China's Bubble Cambridge Lecture MT


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China's Bubble Cambridge Lecture MT

  2. 2. China‟s growth miracle The World‟s Workshop WTO Socialism with Chinese characteristics Xiaping‟s market oriented economic reforms Great Leap Forward
  3. 3. Quarterly growth rates… Average 9.5 % GDP growth rate annually since 1978 600+ million out of poverty…
  4. 4. Overtaking them all… “Since 2001, China‟s GDP has risen fourfold… Economically speaking, China has created three new Chinas in the past decade” Jim O’Neill
  5. 5. Growth splutters…? 2012 target: 7.5%
  6. 6. Economy is too reliant on investment as a driver Consumption has underperformed as a driver Export-led growth has been important too Re-balancing required“China has made remarkable achievements…. But there is a lack of adequate balance, coordination orsustainability in our development” (Premier Wen, 2011)
  7. 7. China‟s 2008 Stimulus Package $586 bn (4 trillion yuan) fiscal stimulusFixed investment growth accounted forover 90% of the growth in the Chinese economy in first 9 months of 2009
  8. 8. Infrastructure boom Easy money Large pool of domestic savings;
  9. 9. 2008-09: A new era and a new pace ofinfrastructure development…35 airports in one year In 2010, 175 airports
  10. 10. Infrastructure boom $228bn – 2011-2015 in aviation
  11. 11. High speed rail links…
  12. 12. Sustainability… 2011: 70 new railways Debts and ticket sales 2012: 9 new ones
  13. 13. Exporting HSR…
  14. 14. Build it… but will they come?
  15. 15. No such thing as a free lunch…“growing resource and environmental constraints are hindering growth.” Premier Wen Jiabao, 2011
  16. 16. The Minister for the Environment: “In China’s thousands of years ofcivilization, the conflict between humankind and nature has never been as serious as it is today…. The depletion, deterioration and exhaustion of resources and the worsening ecological environment have becomebottlenecks and grave impediments to economic and social development.” <1% clean air 20 of the 30 most polluted cities 2/3 cities breach air quality targets
  17. 17. Re-prioritising targets… “We absolutely cannot again sacrifice the environment as the cost for high-speed growth, to have blind development, and in that way tocreate over-capacity and put greater pressure on the environment and resources. That economic development is unsustainable.” Premier Wen 2011 “to raise the quality and the efficiency of growth”
  18. 18. CO2 emissions rise… Doubling in CO2 emissions since 2003
  19. 19. 2007-08 overtakesUSA as biggest CO2 emitter
  20. 20. Sustainability… Cap-and-trade? Since 2009, majority of cleantech IPOs 2006, 2 companies from China in the global list of top 10 solar cell producers In 2010, there were 6 of global top 102009: 50% increase in 2010: $30 billion in low-cost loans to green energy the top 5 solar manufacturers
  21. 21. Energy consumption… China surpasses the USA as the world‟s top energy consumer China has accounted for 75% of the global increase in coal consumption; and 60% of increase in oil use
  22. 22. China‟s Primary Energy Consumption China‟s energy demand has surged over 250% vs world average of 20% Coal-driven economy: 70% (vs Brazil: 6%; India: 51%)
  23. 23. Ratio of Domestic Coal Production toConsumption, 2008 World‟s largest consumer of coal World‟s largest producer of coal Currently self-sufficient in coal; but for how long?
  24. 24. Chinese steel consumption is greater thanUS+EU+Japan+India combined 2000-10: 600m tonnes extra consumed – China: 85% 1980 – 5%; 2008 – 40%Mln tonnes Largest exporter of steel
  25. 25. Soya beans: 1995 - 2010Already a large commodity consumer Corn: 2003 - 2010 World‟s largest consumer/producer of cotton World‟s second largest consumer of sugar World‟s second largest consumer of wheat
  26. 26. Food security is a top priority…
  27. 27. Supply-side constraints… Second largest consumer of oilFifth largest producer; Oil equity;Hydro power; Solar power; Coal Oil: imported crude oil dependence: 1999: 19%... 2010: 55%
  28. 28. Efficiency gains… Energy intensity of a consumption driven economy is much less than an investment driven one 2005-2020: Reduce emissions per unit of GDP by 45%
  29. 29. The largest migration in history Shenzhen – 1978-2010
  30. 30. Lewis Turning Point? 1978: „One Child Policy‟
  31. 31. China‟s population pyramid
  32. 32. Dependency ratio bottomed out… „Demographic dividend‟ Inflection point 2005: „Ageing society‟Source: UN World Population Prospects A longer term concern… Help with rebalancing economy
  33. 33. Working age population vs activepopulation In recent years, economic growth has not been driven by working age population growth Productivity growth
  34. 34. Human capital 6.3 mln college grads p.a Structural adjustment issue; not a labour constraint issue
  35. 35. It is RULC‟s that matter… Productivity improvementsCapital deepening Re-allocation of labour Healthcare improvements
  36. 36. Urban-rural ratio still low…VS US/Japan/S Korea
  37. 37. Further productivity gains remain… Hukuo Overemployment in agriculture: 10%:40%
  38. 38. „Go West‟ programmes$325 bn in infrastructure focused on Western region West is an important growth opportunity The wests share of GDP only 17.8% (2008) Special Economic Zones (XHTIZ)
  39. 39. Chongqing‟s success story… 2020 aim: 640 billion yuan ($100 billion) sized economy
  40. 40. Urban:Rural income ratio
  41. 41. Rising Gini… 2009: Shanghai:7.6x richer p/c than Guizhou
  42. 42. Inflation concerns… Top priority in 2011-15 Five Year Plan: controlling inflation Inflation target of 4% MNCs told to scrap price hikes Monetary tightening
  43. 43. Minimum wages rise… 2011: Migrant minimum wages rose 21%Source: Roubini Group Economics 2006-10: Average minimum wage increase: 12.5% p.a
  44. 44. But: Wage growth is key to execute the blueprint of the 12th Five Year Plan rebalancing and sustainability Target of min.wage toGovernment target rise of13% p.a be 40% of local salaries to 2015 by 2015
  45. 45. Infrastructure, externaleconomies of scale, logistics
  46. 46. 1990s China vs the „modern China‟… No longer purely importing sophisticated inputs and assembling <10% is them into consumer goods for the West assembly-line business
  47. 47. Shift towards higher-value add… China is now a major exporter of higher-value added products Source: US Comtrade, The Beijing Axis Analysis „Magic Seven‟ industries to become 15% of GDP by 2020 R&D expenditure to rise to 2.5% of GDP by 2015
  48. 48. Export-led growth… China‟s X actually fell 17% in 2009… …but it still overtook Germany as the world‟s largest exporter
  49. 49. Currency wars…
  50. 50. Current account balances… help with inflationary pressure and with Currency wars/WTO rebalancing
  51. 51. Yuan has appreciated25% in last 6 years...
  52. 52. Are exports really doomed?
  53. 53. The cost of intervention… Excess liquidity: Growth in M2
  54. 54. Asset bubbles… Has the stock market bubble burst?
  55. 55. Shanghai 2003-10: 150% Real estate construction is 10% of GDP 1998 housing stock privatised 2005-09:Beijing: 27:1 Average houseprice:income price tripled ratio
  56. 56. Asset bubbles… Tipping point in 2011? Average price p.s.m halved since 2009 peak Local govts revenue in trouble
  57. 57. % of cities where housing prices are down month on month Negative multipliers… Govt policiesSource: SocGen Chinese housing market is not the same as the U.S housing market
  58. 58. Growing indebtedness… 1998-05: $500bn written off Non- performing loans Chinese banks have lent an astounding $8 trillion since 2008
  59. 59. Local govt debt  02/20/c_131420191.htm
  60. 60. The future of financial markets… 10-year timetable for easing capital restrictions; liberalising interest rates
  61. 61. Reminiscent of Japan…
  62. 62. The Middle Income Trap…
  63. 63. GDP/c Japan vs China GBR: INSERT GRAPH OF CHINA’S GDP per capita levels… vs USA/UK/Japan/Brazil
  64. 64. Hard or soft landing…? Supply-side Rostow‟s Drive to Maturity phase Inequality constraintsRebalancing Fiscal restraints World Bank Currency 2030Asset bubbles reform Inflation/Deflation Social issues Labour costsSocialism with Environment capitalist th 5-Year Plan Growth of thecharacteristics? 12 middle class