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Chinese Economy - Growth and Development

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These are slides from a revision presentation on the Chinese economy. They are designed for A2 macro students.

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Chinese Economy - Growth and Development

  1. 1. The Chinese Economy Does Have Business Cycles! 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Growth of the Chinese Economy since 1980, source: IMF, April 2016 Annual % change in Real GDP (LHS) Linear (Annual % change in Real GDP (LHS))
  2. 2. Real GDP and Real GDP Growth for China since 1980 0.00 10,000.00 20,000.00 30,000.00 40,000.00 50,000.00 60,000.00 70,000.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Growth of the Chinese Economy since 1980, source: IMF, April 2016 Annual % change in Real GDP (LHS) Level of Real GDP (RHS) Yuan billion
  3. 3. China’s Share of World GDP (Measured at PPP) % 0 2 4 6 8 10 12 14 16 18 20 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China - Gross domestic product based on purchasing-power-parity (PPP) share of world total
  4. 4. Progress in Improving Relative Living Standards 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 GDP per head relative to the United States (% of US GDP per head) (at purchasing power parity) (Source: IMF, forecasts for 2016-19) Brazil China India Indonesia Mexico Russia Turkey China achieved upper-middle-income status as a developing country in 2010
  5. 5. Shares of World Economic Output in 2015 16.86% 16.1% 7.11% 4.3% 3.39% 3.07% 2.9% 2.35% 2.34% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% China USA India Japan Germany Russia Brazil United Kingdom France ShareinglobalGDP(percent) Percentage share of the main industrialized and emerging countries in global gross domestic product (adjusted for purchasing power) in 2015 Note: Adjusted for purchasing power means that the $ value of each country’s GDP has been adjusted to take account of differences in the cost of living in different nations. Using this measure, China in 2015 is now the biggest economy in the world although China’s per capita national income remains a small fraction of advanced high-income countries such as the USA.
  6. 6. Growth Slowdown in Asian Countries – China Following? Source IMF Data
  7. 7. China’s Revised Growth Target (2016) • China’s stated economic goal is to double the 2010 GDP and GDP per capita by 2020, which requires an average annual real GDP growth rate of 6.5% between the years 2016–20 7.4% 7.5% 7.3% 7.3% 7% 7% 6.9% 6.8% 6.7% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 GDPgrowthrate Compared to the same quarter of the previous year Compared to the previous quarter (seasonally adjusted)
  8. 8. Growth and Development Challenges • 2007 – “The biggest problem in China’s economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable.”—Premier Wen Jiabao, March 2007 • 2015 – At the Fifth Plenum of the Communist Party of China meeting in October 2015, President Xi Jinping set a goal of 6.5% growth for China’s 13th Five-Year Plan for 2016– 2020 – He confirmed that China needs to “solve the problem of unbalanced, uncoordinated and unsustainable development.”
  9. 9. Share of GDP by Sector (Value Added) in 2014 20.6% 42.7% 26.8% 30.4% 19.4% 19.9% 23.4% 35.8% 30% 77.8% 48.1% 72% 68.9% 78.9% 79.5% 71% 60% 53% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% United States China Japan Germany France United Kingdom Brazil Russia India ShareofGDP Agriculture Industry Services
  10. 10. Structural of Output & Employment in China since 2002 Distribution of GDP 2002 2014 Primary sector % of GDP 13.4 9.2 Secondary sector % of GDP 44.3 42.7 Tertiary sector % of GDP 42.3 48.1 Distribution of Labour Primary sector % of employment 50.0 29.5 Secondary sector % of employment 21.4 29.9 Tertiary sector % of employment 28.6 40.6 State sector % of employment 9.8 8.2 Source: China Statistical Yearbook 2015
  11. 11. Key Factors Affecting Long Run Economic Growth Investment Productivity Labour supply Research Innovation Enterprise
  12. 12. Where next for China? • “China is not in crisis. However, its ability to evolve smoothly from a command to a market economy is in question as never before.” (Source: Economist, August 2015)
  13. 13. Key Growth Challenges for the Chinese Economy Slow growth of population of working age, rising median age, population set to fall Environmental challenges from China’s size and rapid growth Low rankings for government, rule of law, perceptions of corruption Lewis Turning Point - rapid growth of real wages in the last fifteen years - changing the balance of FDI flows Unbalanced economy - excessively high national savings & investment, unbalanced growth across regions, industries and between urban and rural areas Conditional convergence growth theory: As countries become richer, their per capita income growth rates slow
  14. 14. Key Causes of the Middle Income Trap • The middle income trap is when countries that have achieved middle-income status often experience a growth slowdown and a stagnation in the growth of real per capita incomes: Some of the causes include: • Rising wages / unit labour costs – The surplus supply of labour dwindles – Labour migration can run dry including rural-urban movement – Demographic transition model - falling natural population growth • Productivity growth slows down – Possible failure to invest in human capital especially in tertiary education – Slowdown in the pace of product and process innovation by businesses • Institutions may not support an adaptive and creative economy and society – Financial systems may not be able to cope with rapid expansion of credit • Maintaining macro-economic stability – Many fast growing countries suffer from high inflation – Credit bubbles can develop as speculative investments take hold
  15. 15. Composition of Aggregate Demand for China 47 46 45 43 41 40 38 37 36 37 36 37 37 37 38 17 16 16 15 14 14 14 14 13 13 13 14 14 14 14 34 36 36 40 42 40 40 41 43 46 47 47 46 46 46 2 2 3 2 3 5 8 9 8 4 4 2 3 2 3 0 10 20 30 40 50 60 70 80 90 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Structure of Aggregate Demand for China (per cent of GDP) (source: Haver Analytics & Datastream) Household Consumption Govt Consumption Investment Net exports
  16. 16. Demographics are not favourable for China 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Shareofthepopulation 0-14 years 15-64 years 65 years + Age Distribution of the Population for China 17.6% 66.3% 16.1% 10.5% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 0-15 years 16-59 years 60 years and older # 65 years and older Age Distribution of Chinese Population (2015)
  17. 17. Median Age of Population in Selected Countries (2014) The median age divides a population into two numerically equal groups; half the people are younger than this age and half are older 46.5 46.5 41.1 40.4 39.1 37.8 36.8 31.1 27.3 0 5 10 15 20 25 30 35 40 45 50 Japan Germany France United Kingdom Russia United States China Brazil India Medianageinyears Source: CIA Factbook
  18. 18. Forecast Dependency Ratios for China The dependency ratio denotes the relationship between economic dependent age groups (people who are either too old or too young to work) to those of a working age Source: China Statistical Yearbook 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 Dependencyratio Child dependency ratio Old-age dependency ratio
  19. 19. China’s National Savings and Investment (% of GDP) 30 35 40 45 50 55 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total investment and gross national savings for China, source: IMF Total investment Gross national savings “As the Chinese economy slows to growth below 7 per cent a year, investment rates of close to 45 per cent of gross domestic product no longer make economic sense.” (Martin Wolf, Financial Times)
  20. 20. Gross Capital Investment Spending (% of GDP) Source: HDI report 2015, UNDP Capital investment spending as a % of GDP, average for 2005-2013 Gross Investment Spending Gross Investment Spending (% of GDP) (% of GDP) China 47.3 Ghana 22.7 Mongolia 44.2 Norway 22.6 Ethiopia 35.8 Japan 21.7 Indonesia 31.7 Russian Federation 21.5 South Korea 29.7 Mexico 21.0 Bangladesh 28.4 Germany 19.8 Australia 28.3 Malawi 19.7 India 28.3 United States 19.3 Malaysia 26.9 South Africa 19.3 Singapore 25.9 Spain 18.5 Zambia 25.9 Brazil 18.2 Hong Kong, China (SAR) 23.9 Côte d'Ivoire 17.0 Uganda 23.8 United Kingdom 16.4 Vietnam 23.8 Ireland 15.2 Canada 23.7 Cuba 12.2 Chile 23.6 Greece 11.2
  21. 21. Is China Over-Investing? 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Gross Capital Investment (As a per cent of GDP) (Source: OECD) Japan South Korea China
  22. 22. Evidence of Diminishing Returns to Capital for China? -3.0 -1.0 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources of Long Run Aggregate Supply Growth for China (Per cent of GDP) (Source: US Conference Board) Labour quality and quantity Capital TFP Growth TFP: Growth of Total Factor Productivity
  23. 23. 23% 42% 51% 83% 72% 132%7% 24% 68% 8% 20% 39% 0% 50% 100% 150% 200% 250% 300% 2000 2007 2015 Q2 Level of Debt as a % of Chinese GDP (Source: McKinsey) Government Non-financial corporate Financial Households China has a HUGE level of debt – a big threat to growth “Deleveraging and a further slowdown in the economy could reveal more problems with credit quality, especially in the state-owned enterprise sector.” (IMF, September 2015)
  24. 24. China has a HUGE level of debt – a big threat to growth
  25. 25. China is now the World’s Biggest Polluter 0 2000 4000 6000 8000 10000 12000 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 Emissions of CO2 (annual emissions, millions of tonnes of CO2) China US
  26. 26. The Scale of China’s Environmental Challenges • According to Berkeley Earth, breathing Beijing’s air is the equivalent of smoking almost 40 cigarettes a day; they estimate that air pollution causes 1.6 million deaths a year. • Nearly 30% of China’s major river systems and 40% of its lakes are also polluted • 16% of China’s soil is polluted beyond acceptable standards and 19.4% of China’s total arable land is badly contaminated by heavy metals • World Bank estimates that the annual cost of pollution is 9.7% of Chinese GDP, stemming from destroyed human capital and natural resources and damaged structures
  27. 27. Five Key Elements of the 13th Five Year Plan for China • The Five Year plan agreed in October 2015 has the ultimate objective of achieving a “moderately well-off society” by 2020 1. Innovation - which will be necessary for China to transition into a high value-added economy and, consequently, achieve a higher quality of growth 2. Regional development - which aims to address China’s development disparity among regions and between urban and rural areas through extra infrastructure investment and the stimulation of regional markets / special economic zones 3. Green development - which places importance on developing China’s green economy by tackling pollution and energy efficiency issues through market initiatives 4. Opening up - which looks to increase the efficiency of China’s market by further integrating it with the global market 5. Inclusive development - which aims to ensure that China’s development process benefits all individuals at all levels of society – especially the poorest 40% of households
  28. 28. China – Recent Structural Reforms • The end of the one-child policy in October 2015, allowing all couples to have two children • Reforms of the hukou system to extend urban welfare services to migrant workers and raise the minimum wage • “Made in China 2025” scheme to upgrade China’s manufacturing capacity. Aims to shift China away from reliance on exporting low cost goods into a competitive manufacturing sector for innovative and high-quality products • Targeted sectors for developing new comparative advantage – Information technology (IT) – Power generation, agricultural equipment – Medical products and bio-pharma, robotics – Advanced aerospace, Rail and other transportation equipment
  29. 29. Emerging Industries – Growth Drivers for China The fastest-growing industries in China focus on consumers and services and are utilizing technology and innovation more effectively than traditional heavy industry – these include e-commerce, medical devices, services and high-end manufacturing. Alibaba Tencent Baidu Xiaomi Huawei China Mobile Baidu, Alibaba and Tencent are all publicly listed — abroad!
  30. 30. Emerging Chinese Businesses 334.6 278.3 271.5 212.9 201.7 199.1 189.9 181.1 160.5 121 0 50 100 150 200 250 300 350 400 PetroChina Industrial and Commercial Bank of China China Mobile China Construction Bank Alibaba Bank of China Agricultural Bank of China Tencent Holdings China Life Insurance Sinopec China Petroleum Stock market value in billion U.S. dollars
  31. 31. Chinese Trade and Investment in the Future “China’s annual gross savings are now about $5tn. Finding ways to use this vast flow productively, at home and abroad, will be a challenge.” (Martin Wolf, FT, March 2016)
  32. 32. Trade and Investment: One Belt One Road (OBOR) • China has launched a new One Belt One Road strategy (known as OBOR) • The stated goal of this strategy is to “promote economic prosperity of the countries along the Belt and Road and regional economic cooperation • Two key components of OBROR: 1. The “Silk Road Economic Belt” - a land route designed to connect China with Central Asia, Eastern and Western Europe 2. The “21st Century Maritime Silk Road” - a sea route that runs west from China’s east coast to Europe via the South China Sea and Indian Ocean, and east into the South Pacific • OBOR passes through over 60 countries across Asia, Europe, the Middle East and Africa, which account for 70% of the world’s population and 55% of global GNP
  33. 33. Chinese Trade and Investment in the Future Source: http://www.merics.org/en/merics-analysis/infographicchina-mapping/china-mapping.html
  34. 34. China’s Share of World Trade • China’s export market share rose from 2 percent in 1990 to 7 percent in 2001 (when it joined the World Trade Organisation) and 13 percent in 2013. • China exports – 56 percent of global computer equipment – 65 percent of global plastic toys China’s share of world exports of apparel is declining – her exit from labour-intensive & low-wage industries such as textiles has created opportunities for countries such as Bangladesh, Cambodia, Indonesia, and Vietnam who have developed comparative advantage
  35. 35. The Pattern of Chinese Exports
  36. 36. The Pattern of Chinese Imports
  37. 37. Distribution of Chinese exports in 2015, by trade partner 18% 15.64% 14.58% 12.19% 5.96% 4.45% 2.56% 1.53% 1.97% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% United States European Union Hong Kong ASEAN* Japan South Korea India Russia Taiwan Share of total Chinese exports * ASEAN stands for Association of Southeast Asian Nations - Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam
  38. 38. China – Free Trade Agreements • In recent years China has concluded numerous bilateral free trade agreements. Examples include the following: – Australia (2015) – South Korea (2015) – Switzerland (2014) – Iceland (2014) – Costa Rica (2011) – Peru (2010) – Singapore (2009) – New Zealand (2008) – Pakistan (2007) – Chile (2006) – ASEAN (2005) – Macau SAR (2004) and Hong Kong SAR (2004)
  39. 39. China’s External Surplus (Current Account) 0 2 4 6 8 10 12 0 50 100 150 200 250 300 350 400 450 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China – Current Account Balance, annual data, source IMF Current account balance ($bn) LHS Current account balance (% of GDP) RHS China’s current account surplus has dropped from 10% of GDP in 2007 to just over 2% of GDP in 2015. However her trade surplus has grown in absolute terms as the size of the economy has increased.
  40. 40. China’s Foreign Currency Reserves ($s) $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 CHINA'S FOREIGN CURRENCY RESERVES ($bn) China’s foreign currency reserves peaked at over $4 trillion in 2014 but have been falling recently partly because of private sector capital flight from China (although capital flows are heavily controlled).
  41. 41. The Rise and Rise of China’s Outward Investment (FDI) • China has become a major capital exporter – Examples include: – (2015) ChemChina spent $43bn to acquire the Swiss agrochemical and seeds company Syngenta – (2014) ChemChina spent $9bn to buy Pirelli Tyres – (2015) Dalian Wanda acquired US film studio Legendary Entertainment for $3.5bn and Carmike Cinemas for $1bn – (2015) Chinese aviation and logistics conglomerate HNA Group spent $3bn on airport operator Swiss Port – (2016) China General Nuclear Power Corporation (CGN) acquired a 33.5% interest in EDF’s nuclear power project that is planned to be built at Hinkley Point in the UK for $9bn – (2015) Huawei Technologies opened a new ICT training and innovation centre in Sydney – (2015) Alibaba opened three new cloud data centres in Hong Kong, Singapore and Silicon Valley (USA) • China is using FDI to buy experience, technology, brands and human capital to become more competitive in higher value- added growth industries – part of their new growth strategy.
  42. 42. China’s Exchange Rate Policy • China currently operates a semi-fixed exchange rate – the value of the Yuan is pegged to a basket of currencies and can only move by a limited amount each day • Currently, Chinese currency flexibility is limited by a daily 2 percent trading band around a central parity • The People’s Bank of China (the central bank) intervenes in the market - for example it will draw down on foreign- exchange reserves to support the renminbi exchange rate by selling $s and other currencies to buy the Chinese Yuan. • According to the IMF (2015), a more flexible, market- determined exchange rate is needed for allowing the market to play a more decisive role rebalancing toward consumption, and maintaining an independent monetary policy as the capital account opens
  43. 43. China’s Exchange Rate Policy Period of fixed exchange rate against the US dollar Since 2005 – China has operated a semi- fixed exchange rate – gradual appreciation until 2014
  44. 44. China’s Exchange Rate Policy Devaluation of the Yuan here Over the last year, the Chinese monetary authorities have been attempting a managed depreciation / devaluation of the Yuan to maintain competitiveness
  45. 45. Chinese Trade and Investment in the Future “China’s annual gross savings are now about $5tn. Finding ways to use this vast flow productively, at home and abroad, will be a challenge.” (Martin Wolf, FT, March 2016)
  46. 46. Trade and Investment: One Belt One Road (OBOR) • China has launched a new One Belt One Road strategy (known as OBOR) • The stated goal of this strategy is to “promote economic prosperity of the countries along the Belt and Road and regional economic cooperation • Two key components of OBROR: 1. The “Silk Road Economic Belt” - a land route designed to connect China with Central Asia, Eastern and Western Europe 2. The “21st Century Maritime Silk Road” - a sea route that runs west from China’s east coast to Europe via the South China Sea and Indian Ocean, and east into the South Pacific • OBOR passes through over 60 countries across Asia, Europe, the Middle East and Africa, which account for 70% of the world’s population and 55% of global GNP
  47. 47. Chinese Trade and Investment in the Future Source: http://www.merics.org/en/merics-analysis/infographicchina-mapping/china-mapping.html
  48. 48. A Selection of Key Macro Data for China in 2015 Core inflation is 1.5% but producer prices are falling – sign of excess supply China is transitioning to a “new normal” i.e. real GDP growth of 6-7% Urban unemployment rate has been 4.1% for 5 years Living standards remain low by advanced economy standards - <30% of US China’s current account surplus is now 2-3% of GDP, $300bn trade surplus China’s Gini coefficient is high but now falling – big rural/urban divide
  49. 49. Evaluating the impact of a shock Chinese real economic growth slowed down from 7.3% in 2014 to 6.9% in 2015 Direct effects on UK economy • Trade flows to and from China • Investment flows to and from China (FDI, Portfolio I) • Impact on jobs in the UK in industries directly affected • Impact on Sterling-Yuan exchange rate Indirect effects on UK economy • World commodity prices and global inflation • Impact on nations with whom the UK trades • Threats to globalisation / protectionism • Risk of increased currency volatility
  50. 50. Evaluating the impact of a shock Chinese real economic growth slowed down from 7.3% in 2014 to 6.9% in 2015 -30000 -20000 -10000 0 10000 20000 30000 40000 50000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 The annual value of UK trade with China, £million Trade Balance with China Exports to China Imports from China
  51. 51. Chinese slowdown and the UK Macro Objective Comment on the Effect Inflation Lower – weaker global commodity prices – a deflationary force in the world economy. But depreciating sterling will keep deflation away. Economic growth Weaker – fall in UK exports to China. UK Interest rates already close to zero, limited scope for monetary policy to respond. Unemployment Higher – e.g. steel dumping controversy, fewer exports to China Balance of trade • Uncertain – Yuan devaluation may increase volume of Chinese exports to European Union countries • Lower commodity prices helps the UK as we are a net importer of energy, raw materials etc. UK has large trade deficit with China. Business investment Uncertain – opportunities from faster economic growth in other countries / regions including India. Fewer Chinese tourists & students. Wider external effects Chinese debt crisis might trigger another international finance crisis – falling stock markets. Less than 1% of UK pensions assets are invested in Chinese shares and bonds China’s slowdown is a deflationary shock for the world economy. China is the second largest economy and the second largest importer of both goods and commercial services
  52. 52. Growth and Development in China – Key Indicators Key Macro Data Latest annual GDP Growth (%) 6.7 GDP or GNI per capita (US $, PPP) $12,547 Inflation (%) 1.7 Unemployment rate (% of labour force) 4.1% Fiscal balance (% of GDP) -2.6% Government debt (% of GDP) 57% Yield on 10-Yr Govt Bonds (Per Cent) 2.43% Investment (% of GDP) 45% Gross national savings (% of GDP) 50% Background Information Currency unit Yuan Exchange rate system Semi- Fixed Policy interest rate 3.5% Member of a Regional Trade Agreement WTO in 2001 Current account balance (% of GDP) +2.6% Main corporate tax rate (Per Cent) Not known Competitiveness ranking 28th/144 Corruption Perception Ranking (2015) 83rd/168 Ease of Doing Business Ranking (2015) 84th/189 External Debt (% of GDP) 9% Aspects of Economic Development Latest HDI ranking 90th/189 Mean Years of Schooling 7.5 years % of population living in extreme poverty 6.2% Life Expectancy at birth (years) 75.8 Gini coefficient (Latest published estimate) 0.37 Palma Ratio (= the ratio of the income of top 10% /poorest 40%) 2.7 Inward FDI (% of GDP) 3.5% Remittances (% of GDP) 0.4% Aid (% of GDP) 0%
  53. 53. Contextual Background on Chinese Economy Economic Structure of the Chinese Economy Share of GDP by value added (% of GDP) Primary: 9 Industrial: 43 Services: 48 Main export industries (+ major firms) 1/ ICT equipment, industrial machinery 2/ Office and electrical machinery 3/ Clothing and other textiles Key risks to sustainable growth 1/ Rising inequality places strains on social stability 2/ Excess capacity in many industries risks deflation 3/ Declining working age population from 2016 4/ Threats from rising pollution / water scarcity Development and Growth Issues / Policies for China 3 factors limiting development progress 1/ Hukou resident permit registration system limits labour mobility 2/ Low per capita incomes especially in rural areas 3/ Under-funded health care & pension systems 3 policies used to improve the supply-side 1/ More free trade zones similar to Shanghai Free Trade Zone (SFTZ) 2/ Crack down on corruption, end of 1 child policy 3/ Basic medical insurance for 90% of the population Long term challenges facing China Challenge 1: Growing rich before China grows old Challenge 2: Improving quality of economic growth Challenge 3: Re-balancing China towards higher value manufacturing and service industries
  54. 54. Overview: Main Strengths and Weaknesses for China Economic / Competitive Strengths 1/ Huge FX reserves ($3.3T) + a sovereign wealth fund 2/ Large and growing domestic consumer market 3/ Country leads the way in renewable energy investment 4/ Rising number of globally scaled Chinese businesses 5/ Open economy (X>25% of GDP) rising world influence Other Notes • China’s is at a critical stage of her growth and development - China is transitioning to a new normal, with slower, more sustainable growth • China will have move up the ‘value chain’ as it loses its competitive edge in labour-intensive sectors. China is still a relatively poor country with an estimated GDP per capita on a PPP basis of US$12,879 in 2014, lower than Thailand. • Policies to increase the real incomes of China’s middle class will encourage more consumption as a share of GDP and make the economy less reliant on exports and investment as key sources of economic growth. Main Weaknesses in their Economy 1/ High rate of corruption, poor human rights record 2/ Excessive investment and low rate of consumption 3/ Very high rates of debt (municipal & household) 4/ Rapid wage growth is shifting FDI out of China 5/ Rising inequality between urban & rural areas Other Useful Contextual Knowledge • China has many structural imbalances that will need to be addressed for sustainable growth to continue • The economy remains reliant on credit growth, with overall debt rising to 280% of GDP in mid-2015. • China will need to move away from imitating/copying Western technologies towards generating innovation. • Wages in Chinese manufacturing have more than tripled since 2008. Wage costs are now almost four times higher than in Bangladesh, Cambodia, the Lao People’s Democratic Republic, and Myanmar.

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