China:the pastthe present andthe future

15 October 2011

C-H-I-N-A?

Source: UN

Full Name: People’s Republic of CHINADates back in the valley of the Yellow River around

2500BCLocated in East Asia and covers 9,600,000 square

kilometersCapital: Beijing (Peking) The most populated country in the world,

over 1,300,000,000 peopleLanguage: Mandarin Consists of 56 ethnic groups and 91.5% is Han.

The reasons for China’s growth

The transformation from shops to hi-tech involves massive infrastructure growth

Sweatshop for MNCs

Emergence of discretionary spending

Demand for durable goods, brands etc.

wages

Higher productivity

Urbanisation

higher labour cost

Construction site

labour concentration

Technology competence

experience

the society is no longer poor

easier logistics

conditions

Equipment demand

competitiveness

increase in production

domestic supplies

infrastructure

Education Hi-tech production economy

domestic supplies

knowledge

competence

Growing exports

Demand for raw materials

1970-1999 2000-2015 2015 +

China today – a switch to a strong domestic market

China is becoming a strong market for both consumer goods and raw materials

Sweatshop for MNCs

Emergence of discretionary spending

Demand for durable goods, brands etc.

wages

Higher productivity

Urbanisation

higher labour cost

Construction site

labour concentration

Technology competence

experience

the society is no longer poor

easier logistics

conditions

Equipment demand

competitiveness

increase in production

domestic supplies

infrastructure

Education Hi-tech production economy

domestic supplies

knowledge

competence

Growing exports

Demand for raw materials

The Past – transition from local to global

The dismantling of economic barriers fuelled China’s growth in 1980-1990s

In the middle of the 20th century China was a poor and isolated economy

Trade reforms had a positive impact: China’s share in global trade has increased steadily since 1979. This process began relatively slowly in the 1980s and accelerated in the 1990s with broader trade reforms

In 2001, China became a member of WTO which further facilitated trade

KEY CONCLUSIONS1949- 1978

Centralized Economy

1966-1976“Cultural Revolution”

1979The Major Economic

Reform

1980sExpansion

1990sFurther Expansion

Tight government control over a large part of the economy, reduced consumptionand increased industrialization Control of budget & money supply Suppressed private sector of small and big businesses / Anti CapitalismResults: extremely limited food and resourcesLed by President Mao who claimed to “put China back on track”, beat and tortured people whose rank or political thinking offended, mostly well-educatedResults: ten years of the political movement put China into an even more horrifying social and economical conditionLed by Deng Xiaopeng, who introduced aspects of capitalist economy systemGovernment begins to focus on foreign trade.Results: foreign direct investments in small “economic zones” that provided favored tax treatment and other advantages were permitted Further efforts made to expand the “the economic zones”: 14 coastal cities and three coastal regions “open area” Laws on contracts, patents, and other matters of concern to international trade were passed

Asian Financial Crisis affected China: sharp drop of foreign direct investments and exports. However, it remained largely insulated from the crisis:large reserves in central bank capital inflows that consisted of long-term investments

The Past – emerging as a regional player

Throughout 1990s China has been switching to Asia for imports and exports

China has been increasing trade within Asia-Pacific region while trade with Western countries sloped

The beginning of high-tech manufacturing drove imports of components from ASEAN

The increase in regional trade is closely connected with China’s role as a local major economy

KEY CONCLUSIONS

Source: IMF, Direction of Trade Statistics and CEIC

The Past – exponential growth

Between 1970s and 2000s China has seen exponential growth in trade and GDP

China has made good use of globalisation opportunities

A tenfold growth in GDP between 1990 and 2000 is due to merchandise-driven exports

Cheap exports have allowed the economy to grow during the crises (hi-end substitution vs. low-end expansion)

KEY CONCLUSIONS

Source: IMF, Direction of Trade Statistics

Growth in trade, 1970-2002, 1970 = 1

Nominal GDP, bn yuan, 1952-2005

China’s exports have been growing at the same pace as world exports meaning that China has made the deal of globalisation

In the meanwhile, China’s imports have been growing less fast due to weak domestic demand

China’s GDP has increased tenfold between 1990 and 2000 and nearly 270 times between 1952 and 2004 (inflation not adjusted)

The economy continued growing even during the financial crises of 1988 and 1998

China today – a switch to a strong domestic market

China is becoming a strong market for both consumer goods and raw materials

Sweatshop for MNCs

Emergence of discretionary spending

Demand for durable goods, brands etc.

wages

Higher productivity

Urbanisation

higher labour cost

Construction site

labour concentration

Technology competence

experience

the society is no longer poor

easier logistics

conditions

Equipment demand

competitiveness

increase in production

domestic supplies

infrastructure

Education Hi-tech production economy

domestic supplies

knowledge

competence

Growing exports

Demand for raw materials

China today – growing sophistication of export goods

Hi-tech goods stand for 60% of China’s exports, while hi-tech imports go down

2005 2006 2007 2008 2009

China net export by sector, 2005-2009, USD m

Source: WTO, IMF, press

The share of low-tech goods is declining while electronics and machinery export is gaining weight

The Chinese manufacturers no longer stick to producing for Western brands but launch own brand products

An increasing share of machinery and hi-tech exports as well as local construction spurs demand for mining resources and energy

KEY CONCLUSIONSProducts as share of China exports, % Manufacturing generates the need for both industrial construction and housing, creating the demand for construction materials: the construction market totalled USD 860 bn in 2010. China consumes around 54.7% of world concrete and 36.1% of steel production

Chinese electronics exports reached 60% in 2010, surpassing USD 1 trln. China is starting to manufacture electroincs for domestic market

Source: WTO, World Bank, Political Economy Research Institute University of Massachusetts Amherst, press

KEY CONCLUSIONS

China today – a switch to a strong domestic market

China is becoming a strong market for both consumer goods and raw materials

Currently the Chinese economy is driven mostly by exports

The saving habits of population impede consumer demand, though some increase in consumer spending already takes place

The policies are targeted towards increasing consumer spending thereby facilitating the transition to a domestic market

55% of Chinese exports are by MNCs41% of products manufactured in China are exported

China’s trade balance, 2005-2010, USD bn

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Exports of goods

Exports of services

Imports of goods

Imports of services

58,7% of products manufactured in China are exported

In the 1990s and 2000s the Chinese have been saving most of their disposable income, while a sustainable economy needs a higher level of spending. Currently the domestic expenditures increase by 9,7 percent per year, the government is planning to further stimulate the increase in consumer spending

China today – a switch to a strong domestic market

China is becoming a strong market for both consumer goods and raw materials

Sweatshop for MNCs

Emergence of discretionary spending

Demand for durable goods, brands etc.

wages

Higher productivity

Urbanisation

higher labour cost

Construction site

labour concentration

Technology competence

experience

the society is no longer poor

easier logistics

conditions

Equipment demand

competitiveness

increase in production

domestic supplies

infrastructure

Education Hi-tech production economy

domestic supplies

knowledge

competence

Growing exports

Demand for raw materials

• International Monetary Fund on China: No. 1 in 2016• China’s future lies in:– Increased export of highly manufactured commodities– Changing it’s economic model– Overcoming obstacles

The Future:

• Obstacles:– Inflation– Elderly– Pollution– Sustaining the middle-class– State ownership– Domestic issues

• Health-care• Pension and social security systems

The Future:

• Predictions for the year 2030

The Future:

Source: Article in Foreign Affars, Volume 90, Number 5, September/October 2011. Peter G. Peterson, Institute for International Economics. Massachussetts

The Future – China’s perspectives

Source: Institute for International Economics

YES NO

Aging society Excessive investment Spending money on domestic

issues not projecting power Difficulties in taxing the society Political and ideological issues

Huge market potential Rich labour force Comparative advantage in

labour cost Sound corporate governance Stable government

Is China the world’s next superpower?

• UN• WTO• World Bank• IMF• Political Economy Research Institute University of Massachusetts Amherst• Peterson Peter G. (2011). Article in Foreign Affars, Volume 90, Number 5

Institute for International Economics. Massachussetts• Finance and Development (IMF journal)• Financial Times

References