Veteran development economist Liu Shijin, former Vice President of the State Council Development Research Centre, made the above point in his speech at the “Vision China” High-Level Forum of the Tsinghua PBC (People's Bank of China) School of Finance (PBCSF) on 2 April. Click here and here.
China's unprecedented quickening demographic contraction plus a new stage of slower growth, not to mention severe geopolitical headwinds, makes it even more critical for Total Factor Productivity (TFP) hikes ("high quality development") if its Middle Income Trap is to be overcome, i.e. transiting from per capita GDP of approximately $12,700 (end 2023) to $30,000 to $40,000 by 2035 befitting a "moderately developed country."
To turbo-charge TFP, Liu sets store on shifting emphasis from "physical capital" to "human capital", in other words, expanding social security, healthcare, education, and the service sector in support of hukou (household registration) reform, apart from technological upgrading and stabilizing the all-important real estate sector.
A new generation of service-providers and middle-class consumers is expected to be unleased from some 300 million farmer-turned-workers and 200 million rural migrant workers in cities. They are expected to re-vitalize the economy along with growth-enhancing entrepreneurs and local leaders. (2+1 "growth drivers").
However, in view of herculean obstacles, Liu points out that the above pro-growth policies are not enough. They need to be accompanied by rapid exchange rate appreciation. He cited the latter's over-sized contribution to Germany's and Japan's GDPs in purchaing power parity terms in the 16 years after 1971. Japan's GDP grew by 4.4% on average, with the exchange rate appreciating by 5.1%; Germany's GDP grew by 2.3% on average, with the exchange rate appreciating by 4.3%. Indeed, Japan's per capita GDP once surpassed that of the U.S. in the 1990s, reaching 1.5 times the U.S. level, thanks to its dramatic exchange rate appreciation.
Nevertheless, Liu warns that exchange rate changes are complex, adding that "Japan and Germany experienced significant appreciation under specific international conditions, which have changed considerably. However, for China, which is entering a similar growth stage, these experiences are worth studying and learning from".
