Qian Yingyi: Remarks at the 57th plenary meeting of G30

Qian Yingyi, Dean of the School of Economics and Management, Tsinghua University, attended the 57th plenary meeting of the Group of Thirty (G30) held in Hangzhou during April 26-28, 2007. Mr. Paul Volcker, Chairman of the Board of Trustees, Group of Thirty, and Former Chairman, Board of Governors of the Federal Reserve System, Mr. Jacob A. Frenkel, Chairman of the Group of Thirty and Vice Chairman, American International Group, Mr. Zhou Xiaochuan, Governor of the People's Bank of China and member of the Group of Thirty, as well as more than 20 G30 members participated in the meeting. Qian spoke at the opening dinner on April 26.

Governor Zhou, Chairman Volcker, Chairman Frenkel, Distinguished guests, It is my great privilege to have a chance to participate in the 57th plenary meeting of the Group of Thirty first ever held in China and to make brief remarks at the opening dinner tonight.   Indeed, among the distinguished participants are many people whose names I only saw from the media or in their publications.  Also among the participants are my two former professors Martin Feldstein and Stanley Fisher as well as three members of the Advisory Board of the School of Economics and Management at Tsinghua University: Governor Zhou Xiaochuan, Chairman Liu Mingkang, and Chairman Guo Shuqing.   China's former Premier Zhu Rongji, at one time also the Governor of the People's Bank, was the founding dean of the School of Economics and Management at Tsinghua for 17 years, and I have the privilege to serve as its current dean.  It is arguably the best place in China at present time to study economics and business at all levels in higher learning.

Because we are going to discuss intensively issues concerning current economic developments of China and the world, I thought it might be interesting tonight to discuss something related but different.   In the following 10-15 minutes, I'd like to share with you some of my observations on the history of the Chinese economy, not in the past 30 years, or even 100 years, but in a thousand years.   What prompted me to do that is precisely the location of this meeting, Hangzhou .  Hangzhou was the capital city of the later period of Song Dynasty, which lasted over three hundred years from 960AD to 1279AD.   At the peak, Hangzhou had over 1 million in population.   As monetary economists, you might be interested to learn that China 's Song was the first government in the world to issue paper money, and not surprisingly Song also had the first recorded inflation by the end of the dynasty.  There is a historical meaning for the G30 plenary meeting held in Hangzhou.

There are a lot can be said about Song Dynasty for the economists' interest.   During the peak of Song, China produced over 100 million kilograms iron per year.  China had the highest per capita income in the world.  China 's economic position relative to the rest of the world resembled that of the U.S. today.  Before moving to Hangzhou, the capital city of Song was in Kaifeng, the city along the Yellow River in the north.  Kaifeng was the most important city in the world around 1000AD, like New York City today.  In the eleventh century, it had the population over 1 million.   A gorgeous painting called Qingming Shanghetu, or peace reigns over the river, the 17-foot painted scroll now in the Palace Museum in Beijing, reveals the lifestyle of the people in Kaifeng , rich and poor, as well as the variety of economic activities in rural areas and the city.  A picture is worth more than a thousand words.  Kaifeng was also the city many Jews immigrated to and settled in.   I have known a Chinese from Kaifeng who has a rare last name.   Her family was Jewish hundreds years ago, and now Chinese.

The fact that China was so advanced a thousand years ago made economic historian David Landes lamented in his book The Wealth and Poverty of Nations about Europe: "Anyone who looked at the world, say a thousand years ago, would never have predicted great things for this protrusion at the western end of the Eurasian landmass that we call the continent of Europe…. The probability at that point of European global dominance was somewhere around zero."

Economic historian Angus Maddison is known for his quantitative work in estimating incomes around the world over time.   He estimated (or guessed) average per capita income at the peak of Song was around $600 in 1990 purchasing power parity dollars.  Sadly, history would reveal that China was unable to pass that level again until the mid-1950s.   Song was the beginning of the end of China being the most advanced country in the world.   After Song dynasty, China stagnated in terms of per capita income, despite the fact that it continued to grow due to population expansion.

Since the Opium War of 1840, several generations of Chinese have been searching for ways of modernization.   Unfortunately, for most part over 140 years between 1840 and 1978, China's per capita income was below that at the beginning the period and was only 60% higher at the end of the period.   Foreign invasions, civil wars, and bad policies were all responsible for the dismal economic performance.  Nevertheless, the Chinese learned the lessons over these years, in a hard way undoubtedly, that the secrets for economic success are embedded in some simple words: peace, market, opening, plus sound money.   These are indeed very expensive lessons that the Chinese ever paid for.

China's reform started in 1978, the same year when the Group of Thirty formed.   The next 28 years are the only extended period in the last century and a half when China had all these four pieces in place: peace, market, opening, and sound money.  In less than 30 years between 1978 and 2005, China's per capita income rose by more than 400%.   It is an amazing growth.  But tomorrow I am going to argue that it is not a surprising growth.

Back in 1998, Angus Maddison made a prediction that China would overtake the U.S. as the world's largest economy at purchasing power parity by 2015.   It seemed far-fetched at the time.  His calculation was based on a forecast of China's growth at a modest 7.5% per year.   Since 1999, China's growth has been above 7.5% every year, and over 10% for the last four years, very likely this year too.  Of course even when the two economies of China and the U.S. are of equal size, China's per capita income is still only 23% of the U.S. because U.S. population is only 23% of that of China.  Nevertheless this has historic significance.   For nine out of the last ten centuries, China was the largest economy in the world.  Only in the 1890s, U.S. overtook China.  If Maddison is right, China will regain its historical position as the world's largest economy (at purchasing power parity) in less than 10 years.   When China's history is written in a hundred years it may well be that the last one hundred years is the exception, not the rule.  We should feel very lucky to witness China's returning to its normal position in the world, which I would call a great mean reversion process (for the better) in the history of mankind.

I hope my brief remarks on China's economy in historical perspectives provide you with some background information that will be useful for the discussions on the current economic issues concerning China and the world in the next couple of days.   Because I believe that history matters, sometimes more than we thought.

Thank you.