The Next China

GLBL 318, ECON338, EAST338, Stephen S. Roach

GLBL618, MGT911 stephen.roach@yale.edu
Fall 2015 307 Horchow Hall
M/W: 10:30 to 11:20 Davies Aud. Office hours: MW 1 to 2:30 & by appt.

Born out of necessity in the post-Cultural Revolution chaos of the late 1970s, modern China
is about reforms, opening up, and transition. Notwithstanding the extraordinary
accomplishments that have since ensued, the Chinese leadership has concluded that the
post-1980 development miracle cannot be sustained unless the economy undergoes a major
structural transformation. The Next China will be driven by a daunting shift from a
manufacturing-driven, export- and investment-led development model to an increasingly
services-driven, consumer-led dynamic. The combination of mounting internal pressures
and lingering post-crisis aftershocks in the developed world suggest this rebalancing will
need to occur sooner rather than later. This transition is not without risk underscored by
the challenges of deleveraging, the recent bursting of a major equity bubble, and mounting
geostrategic tensions.

Grounded in the history and economic context of modern Chinas spectacular development
trajectory, this course stresses an analytical framework that unlocks the transition to the
Next China. We stress a three-pronged strategy the expansion of the Chinese services
sector, urbanization, and social safety net imperatives as key building blocks to a modern
consumer society. In addition to the risks noted above, focus is also directed at the
opportunities presented by the Next China that could well be pivotal for Chinas major
trading partners and for the global economy at large.

GRADING

Mid-term Exam (20%): October 12 in class

Final Exam (30%): December 18 at 2:00 pm
Paper (35%): A Building Block for the Next China
Paper proposal: 2-3 pages plus references due October 19
Final paper: 15 pp due November 20
Discussion section contribution (15%)

NOTE: A basic undergraduate course in macroeconomics (Econ 111b, 116a, or 116b) is the
only pre-requisite for this course.

ATTENTION GRADUATE AND PROFESSIONAL SCHOOL STUDENTS:

Please register for this course as GLBL 618 or MGT 911 and complete the discussion
section enrollment accordingly. Please do not register for this class or for
a discussion section using an undergraduate course number.

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Guidelines for Class Readings

Other than books required for purchases and texts available online as noted below, all
readings are posted on the Resources tab of the classes*V2 website. Readings indicated
by (*) are optional but recommended.

CLM is China Leadership Monitor published by the Hoover Institution of Stanford

University and available on http://www.hoover.org/publications/china-leadership-
monitor

Texts Required for Purchase or online access

Hu, Angang, China in 2020: A New Type of Superpower, Brookings Institution Press, 2011

Lardy, Nicholas, Markets Over Mao: The Rise of Private Business in China, Peterson Institute
for International Economics, 2014

Roach, Stephen, Unbalanced: The Codependency of America and China, Yale University Press,
2014

Rosen, Dan, Avoiding the Blind Alley: Chinas Economic Overhaul and Its Global
Implications, Asia Society, 2014; available online at:
http://asiasociety.org/policy-institute/avoiding-blind-alley-chinas-economic-overhaul-
and-its-global-implications

The following two publications are highly recommended for purchase even though assigned
sections are posted on the classes*V2 website

World Bank and Development Research Center PRC, China 2030: Building a Modern,
Harmonious, and Creative High-Income Society, The World Bank, 2013; available
online at:
http://www.worldbank.org/en/news/2012/02/27/china-2030-executive-summary

World Bank and Development Research Center PRC, Urban China: Toward Efficient,
Inclusive and Sustainable Urbanization, The World Bank, 2014; available online at:
http://www.worldbank.org/content/dam/Worldbank/document/EAP/China/WEB-Urban-
China.pdf

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 DRAFT SYLLABUS AND READING ASSIGNMENTS

I. Overview

The miracle of modern Chinas development is unprecedented in the annals of economic

history. But do we really have an accurate depiction of the Chinese economy and its global
impact?

September 2: The China Debate: Biases, Analytics, and Data Reliability

Readings: J. Fernald, et. al., On the Reliability of Chinese Output Figures, San Francisco Fed,
FRBSF Economic Letter, Mar 25, 2013
P. Krugman, Hitting Chinas Wall, The New York Times, Jul 18, 2013
S. Roach, Ten Reasons Why China is Different, Project Syndicate, May 2011
D. Shambaugh, The Coming Chinese Crackup, Wall Street Journal, Mar 6, 2015

II. Modern China in Context

The three Asian giants Japan, India, and China have each gone their own way down the
road of economic development. The lessons from these experiences, as well as their global
impacts, bear critically on the challenges faced by the Next China.

September 4: The Asia Context: China vs. Japan and India

Readings: R. Koo, The Holy Grail of Macro Economics, Wiley, 2009, Ch 1-2
S. Roach, The Next Asia, Wiley 2009, pp 277-81, 290-94, 322-23
S. Roach, Why India is Riskier than China, Project Syndicate, Dec 2011
*S. Smith, Intimate Rivals: Japanese Domestic Policy and a Rising China, Council
on Foreign Relations, 2015,Ch 1-2
The Economist, Reviving Indias Economy, May 24, 2014

September 9: On the Brink in 1979

Readings: *A. Cheremukhin, et. al., The Economy of the Peoples Republic of China from
1953, Jul 2015
A. Hu, China in 2020: A New Type of Superpower, Brookings, 2011, Ch 2
J. Spence, The Search for Modern China, Third ed., Norton, 2013, Ch 20-22, 23*

September 14: Political Roots, Rule of Law, and Governance

Readings: A. Florini, et. al., China Experiments, Brookings, 2012, Ch 1
*F. Fukuyama, The Origins of Political Order, Farrar, Strauss, and Giroux, 2011,
Ch 6-9, 20-21
*W. He, In the Name of Justice, Brookings, 2012, Ch 1
J. Liu, The Ancient Roots of Chinese Liberalism, The Wall Street Journal, July 6,
2011
M. Pei, Chinas Trapped Transition, Harvard University Press, 2006, Ch 1

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III. The 30-year Miracle: 1980 to 2010

For three decades, China relied on a uniquely successful export- and investment-led
development model. This recipe has morphed into a labor-saving, resource-intensive, and
surplus-saving growth dynamic. Sustainability is the question and the ultimate challenge.

September 16: Macro Drivers: Surplus Saving and Export-led Growth

Readings: N. Lardy, Sustaining Chinas Economic Growth After the Financial Crisis, Peterson
Institute for International Economics, 2012, Ch 2
S. Roach, Unbalanced: The Codependency of America and China, Yale University
Press 2014, Ch 1
*H.L. Kee and H. Tang, Domestic Value Added in Exports: Theory and Firm
Evidence from China, April 2015
P. Schott, The Relative Sophistication of Chinese Exports, Economic Policy, 2008

September 21: Macro Implications: Labor-Saving and Resource-Intensive

Readings: *M. Das and P. NDiaye, Chronicle of a Decline Foretold: Has China Reached the
Lewis Turning Point? IMF Working Paper, 2013
E. Economy and M. Levi, By All Means Necessary, Oxford University Press, 2014,
Ch 3 and 10
C. Park, et.al., Can China Meet Its Employment Challenges? in Oi, Rozelle, and
Zhou (eds.), Growing Pains, Shorenstein APARC, 2010, pp 27-56
W.R. Lam, et. al., Chinas Labor Market in the New Normal, IMF July 2015

September 23: China and a New Globalization: Beneficiary or Threat?

Readings: S. Roach, Unbalanced, Ch 6-7

IV. Transition Imperatives

The transitional characteristics of the Chinese economy, which have long been driven by social
stability imperatives, increasingly reflect a precarious balance between internal and external
pressures. Can China continue to succeed where others have failed?

September 28: Balancing Act: Internal vs. External Pressures

Readings: N. Lardy, Sustaining Chinas Economic Growth After the Global Financial Crisis,
Ch 3
S. Roach, Unbalanced, Ch 2-3

September 30: Constraints: Social Stability

Readings: J. Fewsmith, Social management as a Way of Coping with Heightened Social
Tensions, CLM No. 36, Winter 2012
C. Gobel and L. Ong, Social Unrest in China, ECRAN Working Paper, 2012
T. Piketty, Capital In the Twenty-First Century, Harvard University Press, 2014,
Ch 9 (esp pp 326-30)

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October 5: Constraints: Post-Crisis Wake-Up Call and the Middle-Income Trap
Readings: B. Eichengreen, et. al., When Fast Growing Economies Slow Down NBER
Working Paper, Mar 2011
S. Roach, Unbalanced, Ch 9-10

October 7: Four Uns, Strategy, and the Chinese Leadership Gambit

Readings: S. Roach, The Next Asia, pp 229-33
S. Roach, Unbalanced, Ch 4-5
J. Spence, Search for Modern China (Third ed.), Ch 28
D. Bell, The China Model: Political Meritocracy and the Limits of Democracy,
Princeton University Press, 2015, Ch 2 and Conclusion
K. Li, Report on the Work of the Government: 2015

October 12: MID-TERM EXAM

V. Chinas New Normal: Path vs. Destination

The critique of Wen Jiabao sparked an intense internal debate over the sustainability of
Chinas growth model. That led to the enactment of the 12th Five-Year Plan in 2011 and
ratification of a raft of market-friendly reforms in the Third Plenum of November 2013.
Collectively, these iniatives provide a rebalancing blueprint for the transition to the new
normal of the Next China.

October 14: The 12th Five-Year Plan: Services, Urbanization, and Productivity
Readings: N. Lardy, Markets Over Mao: The Rise of Private Business in China, Peterson
Institute for International Economics, 2014, Ch 4
H. Liu, The Basic Logic of the Proposal for the 12th Five-Year Plan, DRC, Mar
2011
S. Roach, America, China, and the Productivity Paradox, Project Syndicate, Jun
2015
S. Roach, Chinas 12th Five-Year Plan, China Development Forum, Mar 2011
World Bank and DRC, Urban China, 2014, Part I and Supporting Report # 1

October 19: Third Plenum and the Social Safety Net (PAPER PROPOSALS DUE)
Readings: *CCP Central Committee, Third Plenum Decision Document, English translation,
Dec 12, 2013
A. Miller, The Road to the Third Plenum, CLM No. 42, Fall 2013
B. Naughton, After the Third Plenum, CLM, No. 43, Spring 2014
S. Roach, Bringing the Chinese Consumer to Life, Project Syndicate, Nov 2013
D. Rosen, Avoiding the Blind Alley: Chinas Economic Overhaul and Its Global
Implications, Asia Society, Oct 2014, Executive summary and Ch 2

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October 21: OCTOBER RECESS

October 26: Rebalancing: The DRC-World Bank Perspective

Readings: World Bank and DRC, China 2030, Part 1: Overview

October 28: Rebalancing: US-China, Codependency, and Asymmetrical Adjustment Risks

Readings: J. Bader, Changing China Policy, Brookings, June 2015
C. Layne, Americas View of China is fogged by liberal ideas, Financial Times,
August 14, 2014
S. Roach, Unbalanced, Ch 11-13
K. Rudd, The Future of U.S.-China Relations Under Xi Jinping, Summary Report,
Harvard Kennedy School, Apr 2015

VI. Rebalancing Risks

Three decades of hyper growth are not without serious consequences for the Next China. What
are the most serious risks that might derail Chinas pro-consumption rebalancing strategy?

November 2: The China Gripe

Readings: S. Roach, Unbalanced, Ch 8
H-J. Chang, Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the
Developing World, Random House, London 2007, Ch 6
J. Gagnon, Combating Widespread Currency Manipulation, Peterson Institute for
International Economics Policy Brief, Number PB12-19, Jul 2012
Mandiant, APT1: Exposing One of Chinas Cyber Espionage Units Feb 2013
M. Swaine, Chinese Views on Cybersecurity in Foreign Relations, CLM No 42,
Fall 2013

November 4: State vs. the Market: Equity Bubbles, Deleveraging, and RMB Reform
Readings: *Y. Huang, Capitalism with Chinese Characteristics, Cambridge University Press,
2008, Ch 1, 5
N. Lardy, Markets Over Mao (Ch 1-3)
McKinsey Global Institute, Debt and (Not Much) Deleveraging, Feb 2015, Ch 4
E. Prasad and L. Ye, The Renminbis Role in the Global Monetary System,
Brookings, Feb 2012
S. Roach, Market Manipulation Goes Global, Project Syndicate, Jul 2015

November 9: The Environment and Green Development

Readings: F. Green and N. Stern, Chinas new normal: Structural change, better growth, and
peak emissions, Centre for Climate Change Economics and Policy, June 2015
A. Hu, China in 2020: A New Type of Superpower, Ch 7
C. Neilson and M. Ho, Clearer Skies Over China, MIT Press, 2013, Ch 1
World Bank and DRC, China 2030, Part II, Supporting Report 3

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November 11: Property Bubble?
Readings: *A. Ahuja and A. Myrvoda, The Spillover Effects of a Downturn in Chinese Real
Estate Investment, IMF working paper, Nov. 2012
M. Chivakul, et. al., Understanding Residential Real Estate in China, IMF
Working Paper, Apr 2015
*IMF Global Housing Watch; accessible at:
http://www.imf.org/external/research/housing/index.htm
R.S. Hunwick, Chinas Eerie Faux-European Ghost Towns, The Atlantic, Jan 2014
Liu, Li-Gang, Is Chinas Property Market Heading Toward Collapse? PIIE Policy
Brief, August 2014

November 16: High-Speed Ageing and the Social Compact

Readings: A. Hu, China in 2020: A New Type of Superpower, Ch 3
*Lee, et. al., Chinas Demography and Its Implications IMF Working Paper, 2013
F. Wang and A. Mason, The Demographic Factor in Chinas Transition in Brandt
and Rawski (eds.), Chinas Great Economic Transformation, Cambridge
University Press, 2008
World Bank and DRC, China 2030, Supporting Report 4, Equality of Opportunity
and Basic Security for All

November 18: Power Blocs, Modern Leadership, and the Anti-corruption Campaign
Readings: J. Fewsmith, Chinas Political Ecology and the Fight Against Corruption, CLM
No 46, Mar 2015
C. Li, Xi Jinpings Inner Circle: Parts 1-5, CLM Nos 43-47, 2014-15
J. Leung, Xis Corruption Crackdown, Foreign Affairs, May/ Jun 2015
D. Pilling, Why Chinas hunt for tigers and flies is bound to fail, Financial Times,
Jul 2014

November 20: PAPERS DUE

November 23-28: NOVEMBER RECESS

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VII. Opportunities and Challenges of the Next China

A pro-consumption model offers better balance and mode assured sustainability for the
Chinese economy. Why does the West continue fixate on the risks in modern China? Do we
risk losing sight of the opportunities of a successful rebalancing?

November 30: The China Dream: Governance and Global Outreach

Readings: J. Fewsmith, Maos Shadow, CLM No 43, Spring 2014
C. Krauss and K. Bradsher, Chinas Global Ambitions New York Times, Jul 2015
D. Lampton, How China is Ruled, Foreign Affairs, Jan/ Feb 2014
A. Miller, How Strong is Xi Jinping? CLM No 43, Spring 20
S. Roach, Chinas Global Governance Challenge, YaleGlobal, Jun 2015
M. Swaine, Chinese Views and Commentary on the One Belt, One Road
Initiative, CLM No 47, Spring 2015
Xi Jinping, Address to the First Session of the 12th National Peoples Congress,
Mar 2013

December 2: The IMF Perspective

Guest Lecture: Markus Rodlauer, IMF Mission Chief for China
Readings: IMF, PRC 2014 Article IV Consultation Aug 2015
*IMF, PRC Spillover Report, Jun 2011
*IMF, Spillover Report, Jul 2015

December 7: Beyond Consumerism: The Internet and Political Reform

Readings: A. Florini, et. al.,, China Experiments, Ch 5
M. Gladwell, Small Change: Why the Revolution Will Not be Tweeted, The New
Yorker, Oct 4, 2010
M. Pei, Chinas Trapped Transition, Ch 2
C. Shirky, The Political Power of Social Media Foreign Affairs, Jan/ Feb 2011
E. X. Li, The Life of the Party, Foreign Affairs, Jan/ Feb 2013
Y. Huang, Democratize or Die, Foreign Affairs, Jan/ Feb 2013

December 9: Codependency (again) and a Dual Identity Crisis: Who is China?

Readings: A. Hu, China in 2020: A New Type of Superpower, Ch 8
A. Nathan and A. Scobell, How China Sees America, Foreign Affairs, Sep/ Oct
2012
S. Roach, Americas China Complex, American Review, Apr 2010
S. Roach, Unbalanced, Preface (pp. ix to xvi)
J. Spence, The Chans Great Continent, WW Norton, 1999, Intro, Ch 1-2, and
Ch 3-12 (*)

December 18 (2:00 pm): FINAL EXAM