The year is 2031, and China’s economy is defined by a wave of new medium and large sized firms that have replaced the old, inefficient State Owned Enterprises. This led to… middle class. How did they get here?
The private sector in China
Inefficient; half of private firms. More debt than private firms: 2005, both had DER of 1.3; 2013 0.8 for P, 1.6 for SOE. Debt:GDP 260%, 115% of which is SOEs. However, in 2012 was only 100%. From 2006-2016, share of profits by SOEs has halved. Response: lighter touch model (like Singapore) in 2015; encouraged growth of new private firms to take over SOEs.
A new reserve currency?
Renminbi to be a WRC, indicated by 1) Petrodollar demand drops as Reuters, Deloitte and BP predict US becomes oil self-sufficient by 2035; FT ran 2015 piece on how China overtook US importing oil, trend continues in future. China deliberately securing use of renminbi in trading oil: 2012 – Iranian diplomats confirm China buying crude oil in Yuan. PBOC and UAE Central Bank perform $5.5bn currency swap, setting stage for Abu Dhabi settling oil sales to China in yuan.
2) China taking advantage of IMF’s Special Drawing Rights. August 2015, World Bank issued 500 million 3-year SDR bonds to selection of 50 banks, brokerages and insurers in China; director general of PBOC Zhu Jun says bonds will attract official investors and then private sector. China Construction Bank Corp. predicted that in the years following, SDR bonds would swell to $7bn across nation. Renminbi included in SDR basket as of October 2016: central banks holding SDRs all over the world exposed to renminbi overnight, gains official reserve currency status quickly
Why advantageous to the Chinese private sector? Reduction in regulations surrounding capital flows + SDR bonds = businesses can venture outside China more easily Better capital account convertibility + more open capital market = financing needs met easily (according to Holdings Plc chief China economist Qu Hongbin.
But might a stronger currency threaten low-value added Chinese exports? Not an issue, as changes to the manufacturing sector are forcing China to switch to high value-added.
China reaches a Lewis Turning Point
Lewis turning point (IMF forecast this by early 2020s). Cost of labour rising since 2000 by 20% per year. Cost of capital rising 4.3% per year between 2000-2010. Between 1990-2005 China needed $3.4 capital for $1 GDP – by 2005-2015, this was $5.4 – by 2025 (IGM predicted the figure would be) $7.6. Trend was already evident in 2016: some heavily capital-reliant industries required .96c in China for every dollar in US. Therefore cost advantages of producing in China disappeared.
Solution is innovation: new business models (such as Xiaomi increasing the lifespan of phones to 24 months to benefit from greater economies of scale and reduce cost of researching new components), higher quality products that fit into different market tier. Already in 2016: R&D jumped from 43% of US’ R&D in 2012 to nearly 60 in 2016.
This growth of the private sector responsible for other changes: fuels ballooning middle class, higher incomes and also attracts FDI to China alongside educated foreign workers to meet the demand created by Chinese firms (15 years not enough time to re-educate entire generation of Chinese students).
China also had to tackle financial instability in the peer-to-peer lending sector before 2031. The industry started around 2013 and grew tenfold in the next couple of years to account for 0.5% of Chinese lending, though it was rife with fraud, scams and malpractice circa 2014-16. The best example of this was Ezubao, the largest peer-to-peer lending group in 2015 which turned out to be a Ponzi scheme, costing 900,000 investors the equivalent of US$7.2 billion.
What did the government do to stop this issue?
What happened was that stricter Chinese regulation of the sector from around 2017 onwards, which included the setting up of a regulatory authority for peer-to-peer lenders and increased penalties for those engaging in malpractice, not only helped to rid the sector of most issues but also aided China’s growth as small firms and individuals were more able to gain financing as a result of Chinese lenders increased trust in the system. Because of this, the value of the shadow banking industry (which was estimated at 45 trillion yuan in 2016) has grown at a far slower rate than the Chinese banking industry as a whole, though estimates of its true size are likely to be unreliable.
China also had to cope with financial instability caused by the prevalence of non-performing loans, or NPLs. In 2016 the proportion of NPLs as a total of all Chinese loans was very hard to establish; back in the days before Chinese figures were reliable, official statistics stated that NPLs formed 2.15% of Chinese commercial bank loans, although most independent estimates placed them at around 10% and Kenneth Rogoff famously said that ‘no serious person thinks it’s below 7-8%’. These statistics were even harder to estimate given the fact that the definitions of NPLs varied widely between China and the West, the fact many bad loans that would be NPLs elsewhere were classed as being in ‘special measures’ under the Chinese system, and the fact that Chinese NPL prevalence only included the banking system and not those loans held by Asset Management Companies or other trusts. In 2022, after the proportion of non-performing loans to total Chinese loans increased to a widespread belief of around 20%, stock markets in China became increasingly volatile, eventually encouraging the Communist Party to ditch its strategy of doing nothing and letting all the bad debt roll over, and solve the issue.
What was the solution to this?
This took the form of a debt resolution act in the early 2020s, which relaxed Chinese restrictions on debt/equity swaps and encouraged banks to make use of them to regain capital due on any outstanding non-performing loans (given the valuation of the companies as valued by the newly-created Debt Management Agency). The resolution also gave banks greater power to seize assets to repay NPLs and reduced the time required to solve NPL disputes in the Chinese court system; the former increased inequality and poverty slightly in the short-term but eventually led to far higher levels of investment in Chinese businesses and subsequently lowered unemployment. China’s making the renminbi a world reserve currency also led to major increases in Chinese capital markets and foreign investment, and increased the proportion of Chinese debt held abroad from 5% to 35%, although (as in the past) there remain some complaints from foreigners of courts being biased in favour of domestic firms in loan disputes. Nonetheless increased foreign investment led to the spreading of NPL ownership around the world, reducing the impacts of default on the Chinese economy whenever defaults did occur (though NPLs currently stand at around merely 3% of Chinese loans).
In the news
The story of China different to story you will see in the news. If our predictions on China are right, expect these stories to develop as they are the steps China will take to protect and nurture its new private sector and world reserve currency status.
Corruption rid of to 1) aid credit flows to Chinese businesses 2) encourage investment in such firms by making them more reliable. Example of Xi Jingping.
Petroyuan recycling: cities in Nigeria, Iran like Dubai (especially given China’s fondness of designing and building entire cities from scratch). Benefits of such recycling: petrodollar used to purchase dollar-denominated assets such as treasury bills which ensure financial liquidity, keep interest rates low and promote non-inflationary growth – expect China to be afforded the same luxury.
One common question from students at this time of year is about recommendations for which university they should apply for. Students, of course, should think about many factors including proximity to home, relative cost of study, relative cost of living and the type of course they wish to undertake. Economics is a common subject to be delivered around the country but each institution will place its own spin with varying degrees of concentration on the individual topics within the core content. In particular, students should look carefully about the numerical content of the course and ask themselves if that matches their requirements and/or skills.
For a student that may be aiming high or looking for some guidance, they could do a lot worse than consider the 'Complete University' guide on where to attend. The guide uses criteria such as entry standards, research reputation, student satisfaction and job prospects to rank universities. Likewise, students may wish to consider the Times Higher Education World University Rankings if they are setting their sights a little wider.
The list below shows the 'Complete University' guide's top 10 and gives a little detail on each, as attained from the university's own publicity. The number in brackets is last year's rankings.
Cambridge University (1)
The Faculty of Economics at Cambridge has roots going back to the 1890s. Though frequently marked in the past by fervent internal academic debate, over theory, ontological approach and methodological orientation, the cumulative contribution of Cambridge economics to the development and evolution of the discipline nationally and internationally has been profound and unique. Cambridge has repeatedly attracted international recognition and distinction by spawning some of the leading economics thinkers and paradigm changers of the times, including, for example, Alfred Marshall (one of the founders of Neoclassical economics), John Maynard Keynes (his general theory of employment, interest and money), Joan Robinson (capital theory), Richard Kahn (multiplier theory), James Meade (international economics), Nicholas Kaldor (increasing returns and economic growth), James Mirrlees (taxation), and Partha Dasguta (poverty and environmental economics). During the 1970s, the ‘Cambridge School of Post-Keynesian Economics’ was a frequently used term to describe the distinctiveness of the research undertaken in the Faculty. The Faculty can boast several Nobel Prize winners over the past century.
Oxford's department of Economics is one of Europe's leading research departments and its members include some of the world's most distinguished academic economists. Amongst the current faculty, 14 are Fellows of the British Academy, 4 are Foreign Honorary Members of the American Academy of Arts and Sciences, 13 are Fellows of the Econometric Society and 7 are Fellows of the European Economics Association. Six Nobel prize winners in Economics – Sir John Hicks, Lawrence Klein, Sir James Meade, Sir James Mirrlees, Amartya Sen and Joe Stiglitz – are former members of the department. In the most recent UK Research Assessment, Oxford Economics had more research output graded as world-leading in terms of its originality, rigour and significance than did any other economics department in the United Kingdom.
The Department of Economics was one of the original departments of the University of Warwick when it was opened in 1965. Since its founding, the Department has become one of the largest departments in the discipline and is now widely regarded as one of the top Economics departments also across Europe. The Department has an academic staff of around 90, including 25 professors. It has approximately 1,200 undergraduate students and 300 postgraduates.
Both economics research and teaching emphasise modern economic analysis and quantitative methods. These have been key underpinnings of the work of the Department since its inception.
University College London (5)
The appointment of John Ramsey McCulloch to the chair of Political Economy at UCL in 1828, supported by funds raised in memory of David Ricardo, established the first Department of Economics in England. Jeremy Bentham was a major intellectual influence on the founders of UCL and Joseph Hume was a member of its original council. Two years later Say himself was appointed to the first Chair of Political Economy in France at the College de France in Paris.
The department of Economics has an outstanding international reputation in key areas of current research. It is the only department of economics in the UK to have received the outstanding grade-point average of 3.78 (out of 4) in the 2014 REFwith 79% of all indicators of output rated at the highest 4* level.
London School of Economics (4)
The LSE Department of Economics is one of the biggest in the world, with expertise across the full spectrum of mainstream economics. A long-standing commitment to remaining at the cutting edge of developments in the field has ensured the lasting impact of its work on the discipline as a whole. Almost every major intellectual development within Economics over the past fifty years has had input from members of the department, which counts ten Nobel Prize winners among its current and former staff and students. Our alumni are employed in a wide range of national and international organisations, in government, international institutions, business and finance.
St Andrews (13)
The School of Economics & Finance is consistently ranked the top Economics School in Scotland. Their research was highly rated in the most recent Research Assessment Exercise (RAE 2008) with 55% of our research rated as ‘world leading’ or ‘internationally excellent’. They have a structured and rigorous foundation of economic concepts, principles, analysis, techniques and knowledge. Their strengths include applied theory, dynamic macroeconomics, finance, household economics, competition, innovation and climate change.
Durham a world class reputation for research and teaching; our research is broad ranging and far reaching and includes theoretical and applied economics, economic growth and policy, behavioural economics and finance, and accounting. Courses concentrate on the fundamental theories and techniques to help you build a successful career in this competitive field. Taking in historic and current, domestic and international perspectives.
The Department has a strong international research reputation in mainstream economics. The University campus is compact, safe and vibrant with world class sports facilities. The campus is situated 2km from the centre of the beautiful historic city of Bath.
The School of Economics at The University of Nottingham is a recognised global leader in its field.
High-quality research feeds into its teaching; they were ranked 6th among the UK's economics departments for research power by the Research Excellence Framework 2014 with research acknowledged as among the most significant of its kind anywhere in the world.
Some aspects of Economics courses at Exeter:
Unique to Exeter, economic classroom experiments are embedded into modules
Flexibility to choose optional modules to suit your interests and career requirements
Study or work abroad or gain industrial experience
Emphasis on helping you improving skills for employment