CHINA GONE GLOBAL Jack Garrity Executive Director Asia Society Washington May 10, 2011
“ All political power comes from the barrel of a gun.”
“ The economy is the basis for global power.”
Can the United States have Guns and Butter too?
US Still Out-Spends the Globe on Defense
However Military Spending Has Risen Across the Globe
China’s Booming Economy
China ‘ s GDP (1990-2010) 2010 GDP Growth Rate: 10.3
China‘s GDP Growth (1990-2010)
China‘s GDP Map 2010
China‘s GDP Compared to Other Countries (2000-2010)
Output and Outlook 1820-2001 India, China and US
Forecast of China’s and US GDP
China’s real per-capita GDP(1980-2000)
Rich- Poor Gap is Enlarging
China‘s GDP/per capita (2000-2010)
Gini Coefficients 1980-2006
China’s household saving
Hukou Household Registration
China’s Living Standard is still low
China’s GDP per capita of $4,200 in 2010 was only 9 percent of that in US
China’s standard of living today is roughly comparable to that of :
Japan in 1954
Taiwan in 1972
South Korea in 1976
When will China become the largest economy
ECONOMIC CONCERNS AND CHALLENGES
Major Structural Problems: Stability /Sustainability of Chinese Economy
Unsustainable export level (Export over GDP ratio)
Unsustainable Low Domestic Consumption (Household consumption over GDP ratio US vs China)
Unsustainable Low Labor Income (Declining Labor income over GDP ratio
Unsustainable High Saving Rate. (China VS the rest of the world, 1978-2006)
Too much Enterprise and Government Savings
The Share of Household Saving in National Saving has declined substantially
Most government investment in China are Local Government Investments
Local government are in deficit. Poor regions have higher deficit
Is China’s real GDP growth sustainable ? Optimistic forecast versus official targets
How much progress can we expect from the 12th 5 Year Plan
The most challenging problems come from regional competition which has been essential for China’s growth
The institutional foundation of regional competition
Why regional competition is becoming a source of problems
Non-Market policies would not work
Market oriented policies may work
GROWTH DRIVEN BY INVESTMENT AND TRADE
CHINA’S FDI INFLOW
Domestic Infrustructure Spending
Railway Crossing| High-speed Network Lengths by Comparison
Map of High Speed Railway
Map of High Speed Railway (Planned)
Will High Speed Railway Speeding Up Economic Growth?
It will spread economic development farther west, by slashing travel time between Chinese cities it will spur trade and ease the flow of people and ideas, its proponents and tourism industries are all tipped as big winners.
Foreign Direct Investment into China
Foreign Investment Spending
China’s FDI inflow VS domestic investment Source: China National Bureau of Statistics $bn $3596bn $68bn $379bn $20bn
Government Debt is Scrambling
China’s Public Debt is More Than 80% of GDP
CDB’s Foreign and Domestic Lending, 2005-2009
Investment Contribution to GDP Growth
Is China One of the Asia’s Flying Geese?
China’s low returns are getting lower.
China achieves about $2.20 in economic output per dollar invested, down from $3.40 in 1980. The United States gets almost $6.50.
(Indonesian efficiency surges after I.M.F.- led overhauls in the late 1990s. Every dollar invested produced $5 in output. Now $3)
China favored sectors like heavy industry and property, producing overcapacity and asset price bubbles. It means China needs more investment in its agricultural sector.
Investors’ Complaints to China
Intellectual property rights protection
Directed lending by state banks to Chinese competitors
Indigenous innovation policy
Currency undervaluation capital control
Restrictions capital movement
Intellectual property rights protection
China’s Exports and Imports(2000-2010) China joins WTO in 2001
Garment trade with EU http://online.wsj.com/article/SB10001424052748704062604576105691622922576.html
Garment trade with US
China in the Global Economy, 2009 % share of the global total Sources: UNDP, NBS, UN Comtrade, SAFE, UNCTAD, IMF, World Bank, RHG; *China‘s share in global total as available from the IMF in November 2010, 101 countries
China’s Production Surplus Production surplus
World Trade 2010- Top 10 exporters Source: WTO data http://www.wto.org/english/news_e/pres11_e/pr628_e.htm
China and Developing states Projected to keep a favorable trade balance
U.S.’s Share of Global Trade 1990 vs. 2010 20% 26% $3,517 bn $15,518 bn Deficit: $ -82 bn Deficit: $ -529 bn
China’s Global Trade by region 2000 VS 2010 $2,723.5 510.8 479.9 385.6 292.6 230.0 174.7 133.3 109.8 103.8 85.1 80.5 48.4 37.0 31.4 20.5 2010 —— 2000 —— China’s surplus 2243 16 4 11 13 6 7 10 15 9 3 6 4 6 3 5 times times times times times times times times times times times times times times times times $373.6 ($125.2) $143.0 $181.7 ($16.1) $210.7 ($22.7) ($25.3) ($6.3) ($25.3) $4.2 $34.6 $26.1 $7.4 $4.0 ($17.3)
China ‘s Global Trade by Region 2010 In Billion
China ‘s Global Trade 2000 VS 2010 2000 2010 Trade Exports Imports China's surplus/deficit Trade Exports Imports China’s surplus/ deficit EU $71.9 $41.1 $30.8 $10.2 $479.9 $311.5 $168.4 $143.0 Russia and rest of Europe $12.3 $3.9 $8.5 ($4.6) $85.1 $44.6 $40.4 $4.2 US $74.5 $52.2 $22.4 $29.8 $385.6 $283.7 $102.0 $181.7 Canada $6.9 $3.2 $3.8 $0.6 $37.0 $22.2 $14.8 $7.4 Africa $9.6 $4.2 $5.4 ($1.3) $109.8 $51.7 $58.1 ($6.3) MENA $17.7 $7.1 $10.6 ($3.5) $174.7 $76.0 $98.7 ($22.7) Northeast Asia $118.5 $53.5 $65.0 ($11.5) $510.8 $192.8 $318.0 ($125.2) China HK, Macao $54.8 $45.2 $9.5 $35.7 $230.0 $220.3 $9.6 $210.7 ASEAN $39.5 $17.3 $22.2 ($4.8) $292.6 $138.2 $154.3 ($16.1) Oceana $12.6 $6.6 $6.0 $0.7 $103.8 $39.3 $64.6 ($25.3) South Asia $5.7 $3.8 $1.9 $1.9 $80.5 $57.6 $23.0 $34.6 Central Asia/ Caucuses $1.8 $0.8 $1.1 ($0.3) $31.4 $17.7 $13.7 $4.0 Central America/ Caribbean $4.1 $3.5 $0.6 $2.9 $48.4 $37.3 $11.2 $26.1 South America $8.4 $3.6 $4.8 ($1.2) $133.3 $54.0 $79.3 ($25.3) Other countries and area $0.0 $0.0 $0.0 $0.0 $20.5 $1.6 $18.9 ($17.3) Total $438.3 $245.8 $192.4 $53.4 $2,723.5 $1,548.6 $1,175.0 $373.6
China’s Share of World Trade (Shadow Chart) 1990-2010
China’s Share of World Total Exports
China’s Share of World Total Exports Clear
China’s Share of World Imports
Exports: Comparison among US, Germany, Japan and China
China's Top 10 Trade Partners in 2010 In billion USD
Top 10 China's Imports in 2010 In billion USD
Top 10 China's Exports 2010 In billion USD
China is the NO.1 trading partner of six G-20 nations
China is the NO. 2 trading partner of Canada, U.S, Indonesia, Mexico and Brazil
As new powers grow…China is becoming ever more important to their trade.
China’s Current Account and percentage of GDP
China’s current account surplus
Trade Remedy Measures on China’s Exports Value ($ billion)
The Disappearing Cost Advantage
Comparison of population in China, Indonesia and Brazil China is now Indonesia's biggest export market, having almost doubled its share in the past decade to about 12.5%.
A Chinese slowdown is a risk.
Both brazil and Indonesia also have vibrant domestic sectors. Household consumption equated to 65% of Indonesia's gross domestic product last year, similar to brazil and well above china’s level of about 40%.
In brazil, mortgages outstanding equate to a mere 3% of GDP, compared with 72% in the U.S., and 18% in China.
Indonesia is set to reap a demographic dividend as its working-age population grows 21 million people by 2020. While china’s working population peaks this decade, creating a headwind thereafter. Brazil’s will peak in 2030.
RMB EXCHANGE RATE
China’s currency has risen against the dollar recently, but against a broad basket of currencies it is basically flat.
RMB against USD 2000-2010
REER USD CNY
CNY/ EUR/ JPY
Big Mac index, CNY is the most under valued currency Source: McDonald’s; The Economist. At market exchange rate (2010 Oct 13th)
The Yuan has strengthened against the dollar and euro over the past several years, leading some economists to say it is approaching fair value
Does China Really Appreciate Their Currency
U.S. imports from China may shrink, they may be replaced by imports from other emerging markets
L imiting the international use of the Yuan
China keeps a rein on capital moving into and out of the country.
The government sets the maximum rate banks can pay to depositors and the minimum they can charge for loans- a boon to the large state-owned banks because the rules give them a cheap source of savings and limit competition from private financial firms.
The managed exchange rate is frustrating Beijing’s commercial and political aspirations.
Surplus of foreign reserves is locked away in low-yield U.S. treasury securities instead of helping develop the country
The exchange rate has become a sort of burden on china. We are creating a lot of distortions in the economy to maintain it.
Currency Change s will be Difficult
China now accelerating the appreciation of Yuan, now 6.49 = $1 – the lowest since 1990s
Letting the Yuan rise and fall freely on world markets could cause pain
Decrease in exports, job loss; Increase in imports
Remove restrictions on loan and deposit rates, as deposit rates below inflation transfers wealth from savers to borrowers
Major impact on entire financial system
Currency Pros and Cons
Undervalued currency boosts trade surplus
Has led to huge increase in foreign reserves
Yuan prices of imported fuel and food increase
Domestic inflation rises – now 5.4%
Other countries upset at China’s “unfair” competition
Volume of dollar-Yuan swaps traded increases
Top 10 underwriters for offshore Yuan-denominated bonds
China’s foreign reserve holdings topped $3 trillion in March, nearly three times the holdings of Japan $1.15 trillion is U.S. treasury
Foreign-exchange reserves keep rising
The Consequence of High Foreign Reserves
China is the world’s largest foreign exchange holder, with reserves exceeding $3 trillion; three times that of Japan.
But these reserves do not give the government a good return, since they are largely invested in low-yield products.
Some analysts estimate yield could be 3 percent at best, while others argue that the real value of china’s reserves has eroded when exchange rates and inflation are taken into account.
Snowballing reserves add to inflation and are disadvantageous to China in international talks on its foreign exchange policies.
Should allow individuals and businesses to hold and manage more foreign reserves
Internationalization of the Yuan
Using Yuan in Trade Settlement?
Criteria for being a dominant international reserve currency
The expectation of Yuan’s rise may lead to change of business strategy
Inflation may lead China to start revaluing its currency
China’s Consumer Prices
China’s annual inflation hit 5.3%
The increase in the amount and prices of imported bulk commodities played a major role in increasing China's imports and thus the quarterly trade deficit.
China's iron ore imports grew by 14.4 percent to 180 million tons in the first quarter. The average price rose by 59.5 percent year-on-year to $156.5 a ton.
The rising price of iron ore has stimulated domestic production. The quality of metallic minerals mined in China, in general, is lower than the imported ones.
Soybean imports dropped by 0.7 percent to 10.96 million tons, but its average price increased by 25.7 percent to $573.9 a ton.
China lifts banks’ reserve ratio to 21%, among the highest in the world.
COMMODITIES A copper-products plant in Nantong, China: The metal bounced back from recent lows
Commodity Prices may increase and Hamper Growth
Metal prices go up
China’s refined copper imports drop
Copper reserves for selected countries
CHINA‘S DEMAND FOR ENERGY
China’s power picture
Typical urban household in China already has at least one air conditioners
Electricity consumption has soared in China
China is now the world Largest energy consumer
Power Output Source: China Electricity Council Unit: billion KWh
China and the US source their oil from different areas
Shanghai trucker strike as the price of oil surges.
In China, coal consumption has surged along with electricity consumption
World Gold Reserves in 2010
The amount individual buyers purchase as an investment is expected to surge two-fold annually.
And the government's gold reserves are "far from enough", and should be increased to fend off global financial risks.
Since China deregulated its gold market in 2008 gold sales as a means of investment have surged, with an annual growth of 100 percent from 2007 to 2010, compared with 30 percent for the global investment market during that period.
Inflation and the weakening purchasing power of the yuan have driven up private demand for gold and this will continue.
China had more than $2.84 trillion in foreign exchange reserves by 2010, but only 1.7 percent were invested in gold.
The government needs to expand its share of gold in the foreign exchange reserves to reduce vulnerability to dollar depreciation. The reserve should be at least 5,000 tons.
In the first quarter, China overtook India to become the largest market for private gold sales.
China has gone from the world’s largest coal exporter to the largest importer
LABOR FORCE ISSUES
Guangdong Migrant Workers
Graduate Employment Many college graduates are more willing to work in places where the cost of living is lower as a result slightly smaller cities in China begun to grow at a faster rate. Source: Chinese college graduates employment annual report
World Class-Average math and science scores for 15-year-olds in 2009
More Chinese Travelling Abroad
The number of outbound travelers totaled more than 57 million in 2010,a rise of 20.4 percent year-on-year,
More than 57 million Chinese are expected to travel abroad this year, and will spend a staggering $55 billion, (China Tourism Academy).
Visitors from China spend more Parting with cash Visitors from China ranked among the top 11 in head count and they were No.7 in spending last year. International arrivals to the U.S. International visitor spending in the U.S. Rank In millions Rank In billions 20.0 13.4 3.9 3.4 1.7 1.3 1.2 1.1 0.9 0.8 $20.8 14.6 11.6 8.7 5.9 5.8 5.0 4.1 4.0 4.0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
CHINA’S INVESTMENT OVERSEAS
China’s overseas investment is surging
China’s ODI is stepping up
Outward Direct Investment: Flows and Stocks, 1981-2010 USD bn, BOP flow data
Source: PBoC, SAFE, RHG
Stock: $245.75 billion
China ODI flow 2003-2009, total $177.2 billion USD