On May 31, 2007 the Carnegie Endowment for International Peace sponsored an event entitled “China’s Economic Fluctuations and their Implications for the Rural Economy.” Carnegie Senior Associate Albert Keidel presented his research sponsored by the Ford Foundation; Fred Gale (U.S. Department of Agriculture) and Stephen Voth commented on the research and Vikram Nehru (World Bank) moderated the discussion.

Keidel’s research explores how China’s macroeconomic fluctuations since 1978 affected China’s rural economy.  Keidel described the fluctuations over this 30 year period, explained his methodology, and then discuss his findings.  One of the most interesting being that China’s growth is not export led, but is instead fueled by domestic demand.

Keidel focuses on the most recent macro fluctuations, 1996-2000 and 2000-2004, and relied on calculating GDP by the expenditure method because administrative reported statistics can be unreliable. An analysis of inflation and GDP shows that there are indeed clear economic fluctuations in China’s economy.

Keidel’s report explores numerous causal arguments about the different fluctuations.  He did this by testing various hypotheses, such as did lower CPI inflation rise real deposit rates, slowing cash flow? After testing this hypothesis Keidel concludes that major drops in CPI inflation cause real deposit rates to rise sharply. Another question Keidel discussed was whether China’s GDP growth has been export-led.  Looking at the cyclical pattern, Keidel concludes that China’s growth has not been export led; when the United States was in recession, China was growing.  This suggests that China’s growth is not driven by exports., but instead by domestic demand.

What has been the rural contribution to this domestic demand? From the fluctuations of urban and rural economies, Keidel concludes that the economies are somewhat independent.  In the rural economies, the government forces farmers to plant grain, which is one of the least profitable crops. Once it becomes too expensive for the government to subsidize, they allow farmers to plant whatever they want.  This has occurred four times since 1978, which explains fluctuations in grain production. In general, the rural areas are disadvantaged by the economic fluctuations.

Keidel recommends that China allow nominal interest rates to move up with inflation and import more grain.  The United States should reassure China that grain embargos will never be used.  Furthermore, the United States needs to recognize that China’s growth is not export-led; this means that the United States does not have a great influence on their economy, and we should try to improve our own competitiveness.

Fred Gale, from the United States Department of Agriculture, commented first on Keidel’s report. According to Gale, the Chinese rural economy is linked to world markets with varying degrees of strength for different commodities. For example, cotton, soybean, and corn prices are greatly linked to world markets. Gale points out that the past five years of stable growth is unusual given past history of fluctuations. Gale explains that the economy is driven by investment.  He also mentions that China is subsidizing the rural economy, which reached $5.5. billion dollars in subsidies last year.

Stephen Voth generally agrees with the conclusions of the paper but posed a few questions. For example, would using a different deflator affect the conclusions of the report? It might show that trade contributes to GDP growth more than Kiedel suggests, though Voth agrees that GDP growth is predominantly led by domestic demand. Voth also thinks there should be more analysis in the report on asset prices and real exchange rates.

Keidel concluded by clarifying that trade is very important to China, but that does not contradict the argument that China’s growth is not export led.  Keidel agrees with Gale that China’s investment rate is high, but Keidel suggests that this is normal for poor countries and that the investment is actually efficient.

During the Q&A period, the speakers commented on how migrant workers contributions to the economy are captured. Voth discussed how the political cycles, especially political directives, in China affect its economic cycles. Keidel thinks that to reduce rural poverty in the long term, the government needs to invest more in cities, especially in transport from rural areas to urban areas so that people can move more freely.

This event summary was prepared by Oriana Skylar Mastro, Junior Fellow in the China Program.