China-US Economic Relation

Jiming Ha

Trade

2

Important Trade Partners

The US is China’s largest trade partner.

China is the third largest trade partners of the US (next to Canada and Mexico).

1. Major exporting countries and regions of China in 2016 2. Major exporting countries and regions of United States in 2016

3Source: General Administration of Customs, P.R.China; Wind

China Has Surplus in Goods and the US Enjoys Surplus in Services

While China has a sizable trade surplus in goods, the US has a significant and rapidly growing surplus in services.

1. Goods Trade between China and the United States 2. Service Trade between China and the United States

4Source: General Administration of Customs, P.R.China ; National Bureau of Statistics, P.R.China ; Wind

-500000

-400000

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-200000

-100000

0

100000

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600000

U.S. net goods exports to China U.S. goods export to China U.S. goods import from China

0

10000

20000

30000

40000

50000

60000

U.S. net services exports to China U.S. services export to China U.S. services import from China

Mill

ion

USD

Mill

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USD

Direct Investment and Capital Flows

5

China Is the Largest Credit Country for the US Government

As of October 2017, foreign investors held 6.35 trillion USD of the treasury bills, of which China held 1.19 trillion USD, accounting for 18.7%.

1. Foreign investors' holding of U.S. Treasury

6Source: DEPARTMENT OF THE TREASURY, U.S. ;Wind

Bill

ion

USD

0

1000

2000

3000

4000

5000

6000

7000

2000-0

3

2000-0

8

2001-0

1

200

1-06

2001-1

1

2002-0

4

2002-0

9

2003-0

2

2003-0

7

2003-1

2

2004-0

5

2004-1

0

2005-0

3

2005-0

8

2006-0

1

2006-0

6

2006-1

1

2007-0

4

2007-0

9

2008-0

2

2008-0

7

2008-1

2

2009-0

5

2009-1

0

2010-0

3

201

0-08

2011-0

1

2011-0

6

2011-1

1

2012-0

4

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9

2013-0

2

201

3-07

2013-1

2

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5

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0

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3

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8

2016-0

1

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6

2016-1

1

2017-0

4

2017-0

9

China's holding of U.S. Treasury Japan's holding of U.S. Treasury Foreign investors' holding of U.S. Treasury

China’s Investment in the US Outpaced US Investment in China

As for bilateral direct investment, China outpaced the US in 2012 and continued to grow rapidly thereafter. China invested about USD 17 billion in the US in 2016, up by 111.5% yoy，while the US invested USD2.4 billion in China, growing by 14.2%.

On a cumulative basis, however, the US has had tremendous investment in China.

1.Flow of Direct Investment 2.Cumulated Direct Investment: 1986 to 2016

7Source: Ministry of Commerce, P.R.China; Wind

4.2 3.9 3.1 2.9 2.6 2.9 2.6

3.0 2.4 2.6 2.8

2.4 2.1 2.4

0.1 0.1 0.2 0.2 0.2 0.5 0.9 1.3

1.8

4.0 3.9

7.6 8.0

17.0

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

The United States invest direct in China China invest direct in the United States

Bill

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USD

0

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1986

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198

8

1989

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201

2

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2016

The United States invest direct in China China invest direct in the United States

Great Opportunities for US Investment Following the Recent Opening-up of China’s Financial Industries

2. Foreign shareholding limits in financial services to be relaxed

8Source: Public information

Industry Current Rules New policy

Banks and financial asset management

Single foreign shareholding is not be allowed to exceed 20% ,and total foreign shareholding is not be allowed to exceed

25%. Unrestricted

Securities Foreign investors will not be allowed to own more equity as

much as 40%.Foreign investors will be allowed to own more equity as much as 51% in securities, fund management and futures

companies. The cap will be removed after three years from the effective date of such detailed implementation rules or regulations. This means foreign managers may use a WFOE structure to implement their retail strategies in the PRC in

the future.Fund management

Foreign investors will not be allowed to own more equity as much as 40%.

Futures Controlled by the Chinese parties

Insurance Foreign investors will not be allowed to own more equity as

much as 50% in life insurance corporation.

After three years from the effective date of such detailed implementation rules or regulations, foreign investors will

be allowed to own up to 51% equity in life insurance companies, with the cap removed in five years.

Increased Correlations Between China and the US Financial Markets

In the early 1990s China’s market volatilities has not impact on the US. The US financial markets continued to rally during the Asian financial crisis. Nevertheless, the US markets responded to the 2015 China stock market rout and the exchange rate devaluation.

1. Stock markets

9Source: Wind

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NASDAQ SHCI

China stock market rout in June of 2015 and the RMB devaluation in August impacted the US markets.

China had no impact on US markets in early years.

US markets continued to rally despite 1997 Asian Financial crisis

China market had been impacted by 2008 American Financial Crisis.

Impact on China of US Policy Changes

10

Increasingly Synchronous Monetary Policy Stance

China’s interest rate policy has been increasingly in sync with the US in the recent years.

Expected US rate hikes and monetary normalization in the near term would be somewhat responded by China’s policy changes.

1. benchmark interest rate

11Source: People's Bank of China; Fed; Wind

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199

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China United States

China’s Real Interest Rates Are Negative

As of November 2011, China’s one-year real lending and deposit rates were -1.45% and -0.2%, respectively, leading to rapid expansion of debt and shadow banking activities.

2.China’s Real Lending Rate

12Source: People's Bank of China , Wind

1.China’s Real Deposit Rate

-10

-5

0

5

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15

Real Lending Rate (on ppi), % p.a. Nominal Lending Rate, % p.a. PPI, YoY%

-6

-4

-2

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8

10

Real Deposit Rate (on Headline CPI), % p.a. Nominal Deposit Rate, % p.a. Headline CPI, YoY%

Fiscal Policy——Implication for China of US Tax Cuts

Tax accounts for 67.3% of profits in China, according to the World Bank, compared to 43.8% in the US (before the tax cuts).

The newly enacted US tax reform is expected to boost US corporate competitiveness, attracting capital flows into the US, including from China.

1.Tax Rate

13Source: Paying Taxes 2018, World Bank

Country or RegionTotal Tax and

Contribution RateTime to comply Number of payments Post-filing Index Score

China 67.3% 207 hours 9 49.1

India 55.3% 214 hours 13 49.3

Germany 48.9% 218 hours 9 97.7

Russian Federation 47.5% 168 hours 7 73.1

Japan 47.4% 151 hours 14 71.7

United States 43.8% 175 hours 11 94

Taiwan, China 34.3% 224 hours 11 63.2

United Kingdom 30.7% 110 hours 8 71

Hong Kong SAR, China 22.9% 72 hours 3 98.9

China and US Economic Complementarity and Competition

14

China’s Labor Cost is Low despite Increases in Recent Years

Even though the productivity growth of China is decreasing, it is still higher than the growth of the United States.

In 2016, China’s labor share is 48.3%, while the United States is 69.1% .

1. Productivity Growth, yoy

15Source: BEA; National Bureau of Statistics, P.R.China; Wind

2.Labor Share

69.1%

48.3%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

United States China(secondary sector)

United States China(secondary sector)

2004 4.7% 12.9%2005 4.5% 11.5%2006 3.7% 11.4%2007 2.3% 13.6%2008 1.8% 16.3%2009 1.0% 4.1%2010 4.5% 15.5%2011 1.8% 14.8%2012 2.5% 4.5%2013 1.4% 7.4%2014 2.2% 6.3%2015 1.8% 3.4%2016 1.1% 6.6%

China’s Leading Field

In 2016, China's online shopping scale (excluding services) reached 750 billion U.S. dollars, accounting for 40% of the global market share.

China has become a world leader in high-speed rail.

Though the U.S. had $112 billion of mobile payments in 2016, such payments in China totaled $9 trillion.

1. Scale of online retail

16Source: emarketer; China's National Bureau of Statistics; United States Department of Commerce; METI of Japan; Public information

Country

Scale of online retail

(billionUSD)

Share of global market

Online retail/Total social retail

China 750 40% 12.6%

UnitedStates

312.1 16.60% 8%

United Kingdom

150 8% -

Japan 90 4.80% 7%

CountryMaximum

speed（km/h）

Ordinary rail (km)

High-speed

rail (km)

China 350 124000 22000

UnitedStates

260 226427 0

3. Scale of Mobile Payments2. Railway

112

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