDP volatility. We also found that the impact of monetary policy and capital efficiency play a very important role in China. We also speculated that the impact of capital efficiency may be related to the mismatch of capital. By the way, China's capital mismatch may hinder economic growth in the long run, but helps to stabilize the economy in the short term. Another influential article after the crisis was from Jermann and Quadrini (2011), introduced the concept of financial shock, which refers to changes in financial market. In other words, the change of difficulties on borrowing from the market that changes with economic cycle. According to Wang Hetian’s article (2014), China’s financial shock can even explain 80% of GDP fluctuations—the impact is greater than the United States. Current research on financial market volatility and economic crisis is limited in China, and more research is needed in this area.


Professor Uhlig mentioned health care spending in OECD countries and you may wonder the number in China. This figure shows health care expenditure in China. In 1995, China's medical expenditure accounted for about 3.5% of GDP. The blue line is the total health care expenditure; the following red line refers to health expenditure shouldered by the government. At the early stage, government spending on health care was less than 1.8%. This number raised rapidly after 2006. Even in the early days, government’s health care expenditure had already reached 15% of total government spending. For the government, the rising health care spending would be a big burden.


To understand the impact of health care spending on the economy, we can use the following cutting-edge research. The article of Uhlig Professor and his co-writer (2016) published in the Econometrica established a R&D investment relationship between financial market and health care for the first time, bringing health care spending into the framework of macroeconomic. Another frontier article was Jones (2016)’s published in the JPE, which tried to establish a substitutional relationship between consumer goods R&D investment and health products R&D investment, incorporating human life value into standard growth theory for the first time.


These cutting-edge theories provide reference for our research. But China has its own special issues. Taking China's aging problem as an example, which is very different to that of the United States’. This is a figure from the French (2005) ‘s article on the RES, which shows the employment participation rate of the US. The upper on refers to the employment participation rate of healthy population. This line shows an obvious feature—the employment rate of the US labor force will decline sharply between the age group of 62 and 66 years old. One explanation is US’s pension policy.


One of my student studied the employment rate of labor force of the same age group in China and found completely different characteristics. There is no such a sharp decline and the participation rate of the elderly is higher. China has attached great importance on aging and published policy of delaying the legal retirement age. However, there is no macro model tools to help us analyze the how delaying legal retirement age may impact China's economic growth and structural changes. In the morning, Professor Qian mentioned that we need to have a model to connect observations from practice with the theoretical framework. This is urgently needed not only for the new structural economics we discussed this morning, but also for further studies on China's macroeconomics. Thank you!

◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation