Macroeconomy Report

November 22, 2011

Wensheng PENG
SFC CE Ref: ARI892

China

RESEARCH

Is 2012 an End or a Beginning? A Story of Chinas Economic Cycle

Highlights
By reviewing Chinas economic growth and the business cycles in the past thirty years, this report attempts to answer questions such as: Is the current economic slowdown a short-term cyclical phenomenon or the beginning of a long-term downward trend? How can the fine-tuning of macroeconomic policy strike a balance between maintaining growth and preventing a rebound of inflation? We find that, at present, Chinas economy is at the juncture of a long-term slowdown in aggregate supply and a short-term moderation in aggregate demand. From a long-term perspective, Chinas potential growth rate is bound to decline due to supply side constraints. From a short-term perspective, sluggish external demand and investment, together with subsequent cyclical policy expansion, are driving a business cycle - GDP growth will slow down to 8.4% in 2012, before picking up mildly to 9% in 2013. Expansion of aggregate supply, especially productivity gains derived from structural reforms is the main source of Chinas long-term economic growth. Over the past 30 years, the three episodes of rapid total factor productivity (TFP) growth were all related to structural reforms. Currently, the potential growth rate has slowed to ~9%, and will fall visibly in the next 10 years. The slowdown mainly reflects gradually fading globalization dividends associated with China's WTO accession, reduced room in the transfer of rural labor, and the housing bubbles squeeze on the real economy. Going forward, productivity gains will depend on deepening structural reforms. We estimate that potential growth rate will drop to 5.5~7.5% in 2020, depending on the progress of reforms.

pengws@cicc.com.cn

Tun LIN
SFC CE Ref: AWE515

lintun@cicc.com.cn

Yang ZHAO
Zhaoy@cicc.com.cn

Bin DU
SFC CE Ref: AYK088

dubin@cicc.com.cn

Aggregate demand fluctuations, together with counter-cyclical policies, have been shaping Chinas short-term business cycles since the mid-1990s, as the country transitioned from a shortage economy to an economy with adequate supply. We expect to see a turning point in the short-term cycle in 2012, with growth bottoming before it picks up slightly. Slowing export and investment growth will weigh on aggregate demand. Export is constrained with weak external demand, while investment slowdown is due to the de-bubbling of the property sector and de-leveraging of industrial sector.

The risk of a hard-landing is small, as recent falling inflation gives the government a lot more room to spur growth. Government-led investment is supported by counter-cyclical policy and the 12th FYP, which will help the economy accelerate in 2013. However, the acceleration is likely to be mild, due to the decline in potential growth rate and the need to control inflation.

Please read carefully the important disclosures at the end of this report

CICC Research: November 22, 2011

Contents
Reform drives Chinas long-term economic cycle ..................................................................................... 4 Productivity gain is the main driver of rapid growth .................................................................................. 4 Potential growth rate has dropped visibly................................................................................................. 7 Structural reform can prevent a sharp slowdown in economic growth ..................................................... 8 China is at an initial stage of long-term slowdown.................................................................................. 10 Short-term economic cycle is driven by external shocks and macroeconomic adjustment................ 12 Short-term cyclical fluctuations are characteristics of a market economy .............................................. 12 Aggregate demand growth loses steam in the short term ...................................................................... 14 The government has more policy space to spur growth......................................................................... 18 Which position in the short-term cycle will 2012 be?.............................................................................. 19

Figures
Figure 1: TFP growth is a key driver of Chinas economic growth .............................................................................5 Figure 2: TFP growth is the main driver of the three rapid-growth periods ................................................................5 Figure 3: The three episodes of rapid pick-up in potential growth rate were all related to reforms............................6 Figure 4: The globalization dividends associated with WTO accession are already limited ......................................6 Figure 5: The amount of transferrable rural labor has dropped significantly ..............................................................7 Figure 6: Land prices have risen rapidly.....................................................................................................................7 Figure 7: Chinas capital stock per capita is still relatively low ...................................................................................8 Figure 8: Chinas demographic structure leads to a high saving rate and thus a high investment rate.....................8 Figure 9: Working-age population growth slowing................................................................................................... 10 Figure 10: China still lags behind in terms of factors that influence the TFP .......................................................... 10 Figure 11: TFP growth depends on reform efforts ....................................................................................................11 Figure 12: Estimate of Chinas potential growth rate in the next decade .................................................................11 Figure 13: Comparison of economic growth under various levels of GDP per capita ..............................................11 Figure 14: Economic fluctuations are relatively mild in a market economy..............................................................11 Figure 15: Investment and external demand are the main sources of economic fluctuations ................................ 13 Figure 16: Political cycle in infrastructure investment.............................................................................................. 13 Figure 17: Infrastructure investment is increased to counter external shocks ........................................................ 14 Figure 18: Credit growth leads economic growth by 1~2 quarters.......................................................................... 14 Figure 19: Economic growth leads inflation by 3~4 quarters................................................................................... 15 Figure 20: The OECD leading indicator points to further slowdown in Chinas export growth................................ 15 Figure 21: Private housing sales growth leads housing starts growth .................................................................... 16 Figure 22: Growth of real estate GFA under construction may slow significantly ................................................... 16 Figure 23: Close correlation between private housing GFA under construction and real estate development investment ................................................................................................................................................. 16 Figure 24: Investment leverage ratio at historic highs ............................................................................................. 16 Figure 25: Business inventories have long been declining ..................................................................................... 17 Figure 26: Capacity utilization rate in key industries remains relatively low............................................................ 17 Figure 27: Trade surplus and fixed capital formation move in opposite directions.................................................. 18 Figure 28: No significant correlation between industry relocation and overall manufacturing investment.............. 18

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CICC Research: November 22, 2011

Introduction
China is seeing inflation enter a downward trend, while economic growth continues to slow down. External demand is likely to remain sluggish due to the European debt crisis, while domestic demand will likely be dragged by investment slowdown due to weakness in the property market. Investors now want to know how deep and how long this round of economic slowdown will be; and whether it is a short-term cyclical phenomenon or the beginning of a long-term trend. Related to this question, how can fine-tuning macro policy strike a balance between maintaining growth and preventing a rebound of inflation? This report reviews Chinas economic growth and fluctuations since the countrys reform and opening up, especially after the establishment of the market economy in the mid-1990s, in an attempt to find patterns to help us determine future economic trends. We look at both long-term growth trends and short-term cyclical fluctuations. Short-term cyclical fluctuations mainly reflect aggregate demand growth and the impacts of macroeconomic policies adopted to manage aggregate demand; while long-term growth trends mainly depend on the economys supply capacity and are more related to structural factors and policies. Unlike mature markets, in a fast-growing emerging market, changes in supply capacity often have a significant impact on economic fluctuations.

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CICC Research: November 22, 2011

Reform drives Chinas long-term economic cycle

Three key issues need to be understood to determine Chinas long-term economic cycle: What are the main drivers of Chinas rapid economic growth since the reform and opening up? Have changes in these factors led to a decline in Chinas potential growth rate, and by how much? And, what other factors do we need to watch out for to predict future growth trends? We try to answer these three questions in this chapter. After deconstructing Chinas economic growth (adjusted with HP filter) over the past 30 years, we found that Chinas economic growth has relied more on productivity gains (total factor productivity, or TFP growth); while the three historical episodes of rapid TFP growth were all related to institutional and structural reforms. Our analysis shows that Chinas potential growth rate has slowed from ~10% during the 11th FYP to ~9%, mainly due to: gradually fading globalization dividends associated with Chinas WTO accession; the property bubbles squeeze on the real economy; and the decreasing rural labor surplus, thus meaning there is less room in productivity improvement via labor transfer. Looking ahead, China is at an initial stage of long-term economic slowdown. The slower labor transfer will become a more significant constraint to TFP growth; and economic growth will rely more on structural reforms. We discuss two scenarios for future growth: baseline scenario and reform scenario. Under the reform scenario, R&D, education, and government effectiveness will improve notably, removing institutional and policy constraints to labor mobility. Under the two cases, the potential growth rate in 2020 will fall to 5.5% and 7.5% respectively

Productivity gains are the main driver of rapid growth

From the structural point of view, the TFP growth is a key driving force of Chinas economic growth. According to Growth Accounting, from the supply side, a countrys economic growth can be split into three components: Labor growth, capital growth and TFP growth1. We can find out the main growth driver by comparing the respective contributions these three factors make. Based on the findings of Park and Park (2010), we break down and compare various countries economic growth from 1992 to 2007. The results show TFP growth contributes ~50% to Chinas GDP growth (labor contributes 6% and capital 43%), well above that of advanced economies and Asian emerging markets (Figure 1). TFP growth contributes only ~1/3 to GDP growth in the four Asian tigers, and 1/5 in other Asian developing countries. This suggests TFP growth has been a key contributor to Chinas economic growth in the past 20 years2.

In general, TPF reflects technological progress and improvements in efficiency from an economic perspective, and is affected by various factors, such as R&D, stock of knowhow, social capital, government efficiency, economic system and culture. Mathematically speaking, it is a residual in growth accounting, or the part of GDP growth not explained by labor and capital growth. 2 Park and Park (2010) mainly use data from Penn World Table 6.3 and the ILO Laborsta database; and GDP and investment are estimated based on of PPP. We use the NBS GDP, employment and investment data to deconstruct Chinas economic growth; capital stock is estimated based on the Perpetual Inventory Method (depreciation rate at 4%), employment figures prior to 1990 are smoothing results. Our findings are similar to those of Park and Park (2010): TFP growth contributes 43% to Chinas economic growth, labor contributes 4% and capital 53%. Also, labor elasticity to economic growth is an important parameter and is estimated at 0.4 (based on reference to Chow and Li, 2002). Our sensitivity analysis shows the changes of this parameter in the range of 0.4~0.6 may lead to a slight increase in labors contribution, but will not impact the overall results to any meaningful extent.

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CICC Research: November 22, 2011 Besides cross-country comparison, we also break down the sources of Chinas economic growth each year (Figure 2). As we can see from the chart, over the past 30 years, there were three periods of economic acceleration: early 1980s; early 1990s; and the 2000s prior to the global financial crisis. Labor and capital growth were relatively stable during all these three periods, while TFP growth was the main growth driver. Technically, the TFP growth here is a residual, i.e. the part of GDP growth that is not explained by labor and capital growth. However, annual GDP growth is to a large extent affected by demand changes, meaning annual TFP growth also reflects short-term changes in aggregate demand, rather than just productivity changes. In order to remove the effect of demand changes, we often use a filtering (smoothing) method to get the trend growth of TFP and combine that with labor and capital changes to estimate the potential growth rate. Figure 1: TFP growth is a key driver of Chinas economic growth
Contributions to GDP growth: 1992-2007
%

Figure 2: TFP growth is the main driver of the three rapid-growth periods
Contributions to GDP growth in China
12 10

Capital

Labor

TFP

GDP growth

Labor

Capital

TFP

GDP growth

% 15 12

9
6

6
4

3
2

0
UK, France, Germany, US Japan Four NIES China 0 7 Asian developing countries

-3 1979 1983 1987 1991 1995 1999 2003 2007 2011

Source: Park and Park (2010), CICC Research 7 Asian developing countries: India, Indonesia, Vietnam, Pakistan, Philippine, Thailand, Malaysia

Source: CEIC, CICC Research

Please read carefully the important disclosures at the end of this report 5

CICC Research: November 22, 2011 The three episodes of a rapid pick-up in the potential growth rate were all related to reforms. We use an HP filter to estimate the potential growth rate over the past 30 years (Figure 3). The results show there were three episodes of rapid pick-up in the potential growth rate; and they all coincided with the TFP growth, mainly reflecting the dividends of structural reforms. The potential growth rate all declined afterwards as reform dividends waned. In the early 1980s, China kicked off rural reforms, in particular the household contract responsibility system reform, which significantly boosted agricultural productivity. The potential growth rate jumped from 8.7% in 1980 to 9.8% in 1986. The average GDP growth over these seven years was as high as 9.4%, 41% of which was contributed by TFP growth. In the early 1990s, China stepped up its reform with Deng Xiaopings Southern Tour speech and the decision to establish a socialist market economic system. The potential growth rate rose from 9.8% in the early 1990s to 10.3% in 1994. The average GDP growth rate over these five years reached 10.1%, 30% of which came from TFP growth. In the early 21st century, Chinas accession to the WTO further increased its trade openness. The potential growth rate again jumped from 9.8% in 2001 to 10.7% in 2006. The average GDP growth over these six years was 10.4%, 37% of which was contributed by TFP growth (Figure 3).

It is worth noting that Chinas WTO accession has boosted TFP from two aspects: First, with the expansion of foreign trade and foreign investment in China, Chinese enterprises have become fully engaged in global competition and enhanced productivity by improving technology and management. Second, export expansion facilitated the transfer of rural surplus labor, thereby spurring labor productivity growth. In the mid-1990s, Chinas economy was confronted with dual challenges of severely insufficient demand relative to potential production capacity and massive unemployment, as its working-age population gradually outnumbered net consumers and there was a large amount of surplus labor in rural areas. The WTO accession provided opportunities for China to reach its supply potential. Figure 3: The three episodes of rapid pick-up in potential growth rate were all related to reforms
Potential output (H-P filter)
Implementation of reform/opening-up and household responsibility system Southern tour speech and proposed shift to a socialist market economy Join WTO % 12

Figure 4: The globalization dividends associated with WTO accession are already limited
Openness total value of exports and import/GDP
% 70

60
11

50
10

40
9

China joined the WTO

30

8 1981 1986 1991 1996 2001 2006 2011

20 1985 1990 1995 2000 2005 2010

Source: CEIC, CICC Research

Source: CEIC, CICC Research

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CICC Research: November 22, 2011

Potential growth rate has dropped visibly

The potential growth rate has fallen visibly, from >10% during the 11th FYP to ~9% now. Our estimates show the drop has been more significant since 2008, due to three reasons: Globalization dividends associated with Chinas WTO accession has gradually been released. Chinas openness (trade-to-GDP ratio) has risen significantly since its WTO accession, up from <40% in the late 1990s to >60% before the global financial crisis, which is well above that of other large economies, indicating limited upside potential3. In the wake of the global financial crisis, Chinas openness has decreased significantly to ~50% due to weak external demand. As China returns to a continental economy, this is an inevitable phenomenon and indicates more balanced growth in aggregate demand. But on the other hand, this also suggests productivity improvement will come less from international competition, but rely more on a good domestic competitive environment (Figure 4). The amount of transferrable rural labor is gradually decreasing. Evidence of this is the number of rural surplus labor (aged 15~35, idle or semi-idle farmers) has declined visibly, from 130mn in 1990 to 30mn now (estimate4), meaning there are fewer people who shift to non-agricultural sectors (Figure 5). This is set to constrain TFP growth, as labor mobility between sectors and rural-urban areas has served as an important driver of TFP growth in the past 20 years. Property bubbles squeeze on the real economy. The run-away land and home prices in recent years have pushed up rents and dampened consumption. The excessive investment demand for housing reduced the efficiency of resource allocation and exacerbated the gap between the rich and poor and especially the gap between rural and urban areas. The negative impacts on the real economy will accumulate gradually along with the rising home prices (Figure 6). Figure 6: Land prices have risen rapidly

Figure 5: The amount of transferrable rural labor has dropped significantly

Estimated rural labor aged 15-35 available for transfer
Million 140 120 100 80

Average price of land puchased

Yuan/Sqm 3000 2500 2000 1500

Growth (RHS)

40 35 30 25 20 15 10

60 40 20 0 1990 1994 1998 2002 2006 2010

1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

5 0

Source: Yang (2009), CEIC, CICC Research

Source: CEIC, CICC Research

According to Wu Jinglian (2010), China conducted reforms in many areas in the early 1990s, including taxation, financial system reform, foreign exchange management, corporate structure and social security, and made enormous progress in the set-up of the macroeconomic system and ownership reform. 4 In terms of openness, China is much higher than the US, Japan, the UK, France, India and Russia, and only lower than Germany. Chinas share of world trade is also high, now at ~9%, vs. a peak of 11% for Germany, 8% for Japan, and 15% for the US in the past 30 years.

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CICC Research: November 22, 2011

Structural reform can prevent a sharp slowdown in economic growth

To predict Chinas future economic growth, we need to analyze trends in capital, labor and TFP. Overall, we believe a drastic drop in investment growth is unlikely; labor growth will decelerate gradually along with the aging population, but the drag on economic growth will mainly be reflected by slower labor mobility (due to declines in rural surplus labor) that will weigh on productivity growth; but reforms that are conducive to R&D, education and government effectiveness can help enhance TFP Investment will not likely slow drastically and will serve as a source of support to economic growth. After the rapid growth over the past 30 years, China has accumulated a large amount of capital and is now seeing the marginal return of investment gradually diminish5. But, will investment growth fall sharply over the next decade? We believe there are two main factors that will prevent this from happening: Capital stock per capita is still low, leaving plenty of room to catch-up. Currently, Chinas capital stock per capita is well below that of advanced economies. For example, in 2008, Chinas capital stock per capita was only 17% of Japans and 18% of the USs. It was also lower than that of Taiwan and South Korea 6 suggesting substantial investment is still needed to achieve an economic catch-up (Figure 7) Chinas demographic structure leads to a high savings rate, which is conducive to investment from the supply side. Currently Chinas ratio of producers (aged 25~64) to net consumers (aged <25 or >64) is ~128%, and will continue to increase until 2015. Such demographic structure means the saving rate will not decline significantly in the future and will stay relatively high. The Feldstein-Horioka puzzle (1980) argues that saving and investment rates are correlated, even in advanced economies with free international capital flows. They are even more closely correlated in China, which has a large population and not fully liberalized capital account (Figure 8). Figure 8: Chinas demographic structure leads to a high saving rate and thus a high investment rate
150 140 130 120 80 60 40 20 0 India Brazil China Taiw an Korea US Australia Japan 110 100 90 80 70 60 1980 1984 1988 30 2016 2020 35 45

Figure 7: Chinas capital stock per capita is still relatively low

Physical capital stock per capita (2008)
$, thousand PPP 120 100

Producer/Net consumer Saving/GDP (RHS) Investment/GDP (RHS)

%55

50

40

1992 1996

2000 2004 2008

2012

Source: Penn Would Table 7.0 (2010), CICC Research

Source: Haver Analytics, CEIC, CICC Research

5 We estimate the number of people engaged in agriculture based on the official statistics of rural employment, and calculate the number of young adults engaged in agriculture based on the estimated proportion of young adults. A large portion of these young adults need to engage in agricultural production and only ~40% are transferable (i.e. part-time young adults), according to estimates made by Ma Xiaohe and Ma Jianlei (2007). We also estimate the number of idle young adults in rural areas (not included in rural employment). The total number of transferable young adults in rural areas is the sum of part-time and idle young adults. 6 A measure of capital efficiency is the incremental capital output ratio. The lower the ratio is, the higher the efficiency of investment. In 2010, Chinas per unit of GDP required 3.4 units of investment, lower than other developing countries in Asia (the Philippines 1.9, Malaysia 1.9, Indonesia 2.5, India 2.5) and closer to developed countries in Europe and North America and advanced economies in Asia (Germany 4.2, US 3.9, Canada 3.8, UK 3.5, South Korea 3.2, Taiwan 2.7, Hong Kong 3.1). This suggests China is roughly between comparable developing countries and advanced economies in terms of investment efficiency.

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CICC Research: November 22, 2011 Decelerating labor force growth has limited impact on economic growth, but a slowdown in the transfer of rural labor will limit TFP improvement. Changes in the working-age population will cause labor growth to slow. Chinas working-age population grew at an average pace of 2.7% in the 1980s, 1.3% in the 1990s and 1.3% since 2000, but the average growth in the next 10 years is estimated at just <0.2%. It is expected that Chinas working-age population growth will gradually decline to zero by ~2016 (Figure 9). The effect of changes in the size of the labor force on economic growth may be hard to estimate using a simple model, as the transfer of labor between different sectors will also influence productivity. Generally speaking, compared to changes in the size of the labor force, the slowdown in the transfer of labor from the agricultural sector to secondary and tertiary sectors may have a greater impact on future economic growth. Our rough estimates show transferable rural labor declined from 130mn in 1990 to 80mn in 2000, and only 30mn in 2010. With the decline in the proportion of young population, the amount of transferable labor in rural areas will fall further, and the transfer potential will shrink, since agricultural production has a minimum labor demand. The speed of, and the potential for, labor transfer not only hinges on the size and age structure of the labor force, but are also related to the urban and rural household registration systems, the business environment for private enterprises, social security for migrant workers, and the living costs in urban areas. The factors other than labor supply itself depend on future policies. There are difficulties in quantifying the negative impact of slowing labor transfer on future economic growth, including the lack of data and uncertainties in policy. But the past experience of labor transfer may serve as a reference. The past three decades can roughly be divided into four periods in terms of the governments attitude towards labor transfer. In the first period (1978~1981), rural reform had just begun and rural household registration control was still strict. In the second period (1982~1993), the government relaxed the rural-urban migration policy along with the development of township and village enterprises, and as a result a lot of labor moved from agricultural to non-agricultural sectors and from rural to urban areas. In the third period (1994~1998), many provinces imposed new limits on migrant workers7. In the fourth period (1999~2005), the limits on migrant workers were lifted and the transfer of labor out of the agricultural sector and rural areas accelerated. According to our observations, the average growth of TFP in the two periods with loosened labor mobility controls was 3.4%, ~0.4ppt faster than the growth recorded in the two periods with tighter controls. Excluding the impact of other factors (e.g. education, R&D, government effectiveness, etc.), the difference is ~0.3ppt. Reform can enhance the TFP. Studies on the experience of other countries show growth of R&D capital stock, increase of average years of schooling, and government effectiveness have statistically significant effects on TFP growth (Lee and Hong, 2010 and Park and Park, 2010). China still lags far behind developed countries in these areas (Figure 10). Chinas R&D investment and R&D capital stock are low. In 2007, Chinas R&D investment as a percentage of GDP was only 1.4%, lower than Germany (2.5%), Japan (3.4%), and the US (2.7%). The gap in R&D capital stock between China and developed countries is even larger due to years of lower R&D investment. Chinas education level is still relatively low. In 2010, the average years of schooling for Chinas population aged over 15 were 8.2 years, significantly lower than the US (12.2 years), Japan (11.6 years), and South Korea (11.8 years).

According to Yong Congmins study (2009), the population mobility was restricted in 1994~1998 and the government encouraged migrant workers to take jobs nearby. Many places introduced measures aimed at protecting the interests of urban residents. Shanghai imposed limits on the employment of non-local workers in 1995, and Beijing and Guangzhou also took similar measures in 1997.

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CICC Research: November 22, 2011 Chinas government and related public services are less efficient. According to the World Banks government effectiveness index8, Chinas score in 2010 was only 0.12 (on a scale from -2.5 to 2.5), much lower than the 1.4~1.5 for developed countries. Figure 10: China still lags behind in terms of factors that influence the TFP
Avg. year of total R&D expenditure schooling aged (% of GDP, 2007) 15+ China India US
1

Figure 9: Working-age population growth slowing

Working age population 15-64

% 4

Government Effectiveness (2010) 0.12 -0.01 1.44 1.4 1.55 1.56 1.19

3 2

1.4 0.8 2.7 3.4 2.5 1.8 3.2

8.2 5.1 12.2 11.6 11.8 9.6 11.8

Japan
0

Germany UK Korea

-1 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: Haver Analytics, CICC Research

Source: WDI, Barro and Lee (2010), Haver Analytics, CICC Research

China is at an initial stage of long-term slowdown

Chinas growth in the future: Baseline scenario and reform scenario. We estimate the possible range of economic growth in the next 10 years based on the projected growth of Chinas working-age population in the next 10 years, the capital stock growth trend in the past 10 years, and two scenarios for TFP. The main difference between the baseline scenario and reform scenario for TFP is the different assumptions for its key determinants (i.e. labor transfer, R&D, education, and government efficiency). In the baseline scenario, we assume R&D, education and government effectiveness improve at the same rates as they did in 2001~2007. In the reform scenario, we assume these factors improve at an accelerated pace to catch up with the US9 (Figure 11). Also, in this scenario, institutional/policy restrictions on labor mobility are gradually removed10. The results of these two scenarios are (Figure 12): Baseline scenario: Average potential growth at ~8% during the 12th FYP, 6.0% during the 13th FYP, and 5.5% in 2020. Reform scenario: Average potential growth at ~9.0% during the 12th FYP, 8.0% during the 13th FYP, and 7.5% in 2020.

This not only suggests an economic slowdown is inevitable, but also indicates substantial room for reform. The scenario analysis is subject to great uncertainty, but this seemingly simple simulation suggests that: first, growth slowdown is inevitable, due both to the demographic changes and the diminishing catch-up effects after becoming a mid-income country; and secondly, there is plenty of room for productivity improvement via institutional
8 The government effectiveness index compiled by the Word Bank takes into account the quality of the governments public services, the competence of public servants, the
Assume the gap in R&D capital stock between China and the US narrows 2% per annum and the enrollment rates at all stages of education rise exponentially. We make no specific assumptions as to which policy/institutional limits on labor mobility will be relaxed, when they will be relaxed, or how they will be relaxed. We just split the impact of these factors on TFP growth evenly between the baseline and reform scenarios, based on 0.5% of empirical value.
10 9

governments ability to make and execute policy, and the governments credibility. The index is on a scale from -2.5 to 2.5. The higher the index is, the more effective the government is.

Please read carefully the important disclosures at the end of this report 10

CICC Research: November 22, 2011 and structural reforms, which cannot prevent a slowdown, but can avoid a sharp slowdown. If we say Chinas productivity gains in the past 10 years mainly resulted from global competition and labor transfer, the improvement of productivity in the next 10 years will depend more on a reduction of institutional thickets, an increase of competition and an improvement of the efficiency of resource allocation. Our view of Chinas slowdown in the next decade is consistent with international experiences. Chinas nominal GDP per capita reached US$4,300 in 2010 and is expected to exceed US$5,000 in 2011. Based on the experiences of Hong Kong, Japan, South Korea, Singapore, and Taiwan, the economic growth tends to slow 1~3ppt when GDP per capita hits US$5,000~13,000. In comparison, our baseline scenario implies a 3.4ppt drop in economic growth, and our reform scenario implies a 2ppt drop, roughly consistent with international experiences. (Figure 13) Figure 11: TFP growth depends on reform efforts Figure 12: Estimate of Chinas potential growth rate in the next decade
Growth of potential output
% 8

Contribution of TFP to output growth

Baseline scenario

Reform scenario

% 11

Baseline scenario

Reform 6 scenario 4

10 9 8

7 6

0 19811990 19912000 20022007 20112020 20112020

5 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: Lee and Hong (2010), CICC Research

Source: Lee and Hong (2010), CICC Research

Figure 13: Comparison of economic growth under various levels of GDP per capita
Reall GDP growth rate with different GDP per capita
GDP per capita < USD 5000 GDP per capita >USD 5000 and <USD 13000 19711979 19761986 19661975 19761986 19771988 19711980 198119892003 1990 % 20012010 20112020 12 10 8 6

Figure 14: Economic fluctuations are relatively mild in a market economy

Gap between growth and potential rate
Deng Xiaoping's southern tour % 6 4 2 0 -2 4 2 0 Asia financial crisis Global financial crisis -4 -6 -8 1978 1982 1986 1990 1994 1998 2002 2006 2010

19781987 19871996

Hong Kong SAR, China

Japan

Korea

Singapore

Taiw an

China

Source: WEO, CICC Research

Source: Lee and Hong (2010), CEIC, CICC Research

Please read carefully the important disclosures at the end of this report 11

CICC Research: November 22, 2011

Short-term economic cycle is driven by external shocks and macroeconomic adjustments

Short-term cyclical fluctuations are characteristics of a market economy
The short-term cyclical fluctuations in Chinas economy around its long-term growth trend since its reform and opening-up have demonstrated several distinctive features. Studying the drivers of short-term cycles since the establishment of a market economy in the mid-1990s will help us predict future economic trends.

1. Short-term fluctuations in the market economy are much milder than before With Deng Xiaopings Southern Tour speech in 1992 as the watershed, Chinas economy after the reform and opening-up is divided into two distinct stages: The planned economy before 1992, and the socialist market economy afterwards. The economy experienced significant fluctuations in the first stage, with GDP growth peaking at 15.2% and bottoming at 3.8%. The economic cycle was relatively short and mainly driven by the governments economic plan, which caused inflexibility and disorder in the economy. In the second stage, Chinas economic fluctuations were much milder, with GDP growth peaking at 14.2% and bottoming at 7.6%. The frequency of fluctuations also dropped (Figure 14). We believe there are two reasons for the stark differences in economic cycles between the planned economy and market economy: Market prices play a greater role in resource allocation. Prior to 1992, resource allocation in Chinas economy was subject to government planning. State-owned enterprises were not facing the market and were keen on increasing investment and production once policy was relaxed. There were no constraints on their expansion due to inflexible resource prices. And, when economic expansion became unsustainable due to resource bottlenecks, the government would be forced to shift its stance, which would lead to a plunge in the production of state-owned enterprises and sharp fluctuations in economic growth. After the establishment of a market economy in 1992, product prices are largely determined by the market, and the flexibility of the pricing system has significantly increased. In response to supply or demand changes, prices will adjust accordingly, influencing consumption and investment behavior, buffering the supply/demand impact to some extent and reducing fluctuations of economic activity. Demand replaces supply as the main constraint of economic growth. As China transitioned from a shortage economy into an economy with abundant supply after the mid-1990s, the main constraint on economic growth is no longer supply shortage, but insufficient demand. This provides more room for the government to use counter-cyclical macroeconomic policies to manage aggregate demand, thereby reducing the economys cyclical fluctuations. As mentioned in the previous section, the expansion of the economys supply capacity is driven by two main factors: 1) productivity improvement via economic reform; and, 2) larger working-age population than net consumers, as well as the transfer of rural surplus labor.

Please read carefully the important disclosures at the end of this report 12

CICC Research: November 22, 2011 2. Exports and investment become the main drivers of short-term cyclical fluctuations As the main constraint on the economy shifted from supply shortage to insufficient demand, short-term cyclical fluctuations in the economy are mainly reflected by changes in aggregate demand. As for the three main drivers of aggregate demand, exports and investment are more volatile, while the contribution of consumption to GDP growth is relatively stable (Figure 15). Since 1995, consumptions contribution to GDP growth is 4.6ppt on average, with a high of 6ppt and a low of 3.4ppt, and its impact on economic growth fluctuation is far smaller than those of exports and investment. External demand shocks caused economic growth to bottom. Since 1995, net exports contribution to GDP growth is 0.9ppt on average, relatively small. But it has been very volatile: the highest point is 4.2ppt while the lowest is -3.6ppt. The lows for Chinas GDP growth since 1995 were recorded in 1999 and 2009, both the result of external shocks. The 1997~1998 Asian financial crisis and the 2008~2009 global financial crisis both led to a plunge in Chinas exports. Investments contribution to GDP growth is volatile. Since 1995, the contribution of investment to GDP growth is 4.5ppt on average, with a high of 8.4ppt and a low of 1.7ppt. Compared to exports that are mainly affected by external shocks, the reasons for investment fluctuations are more complex. Real estate and manufacturing investments are mainly made by enterprises, and their fluctuations reflect both their own cyclicality and the impact of macro policy, especially monetary policy. Infrastructure investment is mainly made by the government and is more affected by fiscal policy. Figure 16: Political cycle in infrastructure investment

Figure 15: Investment and external demand are the main sources of economic fluctuations
Final Consumption Net Export Gross Capital Formation % 25 GDP Growth Rate
20 15 10 5 0 -5

Real growth rate of Infrastructural investment

9 thFYP 1996-2000 10th FYP 2001-2005 11th FYP 2006-2010 12th FYP 2011-2015
% 50 45 40 35 30 25 20 15 10 5 0 2017

1992

1997 15th National congress

2002 16th National congress

2007 17th National congress

2012 18th National congress

-10 1980 1985 1990 1995 2000 2005 2010

Source: CEIC, CICC Research

Source: CEIC, Wind, CICC Research

3. Macro policy is counter-cyclical and also reflects the political cycles impact In a market economy, macro policy mainly comprises of fiscal policy and monetary policy, with the focus on aggregate demand management. It mainly affects investment in China. Fiscal policy has a direct impact on government-led infrastructure investment, while monetary policy influences a wider range of investment by changing the monetary and credit conditions. The macro policy trajectory since 1995 suggests investment fluctuations reflect not only counter-cyclical policy response to external shocks, but also the impact of the political cycle.
Please read carefully the important disclosures at the end of this report 13

CICC Research: November 22, 2011 There are political cycles in government-led investment. Infrastructure investment is mainly made by the government and its growth depends primarily on fiscal policy. The growth of infrastructure investment since 1995 shows there is a political cycle in fiscal policy (Figure 16). Such political cycles are evidenced by the impacts of administration changes and FYPs on infrastructure investment, which sees a round of sharp acceleration in each governments term of office or each FYP period. The acceleration generally occurs in the first year of a governments term of office or in the mid-term of a FYP period. However, monetary policy has clear counter-cyclical characteristics, particularly when there are external shocks. The three rounds of major economic stimulus since 1995 were all launched in response to substantial downside risks arising from external shocks (Figure 17). In order to prevent a sharp economic slowdown amid external shocks, monetary policy is loosened significantly to support domestic demand, and the effect is mainly on investment. Conversely, when aggregate demand grows too quickly and inflationary pressure builds up, monetary policy is tightened to curb the growth of aggregate demand by slowing investment. The lagged effect of macro policy on growth and inflation is one of the underlying causes of cyclical fluctuations in the economy. Historical data shows there was a significant lag in the effect of monetary policy on economic growth and inflation. Credit growth generally leads economic growth by 1~2 quarters (Figure 18) and economic growth leads inflation by 3~4 quarters (Figure 19). If the lagged effect of policy combined with external shocks in the same direction (for example, policy tightening meets a sudden drop in external demand), the fluctuation in the economy could be greater than policy makers desire, and vice versa. Figure 18: Credit growth leads economic growth by 1~2 quarters
% 45

Figure 17: Infrastructure investment is increased to counter external shocks

Real growth rate of infrastructural investment (LHS) Real growth rate of exports (RHS) %
Asia financial crisis SARS Global financial crisis 50 40 30 20 10 0

% 50 45 40 35 30 25 20 15 10 5 0 1995

Rmb loans real YoY, 2 quarters ago (LHS) GDP YoY (RHS)

% 16 15 14 13 12 11

40 35 30 25 20 15 10

10 9 8 7 6 1999 2001 2003 2005 2007 2009 2011

-10 -20 1997 1999 2001 2003 2005 2007 2009 2011

5 0 1997

Source: CEIC, Wind, CICC Research

Source: CEIC, CICC Research

Aggregate demand growth loses steam in the short term

Based on the above analysis and recent developments at home and abroad, our view about short-term growth is that weak external demand and slower real estate investment will eventually affect manufacturing investment, dampening aggregate demands growth momentum.

Please read carefully the important disclosures at the end of this report 14

CICC Research: November 22, 2011 First, the sluggish external demand indicates exports contribution to GDP growth will decline. From a short-term perspective, export growth depends mainly on the growth of external demand. The outlook for the global economy, especially developed countries, does not look good due to the impact of the Eurozone debt crisis. The OECD leading indicator, which is closely correlated with Chinas export growth (Figure 20), has been falling recently, pointing to the risk of a slowdown in Chinas export growth in the near term. In our macroeconomic outlook report published in April 2011 (please see the report: Growth slowing, inflation control campaign extended), we predicted that the contribution of net exports to GDP growth in 2011 would be negative. The recent export growth trend is largely in line with our expectations. We maintain our forecast that export growth in 2012 will slow to 10% and net exports contribution to GDP growth will be -0.6ppt. Figure 19: Economic growth leads inflation by 3~4 quarters
% 16 14 12 10 8 6 4 2 1978

Figure 20: The OECD leading indicator points to further slowdown in Chinas export growth
% 25 20 15 10

GDP (LHS)

CPI (RHS)

25 20 15 10 5

OECD leading indicator YoY (LHS) Export volume YoY, 3-month average (RHS)

50 40 30 20 10 0 -10 -20

0
0 -5 -10 1982 1986 1990 1994 1998 2002 2006 2010

-5 -10

-15 -30 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: CEIC, CICC Research

Source: CEIC, Bloomberg, CICC Research

Second, deleveraging will reduce growth momentum in investment. Chinas investment consists of four parts: Infrastructure construction, real estate, manufacturing, and others, which accounted for 22%, 25%, 34% and 19% of FAI (year to date). Infrastructure investment is mainly made by the government and its growth depends primarily on fiscal policy; the other three parts of investment are mainly made by enterprises and are more subject to market conditions and the economic cycle under existing macro policies. Investment growth is likely to slow in 2012, judging from its inherent momentum. The contraction of property bubble will drag down real estate investment growth. As the property tightening measures gradually kick in, the growth of property sales in GFA terms has decelerated significantly this year, indicating a possible sharp decline in private housing starts GFA next year (Figure 21). A considerable part of housing starts this year are public housing (>10mn units). However, the target of public housing starts next year may be 6~8mn units, according to the Ministry of Housing and the Ministry of Urban-Rural Development (MoHURD). A large decline in public housing starts may lead to negative growth of overall housing starts GFA next year. Based on the relationship between GFA under construction and new starts, we estimate the growth of GFA under construction next year will slow significantly, but is unlikely to slip into negative territory (Figure 22). This, together with the stable correlation between real estate development investment and GFA under construction, point to an around 15% YoY growth in real estate development investment in 2012, vs. the 31% growth over the first ten months of this year (Figure 23).

Please read carefully the important disclosures at the end of this report 15

CICC Research: November 22, 2011 Deleveraging may weigh on manufacturing investment. FAI in the manufacturing sector remains strong this year, mainly reflecting continued business investment expansion driven by loose monetary conditions over the past two years, as well as the lagged boost from the previous fast growth of real estate investment and exports. The manufacturing investment leverage ratio is currently at historic highs (Figure 24). Given the tightened monetary conditions this year, the negative impact of the cooling export and real estate sectors on manufacturing investment will eventually be felt. Corporate profits have been already affected, as industrial enterprises recently see slower profit growth. Growth expectations in earnings are unlikely to improve significantly any time soon, discouraging for corporate investment. Figure 22: Growth of real estate GFA under construction may slow significantly
GFA under construction
120 100 80 60 40
10 % 50 40 30 20

Figure 21: Private housing sales growth leads housing starts growth
Floor space newly-started YoY, 3-month average Floor space sold YoY, 3-month average
%

GFA newly-started

20 0 -20 -40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1999 2001 2003 2005 2007 2009 2011 0 -10 -20

Source: CEIC, CICC Research

Source: CEIC, CICC Research

Figure 23: Close correlation between private housing GFA under construction and real estate development investment
GFA under construction YoY Real estate development investment YoY
% 35

Figure 24: Investment leverage ratio at historic highs

Leverage of FAI fund source

4.5

30

25

3.5

20

15

2.5

10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

2003

2004

2005

2006

2007

2008

2009

2010

2 2011

Source: CEIC, CICC Research

Source: CEIC, CICC Research

Please read carefully the important disclosures at the end of this report 16

CICC Research: November 22, 2011 In addition to FAI, changes of inventories are also part of capital formation and often have an impact on short-term cyclical fluctuations in the economy. As inventories (inputs and finished goods an enterprise has to hold to ensure smooth production and sales) are part of idle resources, enterprises will minimize unnecessary inventories economically. Reflecting such efforts as well as the improvement of enterprises management skills, Chinas inventory to sales ratio has long been declining (Figure 25). From a short-term perspective, the wave of inventory adjustment triggered by the 2008 financial crisis has already faded away, and the recent inventory adjustment shows no signs of impulse, causing little impact on investment growth.

Production capacity shortage is not the starting point for a new round of investment cycle. In addition to the abovementioned cyclical factors, capacity shortage or surplus is often cited as a structural factor in analyzing FAI. First, the capacity utilization rate itself is a cyclical phenomenon: It is high when demand is strong and low when growth is weak. Therefore, only capacity shortage beyond the normal cyclical economic fluctuations could lead to a new business investment cycle. Is China now facing continued capacity shortage that is beyond economic cyclical fluctuations? Our answer is no. The capacity utilization rate is now relatively low in Chinas electrical machinery manufacturing, ferrous and nonferrous metal smelting industries (Figure 26), which account for a large proportion of FAI. Overcapacity in key industries, or the absence of an apparent capacity shortage, does not support the start of a new round of large-scale investment. Figure 25: Business inventories have long been declining
Inventory-sales-ratio of industrial enterprises
monthly sales 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 26: Capacity utilization rate in key industries remains relatively low
hours 5600 5400 100 5200 5000 4800 4600 70 4400 4200 1996 60 1998 2000 2002 2004 2006 2008 2010 90

Utilization of power generating equipment (LHS) Utilization rate of crude steel (RHS) Utilization rate of aluminium (RHS)

% 110

80

Source: CEIC, CICC Research

Source: CEIC, CICC Research

From a macro perspective, some analyses cite the sharp drop in Chinas trade surplus in recent years as evidence of a production capacity shortage. Their logic is that trade surplus is total output minus domestic demand (consumption and investment), and the reduced trade surplus suggests production capacity declines relative to domestic demand (Figure 27). But there are two errors in such logic: Firstly, declines in trade surplus may stem from reduced external demand or increased domestic demand. The decline in Chinas trade surplus since 2007 mainly reflected export slowdown; and the domestic demand growth did not accelerate much. And, secondly, in terms of domestic demand, investment has been growing faster than consumption, with an even wider gap in recent years. Investment will increase future production capacity.

Please read carefully the important disclosures at the end of this report 17

CICC Research: November 22, 2011 Another structural factor that may influence FAI is the relocation of the manufacturing industry from the eastern coastal areas to central/western regions, which to some extent supports the growth of manufacturing investment. However, this factor has existed for several years and is unlikely to offset the impact of the slowing export and real estate sectors on manufacturing investment. Historical data shows no significant correlation between the speed of industry relocation and growth in manufacturing investment (Figure 28). Figure 27: Trade surplus and fixed capital formation move in opposite directions
% 52 50 48 46 44 42 40 38 36 34 5 4 3
4 6 30 28 26 24 2011

Figure 28: No significant correlation between industry relocation and overall manufacturing investment
% 10 9 8 7 6
10 8 % 14 12

Capital formation as % of GDP (LHS) Trade surplus as % of GDP (RHS)

YoY difference between FAI in eastern and central-to-west region (LHS) Manufacturing FAI YoY (RHS)

% 40 38 36 34 32

2
2 2004

1 32 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2005

2006

2007

2008

2009

2010

Source: CEIC, CICC Research

Source: CEIC, CICC Research

The government has more policy bullets to spur growth

The above analysis shows the growth momentum in demand is relatively weak, but the authorities have begun to fine-tune their macro policies. Should external shocks intensify, the authorities may step up policy adjustment to bolster economic growth. Falling inflation provides policy makers more room to support growth. Judging from the political cycle revealed by the historical data, 2012 is unlikely to see strong expansion of infrastructure investment, but the authorities will likely continue to adopt counter-cyclical macro policies. A positive development in recent months is that inflation has been falling off, providing room for the government to support growth. There is room for the authorities to loosen monetary policy if necessary, considering the RRR is at a record high of 21.5% and major state-owned banks are subject to tight credit controls. Macro-prudential regulations (e.g. regulatory requirements on banks loan to deposit ratio and capital adequacy ratio) have also played a role in curbing credit expansion in the past year. But macro-prudential regulations themselves are also counter-cyclical, and unlikely to conflict with macro policy. As to the fiscal policy, structural tax cuts are worth attention. The governments tax revenue increased rapidly in the past few years. Considering the 12th FYP goals to improve peoples well-being and adjust the economic structure, there is significant room for structural tax cuts. Indeed, the recent tax reform trials indicate the policy direction of tax cuts, though their impact on the overall tax burden is limited in the short term. We expect there will be further tax reform initiatives to bring about substantial tax reductions for businesses and particularly the private sector.

Please read carefully the important disclosures at the end of this report 18

CICC Research: November 22, 2011 The government has enough policy bullets to spur growth, but a large-scale stimulus is unlikely. The extremely loose monetary and fiscal policies of 2008~2009 caused a series of side effects. In particular, the excessive expansion of money and credit relative to the size of the economy set the stage for the subsequent inflation acceleration and asset bubbles. The property tightening campaign is at a critical juncture and the possibility of relaxation is low. Despite the controversy over some administrative control measures, we believe the curbs on the property market will remain in place for a long time, considering the high savings tend to fuel investment demand for real estate, and the urban-rural dual structure means rising property prices have implications for social equity during Chinas urbanization process. From a long-term perspective, the government may replace the purchase and price limits with market-based measures, especially tax policies. But short term, with the loosening of monetary and credit policies, relaxation of administrative measures becomes even less likely; otherwise loosened monetary conditions would easily fuel the investment and speculative demand for real estate and reflate the property bubble.

Which position in the short-term cycle will China be at in 2012?

A basic conclusion from the above analysis is that sluggish external demand and investment deleveraging will lead to weaker growth momentum in Chinas exports and investment (especially real estate investment) in 2012, making it quite likely for 2012s economic growth to slow from that of 2011. However, the risk of a hard landing is low as counter-cyclical macro policies will help cushion the slowdown in growth. Our baseline forecast is that economic growth will slow to 8.4% in 2012 from 9.2% in 2011, with QoQ growth to pick up later in the year but YoY growth to hit the bottom around mid-2012. We expect growth to recover modestly to 9% in 2013, which may be slightly higher than the potential growth rate at the time, but should not be a severe overheating. First, based on the historical pattern, we expect the government-led infrastructure investment to accelerate markedly in 2013 (mid-term of the 12th FYP period). The positive effect of local government reshuffle on investment may be fully felt in 2013. Second, deleverage in the property sector will likely continue for some time and weigh on real estate-related investment. There is large uncertainty as to how long the process will continue. But our basic view is that a sharp deceleration in real estate investment and counter-cyclical policy tightening are unlikely to concur. If slowing real estate investment exerts a big drag on economic growth, there will be room for the government to boost aggregate demand. Finally, we believe the European debt crisis poses greater downside risks to the global economy in 2012 than in 2013, though there are many uncertainties. Recent developments suggest the market is unlikely to give Europe much time to resolve its debt crisis. The US will likely face fiscal tightening pressure in 2013, but to what extent will depend on its growth at the time. For emerging markets which have just experienced the latest round of inflation, our basic view is that their governments still have room to support growth. To sum up, we believe the current slowdown is part of both the long-term trend and the short-term down-cycle. From a long-term perspective, Chinas potential growth rate is likely to slow markedly in the next 10 years due to: 1) Much less labor in rural areas to transfer into the industrial sector; and, 2) the waning effect of entering WTO. From a short-term perspective, export growth will likely decelerate due to weak external demand, and deleverage in property and industrial investment will weigh on economic growth; but the government now has more room to spur growth. We expect the economic growth to hit the bottom of this ongoing short-term cycle in 2012, before recovering modestly in 2013. A return to the >10% growth seen in the past decade is unlikely due to the lower growth potential.
Please read carefully the important disclosures at the end of this report 19

CICC Research: November 22, 2011

References
Cai, Fang, Urbanization and the Contribution of Migrant WorkersThoughts on Chinas Long-term Economic Growth in the Post-crisis era, China Demographic Science, 2010 (1) Liu, Shijin, Trap or BarrierChallenges and Strategic Options for Chinas Economy, Comparison, 54th edition, 2011 Ma, Xiaohe and Ma Jianlei, How Much Labor Surplus Is There in Rural China? China Rural Economy, 2007 (12) Wu, Jinglian, The Sixty Years of Chinas Economy, Sichuan Reform, 2010 (2) Yang, Congmin, A Study of the Scale of Migrant Workers Since Reform and Opening-up, Discovery, 2009 (4) Barro, R. and J-W. Lee., 2010, A New Data Set of Educational Attainment in the World, 1950-2010. NBER Working Paper No. 15902, National Bureau of Economics Research, Massachusetts. Chow, Gregory C. and Kui-Wai Li., 2002, Chinas Economic Growth: 19522010, Economic Development and Cultural Change, 51 (1) October: 247-256. Feldstein, M., and C. Horioka, 1980, Domestic Saving and International Capital Flows, Economic Journal, 90 (2):31429. Fischer, S., 1993, The Role of Macroeconomic Factors in Growth, Journal of Monetary Economics, 32: 485-512 Harberger, A., 1978, Perspectives on Capital and Technology in Less Developed Countries, in. M.J. Artis and A.R. Nobay, eds., Contemporary Economic Analysis, London: Croom Helm Lee, J-W and Kiseok Hong, 2010, Economic Growth in Asia: Determinants and Prospects. ADB Economics Working Paper Series No. 220, Asian Development Bank, Manila. Park, Donghyun and Jungsoo Park, 2010, Drivers of Developing Asias Growth: Past and Future. ADB Economics Working Paper Series No. 235, Asian Development Bank, Manila. Shioji, Etsuro and Vu Tuan Khai, 2011, Physical Capital Accumulation in Asia-12: Past Trends and Future Projections. ADB Economics Working Paper Series No. 240, Asian Development Bank, Manila.

Please read carefully the important disclosures at the end of this report 20

CICC Research: November 22, 2011

Important legal disclosures

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