The Growth of China

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					The Growth of China

      Week 7

    The extent of China’s economy
   In dollar terms, its GDP is the sixth largest in the
   In terms of purchasing-power parity it is second only
    to the United States with an 11.8% share of world
   Last year's official growth figure of 9.1% made it the
    most dynamic large economy in the world—by far
   Projected growth for 2004 is 8.5%
   But:
   Is the economy running hot?
   Industrial capacity is growing massively
   Driven by FDI

2002 – World’s largest receiver
            of FDI

     Concern to other producers
   It is China's strength as a trading nation
    that most worries others
   Japan accuses China of unfairly
    maintaining an undervalued currency in
    order to make its exports more competitive.
   In 2001 exports rose by 23% to $266 billion
   Accounted for 4.4% of all world exports.
   Highest level they have ever reached
   (But note Japan‟s record of 10.1% of world
    exports in 1986)

         Areas of trade increase
   China's trade surplus in 2001 increased to over $30
   At 2.9% of GDP, it was relatively larger than Japan's
    (1.7%) but smaller than South Korea's (3.2%).
   China's trade surplus as a percentage of GDP has
    declined every year since 1997
   Has a substantial trade deficit with Malaysia, South
    Korea and Thailand.
   Since it joined the WTO, China's imports from Japan
    have been increasing at an annual rate of 40-50%.

                Warning Signs?
   China's trade is nowhere near historically
    unprecedented levels.
   Since Open Door policy of 1978, the country's
    share of world trade has more or less quadrupled.
   But so did..
   Japan's between 1955 and 1985 and
   Asian tigers' between 1965 and 1995
   Inevitable effect of growth is impact on other
    countries‟ competitive position
   Potential retaliation to Chinese market penetration

               Retaliatory moves
   December 2003
   China has failed to live up to many of the obligations it
    undertook when it joined the World Trade Organization
    (WTO) two years ago and continues to favour its own
    companies at the expense of U.S. firms, the U.S. trade
    representative's office (USTR) said in a report released

   November 2003
   A US move to limit imports of Chinese textiles has sparked
    protest from Beijing and could incur retaliation
   Several members of the Bush administration have hinted
    that the Chinese yuan is being kept artificially low to boost
    Chinese exports

       Foreign Direct Investment
   Another current concern about China is that it is
    taking much foreign direct investment
   This could be destined elsewhere
   As stated in 2002 surpassed America as the world's
    largest recipient of FDI with $53 billion-worth
   But that had more to do with the collapse of
    investment in America than with the rise in China
   Inflows into America in 1999 and 2000 were $283
    billion and $301 billion respectively
   The figures for China in the same years were $40
    billion and $41 billion

          Is this the real picture?
   Yasheng Huang (Harvard Business School) suggests
    China's high level of FDI is a sign of weaknesses in China's
    own financial system and of an inability to make good use
    of its high level of domestic savings.
   He points out that since the financial reforms of 1997, FDI
    has played a relatively diminishing role in China's
   Raw numbers exaggerate the picture
   A large amount of China's FDI is money that has been
    earned in mainland China but then booked to accounts in
    Hong Kong for tax reasons
   It subsequently comes back to the mainland as FDI, in a
    process of “round-tripping”
   Half of inward FDI comes from Hong Kong

    Have we a Chinese “Economic
   January and February 2002
   Exports reached $40.84 billion (up
    14.1% from a year earlier)
   Imports totalled $34.89 (up only 3.2%)
   Situation replicates East Asian NIEs
    of the 1970‟s

    Have we a Chinese “Economic
   Cost of labour
   Manufacturing wages in China average about 60 cents an hour
     •   5% of the American average
     •   10% of that in some neighbouring Asian economies

   It has a seemingly infinite supply of workers

   China looks as though it could out-compete other economies in
    the manufacturing of almost anything labour-intensive

   In fact in 2002 70% of China's exports were of garments, toys,
    shoes, furniture, etc.

   But in capital-intensive goods China was increasingly producing
    but not exporting

Production shift – rise of hi-tech
         export trade
   January 6, 2004
   China says it exported $110 billion worth of high tech products in
    2003, up 5 percent from 2002, which had been up 40 percent from

   High-tech exports now account for one quarter of the value of all
    Chinese exports

   In 1998 they accounted for only 11 percent
   U.S., Japanese and Korean manufacturers of computers,
    televisions and other goods have outsourced much of their
    production to China.

   August 2003
   China exported 41,295 automobiles in the first half of this year, a
    rise of 266.4 percent over the same period last year

          Is this sustainable?
   How is China funding its expansion?

   What are the impacts of expansion?

   Have a parallel with East Asia pre-

                 Danger points - 1
   Labour Issues
   China must create some 12 million to 15 million new jobs
    annually just to keep up with population growth
   The government must deal with an estimated 270 million
    unemployed or underemployed people
   A "floating population" (dis-possessed rural workers who have
    moved to the cities to find work) of between 100 million and 150
    million is growing by almost 5 percent annually
   These migrants exist with no job security, no long-term housing,
    and no health care
   China has no functioning pension system
   The cost of creating one is estimated in the hundreds of billions
    of dollars

              Danger points - 2
   Capital Issues
   Ineffective stock markets mean China does not have
    the capacity to form local capital to fund
   Therefore dependence on FDI
   State banks provide 98 percent of all financing for
    local companies
   But much funding goes to support SOEs
   Banks are essentially insolvent
   Standard and Poor's estimates that it would cost
    around US$518 billion (40 percent of GDP) to clean
    up their non-performing loans

                 Danger points - 3
   Government Revenue Issues
   Since 1998 the government has relied on bigger and bigger bond
   Estimates of the government's growing aggregate liabilities are in
    the range of 70 percent to over 150 percent of GDP
   The government's ability to collect tax revenue remains weak
    yielding less than the equivalent of 15 percent of GDP.

   Overtrading Issues
   Fears of an investment bubble
   Caused by uncontrolled, indiscriminate and excessively
    exuberant investment and growth
   Could lead to collapse

    Is the pegged currency a risk?

   IMF concerned about effect on Southeast Asia post-
    crisis recovery
   China is taking much of FDI that might otherwise
    have gone to Southeast Asia's
   Also continues to flout IMF advice to relax its
    currency peg
   Effect...
   In current weak dollar environment China has a
    pricing advantage over most of the rest of Asia.
   IMF and US pressure to float currency

             The experts say No
   Robert Mundell (Nobel prize winner in economics stated in
    September 2003
   "Appreciation or floating of the renminbi would involve a
    major change in China's international monetary policy and
    have important consequences for growth and stability in
    China and the stability of Asia“

   Fred Hu - managing director of Goldman Sachs (Asia)
   "China's recent export performance has been truly
    spectacular, but it is primarily driven by the country's
    decade-long trade reforms, dynamic private enterprises,
    abundance of cheap labour and most importantly,
    multinational companies' growing processing and
    assembly operations in China"

         Chinese Management
   Are Chinese managers capable of
    operating in a market economy?
   Is there a unique “Chinese
   Is there such a thing as a Chinese

    The effects of Modernisation &
   Breakdown of the 'iron rice bowl„
   Breakdown of the extended family
   Reductions in welfare benefits and a trend to individual
   Political leadership accepts that more fundamental social and
    economic reforms, such as creating a secondary market for
    social welfare, are needed.
   In the short term, Chinese enterprises will tend to graft Western
    practices on to indigenous approaches
   Joint ventures and Wholly Owned Foreign Enterprises are
    serving as role models for domestic firms
   The Chinese will increasingly adopt foreign management
    approaches to run their businesses
   In the longer term, Chinese management norms are likely to
    converge to those in industrial and post-industrial economies
   Chinese management may represent the emergence of a 'global'
    set of management practices

    The effects of Modernisation &
   Major change in labour market
    replicating Western labour market
   Creates requirement to replicated
    Western labour management practice
   Does it replace traditional Chinese
    cultural values
   Does “tradition” prevent Western-
    style management innovation?

   Interpersonal connections
   Has been identified as one of the key factors leading to
    business success in China
   Viewed as long-term cooperation among business partners
    that contributes to organizational efficiency and sustained
    competitive advantage
   Connects people to form a resource coalition where
    business partners share resources and obtain assistance
    that otherwise may not be available
   Rooted in a culture characterized by interdependence and
   People exchange favours to develop extensive networks of
    interpersonal relationships to share scarce resources and
    cope with uncertainties

    Has guanxi a place in modern
   Changes from a closed to an open market system
    have disturbed the subjects‟ values as well as
    continuing gradually to undermine Chinese cultural

   Instead of maintaining or improving harmony
    individuals are trying to get better-paid jobs and raise
    their employability by undertaking further education
    and training.
   Competition and the guanxi mechanisms are
    mutually reinforcing
   Individuals try to extend their relationships in order
    to generate better career opportunities

   Evidence that tradition and
entrepreneurship are not mutually