china in the global economy - stanford...
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China in the Global EconomyLawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic DevelopmentDepartment of Economics
Stanford UniversityStanford, CA 94305-6072, U.S.A.
May 28, 2002
Phone: 1-650-723-3708; Fax: 1-650-723-7145Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Lawrence J. Lau, Stanford University 2
A Previewu The Chinese Economy Today u How Reliable Are Chinese Economic Data?u Comparison with Developed and Developing Economiesu China without the World and the World without Chinau Prospects for Future Economic Growth
u Sources of East Asian Economic Growthu The Three Paradigms of Economic Growthu The Development of the “Great West”
The Chinese Economy Today
Lawrence J. Lau, Stanford University 4
The Chinese Economy Today (1)u East Asia is the fastest-growing region in the world over the past two decades, the
East Asian currency crisis of 1997-98 notwithstandingu China is the fastest growing country in East Asia—nearly 10% p.a. since
beginning of economic reform (1979)u Between 1979 and 2001, Chinese real GDP grew from $177 billion to $1.16
trillion (2001 prices) and real GDP per capita grew from $183 to $920. The U.S. GDP ($10.19 trillion) and GDP per capita ($36,840) are respectively 9 and 40 times the comparable Chinese figures.
u China survived the East Asian currency crisis relatively unscathed.u China is one of the very few socialist countries that have made a successful
transition from a centrally planned to a market economy—the 10th Five-Year Plan is only indicative and not mandatory; the rate of interest (the price of money) and the exchange rate are the only prices that are still administratively determined on the margin.
u The private (non-state) sector accounts for more than 65% of GDP and an even greater percentage of employment in 2001—non-state-owned firms face hard budget constraints and ordinary citizens can make a good living without being beholden to the state.
u China is the 6th largest trading country in the world (exports of US$266.2 billion and imports of US$245 billion, totaling US$511.2 billion in 2001)
u China is no longer a “shortage” economy--insufficient aggregate demand is a real possibility
Lawrence J. Lau, Stanford University 5
The Chinese Economy Today (2)
1979 2001US$ (2001 prices)
Real GDP 177 bill. 1.16 trill.
Real GDP per capita 183 920
Lawrence J. Lau, Stanford University 6
The Chinese Economy Today (3)
U.S. ChinaUS$ (current prices)
2001 GDP 10.19 trill. 1.16 trill.
2001 GDP per capita 36,840 920
Lawrence J. Lau, Stanford University 7
Rates of Growth of Real GDP and Inflation(% p.a.)
u Actual Real GDP RPI CPI1997 8.8 0.8 2.81998 7.8 -2.6 -0.81999 7.1 -2.9 -1.32000 8.0 -1.5 0.42001 7.3 -0.8 0.72002Q1 7.6 -0.6
u Projections2002 >7.0 (NBS)
7.0 (ADB)7.5 1.0 (Lau)6.9 (Lehman)
u Despite fluctuations in exports and imports, the rate of growth of real GDP has remained remarkably stable at 7-8%. Exports are approximately 20% of GDP, but the value-added component is only approximately 30%, resulting in an export-generated value-added to GDP ratio of 6%. Chinese exports to the U.S. is approximately 7.3% of Chinese GDP (according to adjusted U.S. data), with a value-added content of 20%, resulting in a value-added to GDP ratio of 1.5%.
u The Development Research Center of the State Council has estimated that accession to WTO will increase the rate of growth of the Chinese economy by 0.5% per annum; the U.S. International Trade Commission has estimated that real GDP would be 4% higher in 2010 than otherwise.
u The National Bureau of Statistics (NBS) projected that the award of the 2008 Summer Olympic Games to Beijing should add 0.3-0.4% to the average annual growth rate
u The long-term core inflation rate--inflation rate net of changes in the prices of energy and food--may be estimated at 1 percent--there is no deflation
Lawrence J. Lau, Stanford University 8
Quarterly Rates of Growth of the Real GDP of the Chinese Economy, Y-o-Y
YoY Quarterly Rates of Growth of Real GDP
-5%
0%
5%
10%
15%
20%
25%
1983q
1
1984q
2
1985q
3
1986q
4
1988q
1
1989q
2
1990q
3
1991q
4
1993q
1
1994q
2
1995q
3
1996q
4
1998q
1
1999q
2
2000q
3
2001q
4
Quarter
Perc
en
t p
er
an
nu
m
GDPQ1 GDPQ2
GDPQ3 GDPQ4
Lawrence J. Lau, Stanford University 9
Quarterly Rates of Growth of the Real Gross Fixed Investment of the Chinese Economy, Y-o-Y
YoY Quarterly Rates of Growth of Real Gross Fixed Investment
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1997q
1
1997q
3
1998q
1
1998q
3
1999q
1
1999q
3
2000q
1
2000q
3
2001q
1
2001q
3
2002q
1
Quarter
perc
en
t p
er
an
nu
m
Quarter 1
Quarter 2
Quarter 3
Quarter 4
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The Consumer and Retail Price IndicesMonthly Rates of Change of Price Indices Since 1995 (Y-o-Y)
-10
-5
0
5
10
15
20
25
95-03 95-10 96-05 96-12 97-07 98-02 98-09 99-04 99-11 00-06 01-01 01-08 02-03
Month
%
RPI
CPI
CPI for 36 Big Cities
Price Index for Agricultural Production Material
Lawrence J. Lau, Stanford University 11
Has “Deflation” Stopped?u Deflation has slowed/stopped:
u In 1999 the RPI declined 2.9%; in 2000 the RPI declined only 1.5%u In 1999 the CPI declined 1.3%; in 2000 the CPI rose 0.4%u In 2001, the CPI rose 0.7%, the RPI declined 0.8% and the PPI declined
3.7%u In 2002Q1, the CPI declined 0.6%u In April 2002, the PPI declined 3.1% Y-o-Y; in January-April, 2002, the PPI
declined 3.8% Y-o-Yu The “core” rate of inflation is positive
u The decline in prices over the past two years was due in part to the fall in the prices of energy and in particular oil and food because of the good harvest
u The long-term core inflation rate--inflation rate net of changes in the prices of energy and food--may be estimated at 1 percent--there is no deflation
Lawrence J. Lau, Stanford University 12
Growth Rates of the Money SupplyMoney Supply Growth Rates (Percent p. a.)
-10
-5
0
5
10
15
20
25
30
35
40
97-01 97-08 98-03 98-10 99-05 99-12 00-07 01-02 01-09 02-04
Month
%
M0 Growth Rate
M1 Growth Rate
M2 Growth Rate
Lawrence J. Lau, Stanford University 13
China’s Gross Domestic Investment as a Percent of GDP
China's Gross Domestic Investment as a Percent of GDP
0
10
20
30
40
50
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Percent
Lawrence J. Lau, Stanford University 14
Quarterly Rates of Growth of Real GDP:Selected East Asian Economies
Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies
-20
-15
-10
-5
0
5
10
15
1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1
Quarter
An
nu
ali
zed
Rate
s in
Per
cen
t
China Hong Kong Indonesia
Korea Malaysia Philippines
Singapore Taiwan Thailand
Japan India
Lawrence J. Lau, Stanford University 15
Quarterly Rates of Growth of Exports:Selected East Asian Economies
Year-over-Year Quarterly Rates of Growth of Exports in U.S.$(Percent)
-50
-40
-30
-20
-10
0
10
20
30
40
50
Q1 97 Q3 97 Q1 98 Q3 98 Q1 99 Q3 99 Q1 00 Q3 00 Q1 01 Q3 01 Q1 02
Perc
en
t p
.a.
China Hong Kong Indonesia South Korea
Malaysia Philippines Singapore Taiwan
Thailand Japan India
Lawrence J. Lau, Stanford University 16
Quarterly Rates of Growth of Imports :Selected East Asian Economies
Year-over-Year Quarterly Rates of Growth of Imports in U.S.$ (Percent)
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
Q1 97 Q3 97 Q1 98 Q3 98 Q1 99 Q3 99 Q1 00 Q3 00 Q1 01 Q3 01 Q1 02Pe
rce
nt
p.a
.
China Hong Kong Indonesia
South Korea Malaysia Philippines
Singapore Taiwan Thailand
Japan India
Lawrence J. Lau, Stanford University 17
Value-Added in IndustryValue Added in Industry
0
50
100
150
200
250
300
97-0
1
97-0
5
97-0
9
98-0
1
98-0
5
98-0
9
99-0
1
99-0
5
99-0
9
00-0
1
00-0
5
00-0
9
01-0
1
01-0
5
01-0
9
02-0
1
02-0
5
Month
Bilion Yuan
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
%Total Value-Added
Rate of Growth (%) (Y-o-Y in comparable prices)
Lawrence J. Lau, Stanford University 18
Exports, Imports and Foreign Exchange Reservesu In 2000, exports rose 27.8% to US$249.2 billion; imports rose 35.8%
to US$225.1 billion; with a trade surplus of US$24.1 billionu In 2001, exports rose 6.8% Y-o-Y to US$266.2 billion and imports
rose 8.2% to US$243.6 billion with a trade surplus of US$22.5 billionu All these data confirm a slowdown in the growth of exports and a
narrowing of the trade surplus—export growth is likely to be zero in the near term
u Chinese tourists traveling abroad exceeded 10 million in 2000; the tourism component of the balance of payments turned negative in 2000
u Official foreign reserves continued to rise, reaching US$212.2 billion at year end 2001, an increase of US$46.6 billion over year end 2000 (larger than the trade surplus of US$22.5 billion), and surpassing total outstanding external loans by a wide margin
u The exchange rate of the Renminbi vis-à-vis the U.S. Dollar has remained stable since 1994 (in fact, there has been a slight appreciation from 8.7 Yuan/US$ to 8.3 Yuan/US$)
Lawrence J. Lau, Stanford University 19
Monthly Exports, Imports and Trade BalanceOfficial Chinese Data
Monthly Exports, Imports, and Trade Balance
-10
-5
0
5
10
15
20
25
30
Jan-92 Dec-92 Nov-93 Oct-94 Sep-95 Aug-96 Jul-97 Jun-98 May-99 Apr-00 Mar-01 Feb-02
Month
US
$ B
illi
on
Exports Imports Trade Balance
Lawrence J. Lau, Stanford University 20
Composition of Chinese Exports by Primary Commodities versus Manufactured Goods
Lawrence J. Lau, Stanford University 21
Manufactured Exports as a Percent of Total Chinese Exports
Distribution of Chinese Manufactured Exports as Percent of Total Exports1985-2000
-
10
20
30
40
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Per
cen
t
Clothing, Footware and Toys
Machines and Transport Equipments
Lawrence J. Lau, Stanford University 22
Direct and Total Effects of Non-Competitive-Imports (NCI) Model (Value-Added)
Direct Totalu Processing Exports 0.153 0.176
u Textiles 0.147 0.165u Wearing Apparel 0.158 0.170
u Non-Processing Exports 0.329 0.925u Textiles 0.195 0.934u Wearing Apparel 0.229 0.944
u All Exports (Weighted Average of Processing and Non-Processing Exports) 0.240 0.545u Textiles 0.178 0.657u Wearing Apparel 0.183 0.441
Lawrence J. Lau, Stanford University 23
Direct and Total Effects of Non-Competitive-Imports (NCI) Model (Employment)
Direct Totalu Processing Exports 0.048 0.057
u Textiles 0.044 0.050u Wearing Apparel 0.048 0.052
u Non-Processing Exports 0.214 0.703u Textiles 0.107 0.845u Wearing Apparel 0.108 0.745
u All Exports (Weighted Average of Processing and Non-Processing Exports) 0.130 0.375u Textiles 0.084 0.558u Wearing Apparel 0.069 0.294
Lawrence J. Lau, Stanford University 24
The Exchange Rate, the Interest Rates and the Stock Market Index
Exchange Rate, Stock Market Index and Interest RatesChina
0
20
40
60
80
100
120
140
160
180
200
01/02/97 08/06/97 03/10/98 10/12/98 05/14/99 12/16/99 07/20/00 02/21/01 09/25/01 04/29/02
0
1
2
3
4
5
6
7
8
Exchange Rate Index, 1/2/97=100
Stock Market Index, 1/2/97=100
Interest Rate (3 months) r. scale
Interest Rate (12 months) r. scale
Lawrence J. Lau, Stanford University 25
Composition of Foreign Investment—Portfolio vs. Direct: China (Annual Data)
Composition of Foreign Investment, China
0
10
20
30
40
50
60
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
Year
Bil
lio
n U
S$
Foreign Portfolio Investment
Foreign Direct Investment
Lawrence J. Lau, Stanford University 26
Composition of External Debt—Short-Term (Less Than a Year) vs. Long-Term: China
Stock of External Debt: ChinaBank for International Settlements Data
0
20
40
60
80
100
120
140
160
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Bil
lio
n U
S$
Long-term Short-term
Lawrence J. Lau, Stanford University 27
External Debt and Official Foreign Exchange Reserves: China
China's External Debt vs. Foreign Exchange Reserves(International Financial Statistics Data)
0
20
40
60
80
100
120
140
160
180
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Bil
lio
n U
S$
Total external debt
Foreign exchange reserves
Lawrence J. Lau, Stanford University 28
The Growth of the Non-State Sector-Industry
Distribution of Gross Value of Industrial Production by Ownership
2000
Collective14%
State-owned 24%
Individual 6%
Other Types56%
1979
Collective22%
State-owned 78%
Lawrence J. Lau, Stanford University 29
The Growth of Industrial Output by Sector of Ownership
The Rate of Growth of Industrial Output by Sector of Ownership
0%
10%
20%
30%
40%
50%
60%
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Total Industrial Output
State-Owned Enterprises
Non-State Owned Enterprises
Lawrence J. Lau, Stanford University 30
The Growth of the Non-State Sector-Retail
The Distribution of Retail Sales by Ownership1979Joint-Owned
0.0%Individual0.2%
Collective-Owned43.1% State-Owned
54.0%
Others2.6% 1998
Joint-Owned0.6%
Individual37.1%
Others25.2%
Collective-Owned16.6%
State-Owned20.7%
Lawrence J. Lau, Stanford University 31
The Tenth Five-Year Plan (2001-2005)u An indicative (or predictive) plan rather than a mandatory planu Doubling of real GDP between 2001 and 2010, with an implied rate
of growth of 7.2% p.a.u An inflation target of less than 3% p.a.u An increase in the share of central government revenue in GDP (the
introduction of a comprehensive individual income tax)—tax revenue as a proportion of GDP rose from 14.2% of GDP in 2000 to17.1% of GDP in 2001
u Indirect (macroeconomic) control of the economy using instruments such as money supply, interest rate and exchange rates rather than direct (microeconomic) control through administrative directives, commands and central planning with mandatory targets
Lawrence J. Lau, Stanford University 32
Marketization:Final Abolition of Planned Pricesu The market prices of more than 99% of commodities have been
determined by supply and demand for at least a decadeu In 2001/07, the remaining planned prices are abolished with the
exception of the following: the prices of natural gas, oil, edible oils, grains, tobacco, water, salt, and products related to national security
u The exchange rate and the rate of interest are still determined administratively by the People’s Bank of China, the central bank
u The dual-track system of prices introduced in the mid-1980s to facilitate the transition of China from a centrally planned to asocialist market economy has finally been phased out, reducing to a single-track, market-based system, with the exceptions noted above
Lawrence J. Lau, Stanford University 33
The Contributions of Sectoral Value-Addeds to China’s GDP
Lawrence J. Lau, Stanford University 34
The Sectoral Contributions to China’s Employment
Lawrence J. Lau, Stanford University 35
Total Government Budget Revenue, Expenditure, and Deficit as a Percent of GDP
Total Government Budget Revenue and Expenditure as Percent of GDP
0%
5%
10%
15%
20%
25%
30%
35%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
Pe
rce
nt
of
GD
P a
t C
urr
en
t P
ric
es
-4.5%
-2.5%
-0.5%
1.5%
Fiscal Revenue
Expenditure
Surplus/Deficit
How Reliable Are Chinese Economic Data?
Lawrence J. Lau, Stanford University 37
How Reliable Are Chinese Economic Data?u Since 1979, there has been no intentional falsification of statistical data on the part
of the National Bureau of Statistics (NBS), an independent agency of the central government of the People’s Republic of China.
u If in fact, there were intentional falsification of the published statistical data by the Government of the People’s Republic of China, that implies the maintenance of two separate sets of books. There is no evidence that there exist to sets of books at the National Bureau of Statistics.
u One may criticize the methodology, the adequacy of the sampling techniques, the method of data collection, processing and adjustments; and there are undoubtedly biases and errors in the published data, e.g., the omission of the underground economy.
u However, the year-to-year rate of growth of real GDP should be reasonably reliable despite the biases because the degree of biases in the estimation of the levels of GDP changes only very gradually over time.
u There is likely to be under-reporting in wealthy regions and over-reporting in poor regions. The actual degree of inequality is probably greater than that revealed by the officially published statistics.
Lawrence J. Lau, Stanford University 38
How Reliable Are Chinese Economic Data?u Discrepancy between the NBS figures and the published provincial
figures--the figure for the rate of growth of Chinese GDP published by the NBS is almost always less than the weighted average of the rates of growth of Chinese provincial GDPs, published by the provincial and regional statistical bureaus, by a significant margin.
u This has been true for many years, and is a widely known fact, and openly acknowledged by the NBS, and is reflected in the annuallypublished Statistical Yearbook of China.
u The NBS believes that its national figure is much more accurate and reliable than the sum or weighted average of the provincial and regional figures. While it uses the provincial figures as one of the inputs, the NBS has other, independent, sources of data which it uses for making the final adjustments.
Lawrence J. Lau, Stanford University 39
Is GDP Growth Compatible with the Growth of Electricity and Freight Traffic?
u The rate of growth of electricity production is 6.2% in 1999, 10.7% in 2000, and 8.5% in 2001; The rate of growth of freight traffic is 2.4% in 1999, 3.5% in 2000, and 3.1% in 2001.
u Common factors:u The rate of growth of the manufacturing sector has slowed down relative to the
construction sector and the service sector.u Differences in the rates of growth between heavy and light industry.u Intra-industry changes in the composition of outputs, including upgrading of
the qualities (and hence values-added) of products.u Effects of changes in the loci of production and consumption.
u Factors specific to electricity production:u Effects of changes in prices--the price of electricity has risen 3-4 fold since
1990.u Effects of changes in efficiency.u Other “economic” and technical reasons for changes in the rates of
transmission losses.u Effects of co-generation--under-reporting and marginal users.
u Factors specific to freight traffic:u Effects of environmental regulation and inter-fuel substitution—almost 50% of
railroad freight traffic was for coal.
Lawrence J. Lau, Stanford University 40
How Reliable Are Chinese Economic Data?The Rate of Growth of Freight Transported
u Why was the rate of growth of railroad freight transported, measured in metric ton-kilometers, negative in 1998 at the same time the rate of growth of real GDP was 7.8%?
u While there is no compelling reason why the rate of growth of freight should be the same as the rate of growth of real GDP, the fact that they were in opposite directions was alarming and greatly puzzling. At the time, the Chinese Government was sufficiently concerned about the apparent discrepancy between the two rates of growth to have commissioned a study to look into the matter. The major cause for the reduction of railroad freight transported, it turned out, was the large reduction in the consumption of coal, caused mostly by the then newly issued environmental regulations covering the major urban areas.
u Almost half of Chinese freight transported was due to coal; with a sharp reduction in the quantities of coal shipped from the production areas in western China to the population centers on the eastern seaboard, there was a similarly sharp reduction in the total ton-kilometers. The coal that was used in eastern China was largelyreplaced by oil and gas, and indirectly, by electricity. If one looks at the rate of growth of non-coal freight transported in 1998, it was only slightly negative and not inconsistent with the secular decline in non-coal railroad freight transported relative to the real GDP.
Lawrence J. Lau, Stanford University 41
Why Was the Rate of Growth of Energy Consumption So Low During 1997-2000?
u For a rapidly growing and transforming economy, one expects the energy to real GDP ratio to decline over time. In the case of China, a number of factors that are relevant:
u (i) the rise in the relative price of energy in the early 1990s (e.g., the price of electricity has increased 3 to 4-fold) and the resulting conservation efforts;
u (ii) the more efficient production and transmission of energy from the new and large-scale power plants and power grids;
u (iii) the change in the intersectoral composition of GDP, principally the rapid growth of the service (including construction) sector, which requires little energy, relative to the agricultural and industrial sectors and the more rapid growth of light industry relative to heavy industry; and
u (iv) the change in the intra-sectoral composition of output, due especially to the upgrading of quality—for example, the proportion of high-quality steel produced in the steel sector has been rising rapidly, with the value-added rising much faster than energy consumption per ton. Thus, for the steel sector, the energy to value-added ratio will appear to be declining. The rate of growth of GDP can therefore be much faster than the rate of growth of energy consumption.
u In the Chinese case, there is actually an additional factor. As part of an environmental and safely campaign, many small and medium coal mines were ordered closed in 1997. However, many localities, for a variety of reasons, secretly kept these mines working, and their production did not find their way into the statistics. No one knows for sure how much unreported production of coal there was during each of these years. It may be estimated to be on the order of 10% of the annual output in 1997, and then declining gradually over time, as these mines became closed. Thus, it is in part the under-reporting of coal production (and consumption), rather than the over-reporting of real GDP, that contributed to the slower reported rate of growth of energy relative to real GDP during some of these years.
u The Chinese energy consumption/GDP ratio has been declining continuously since 1980 by approximately 2/3 (while the U.S. energy consumption/GDP ratio has declined by approximately 1/3 between 1980 and 2000).
Lawrence J. Lau, Stanford University 42
Real GDP and Energy Consumption of China1952-2000
Real GDP and Energy Consumption of China
0
200
400
600
800
1000
1200
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
Bil
lio
n 1
99
0 U
S$
0
50
100
150
200
250
300
350
400
10
0 T
rill
ion
BT
U
GDP (Billion of 1990 US$)
Engergy Consumption (Hundred Trillion BTU)
Lawrence J. Lau, Stanford University 43
Primary Energy Consumption-GDP Ratio (China and the United States)
Primary Energy Consumption-GDP Ratio (China and the United States)
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
BT
U/1
990 U
S$
United States (U.S. Energy Information AdministrationData)
China (U.S. Energy Information Administration Data)
China (China Statistical Yearbook 2001)
Lawrence J. Lau, Stanford University 44
How Reliable Are Chinese Economic Data?The Rates of Growth of Physical Outputs
u Why was the rate of growth of value added in industry as a whole so much higher than the weighted average of the rates of growth of the quantities of individual physical industrial commodities and products?
u The explanation lies once again in the change in the intra-sectoral composition of output—over time, as the quality of the goods produced improved, say, from raw iron to stainless steel, from plain cotton textiles to expensively finished designer fabrics, the value-added per ton of steel or per meter of cloth rose rapidly. For a developed economy nearly at equilibrium, the improvement in quality is marginal and gradual; for a rapidly growing and transforming economy such as China’s, these improvements can come about very quickly and abruptly, resulting in real value-added rising significantly faster than the quantities of physical outputs.
Lawrence J. Lau, Stanford University 45
How Reliable Are Chinese Economic Data?Cross-Validation with Other Data
u It is possible to cross-check these figures on the rates of growth of real GDP, derived mostly from the production side, with those estimates derived independently from other methods. There are at least two other methods: the expenditure approach, consisting of looking at the rates of growth of final demands—consumption, investment, government expenditures, and net exports; and the income approach, consisting of adding up the incomes of households and enterprises (and indirect taxes), derived from survey rather than production or end use data.
u The results of these calculations do not differ from the published rates of growth of GDP by more than 100 basis points, which should be considered to be well within the margin of error for the statistics of a developing country.
u It is also possible to cross-check these figures with imports data, obtained from the statistics of trading partner countries (Chinese imports must be the exports of some other countries).
u It is also possible to cross-check using the quantity theory of money equation (the sum of the rates of growth of the money supply and the velocity of circulation of money must be equal to the sum of rates of growth on information and real GDP):
MV=PT
Lawrence J. Lau, Stanford University 46
Are the Reported Rates of Growth of Real GDP Reliable? 1999u The expenditure approach
u Rate of growth of real gross fixed investment=7.3% with a share of GDP of 35.3% (=2.6%)
u Rate of growth of changes in stocks estimated at –18.0% with a share of 2.8% (= - 0.5%)
u Rate of growth of real retail sales=10%; rate of growth of real per capita disposable income (=9.3% urban; 4% rural); rate of growth of real personal consumption=8.9% with an estimated share of GDP of 46% (=4.1%)
u Rate of growth of government consumption=14.1% with a share of GDP of 11.9% (=1.7%)
u Rate of growth of net exports estimated at between 20% and 50% (trade surplus was US$30 billion in 1999 with the crackdown on smuggling; smuggling adjusted trade surplus in 1998 may be estimated at between US$20-25 billion) with a share of GDP of 3.8% (=0.76%)
u The sum of the real rates of growth of the components of expenditure = 2.6 -0.5+4.1+1.7+0.76 = 8.66% (compared to 7.1%); excluding the rate of growth of net exports, the estimated rate of growth of real GDP according to the expenditure approach would be 7.9%.
Comparison withDeveloped and Developing Economies
Lawrence J. Lau, Stanford University 48
Population of Selected Countries and Regions,1970 and 1999
Population of Selected Countries and Regions
0
200
400
600
800
1,000
1,200
1,400
Bra
zil
Chin
a
Fra
nce
India
Indonesia
Italy
Japan
Kore
a, R
ep.
Mexic
o
Taiw
an
Unite
d K
ingdom
Unite
d S
tate
s
Millio
n P
ers
on
s
1970 1999
Lawrence J. Lau, Stanford University 49
Real GDP of Selected Countries and Regions,1970 and 2001
Real GDP of Selected Countries and Regions, 1970 and 2001(1995 US$)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Bra
zil
Ch
ina
Fra
nce
Ind
ia
Ind
on
esia
Italy
Jap
an
Ko
rea, R
ep
.
Mexic
o
Taiw
an
Un
ited
Kin
gd
om
Un
ited
Sta
tes
Billio
n U
S$
1970 2001
Lawrence J. Lau, Stanford University 50
Real GDP per Capita of Selected Countries and Regions, 1970 and 2000
Real GDP per Capita of Selected Countries and Regions, 1970 and 2000(1995 US$)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Bra
zil
Ch
ina
Fra
nce
Ind
ia
Ind
on
esia
Italy
Jap
an
Ko
rea
Mexic
o
Taiw
an
UK
US
US
$
1970 2000
Lawrence J. Lau, Stanford University 51
Rates of Growth of Real GDP of G7 CountriesRates of Growth of Real GDPs of G7 Countries
(Percent)
-2
-1
0
1
2
3
4
5
6
7
8
1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Perc
en
t
Canada France
Germany Italy
Japan United Kingdom
United States
Lawrence J. Lau, Stanford University 52
Quarterly Rates of Growth of Real GDP:Selected East Asian Economies
Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies
-20
-15
-10
-5
0
5
10
15
1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1
Quarter
An
nu
ali
zed
Rate
s in
Per
cen
t
China Hong Kong Indonesia
Korea Malaysia Philippines
Singapore Taiwan Thailand
Japan India
Lawrence J. Lau, Stanford University 53
Rates of Unemployment of G-7 CountriesMonthly Unemployment Rates of G7 Countries
0
2
4
6
8
10
12
14
16
Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02
Month
%
Canada FranceItaly JapanUnited Kindom United StatesGermany
Lawrence J. Lau, Stanford University 54
Quarterly Rates of Unemployment:Selected East Asian Economies
Unemloyment Rate of Selected Esat Asian Economies (Quarterly Data)
0.00
4.00
8.00
12.00
16.00
1995Q1 1995Q4 1996Q3 1997Q2 1998Q1 1998Q4 1999Q3 2000Q2 2001Q1 2001Q4Quarter
Per
cen
t
China Hong Kong Indonesia Korea Malaysia
Philippines Singapore Taiwan Thailand Japan
Lawrence J. Lau, Stanford University 55
Annual Rates of Unemployment:Selected East Asian Economies
Annual Unemloyment Rates of Selected Esat Asian Economies
0.00
3.00
6.00
9.00
12.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000Year
Per
cen
t
China Hong Kong Indonesia Korea Malaysia
Philippines Singapore Taiwan Thailand Japan
Lawrence J. Lau, Stanford University 56
Rates of Inflation of G-7 Countries (GDP Deflator)
Rates of Inflation of G-7 Countries (GDP Deflator)
-4
-2
0
2
4
6
8
10
12
14
16
1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Perc
en
t
United Kingdom United StatesCanada FranceGermany ItalyJapan
Lawrence J. Lau, Stanford University 57
Rates of Inflation of G-7 Countries (CPI)
Rates of Inflation of G-7 Countries (CPI)
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Perc
en
t
Canada FranceGermany ItalyJapan United KingdomUnited States
Lawrence J. Lau, Stanford University 58
The Consumer and Retail Price IndicesMonthly Rates of Change of Price Indices Since 1995 (Y-o-Y)
-10
-5
0
5
10
15
20
25
95-03 95-10 96-05 96-12 97-07 98-02 98-09 99-04 99-11 00-06 01-01 01-08 02-03
Month
%
RPI
CPI
CPI for 36 Big Cities
Price Index for Agricultural Production Material
Lawrence J. Lau, Stanford University 59
Rates of Interest of G-7 CountriesInterest Rates of G7 Countries
(90 days Deposit Rates)
0
2
4
6
8
10
12
14
1990M1 1991M1 1992M1 1993M1 1994M1 1995M1 1996M1 1997M1 1998M1 1999M1 2000M1 2001M1 2002M1Quarter
%
CANADA FRANCE
GERMANY ITALY
JAPAN UNITED KINGDOM
UNITED STATES
Lawrence J. Lau, Stanford University 60
The Exchange Rates of the Japanese Yen and the Euro
The Exchange Rates of the Japanese Yen and the Euro (in terms of US$)
60.0
80.0
100.0
120.0
140.0
160.0
180.0
1990M1 1991M1 1992M1 1993M1 1994M1 1995M1 1996M1 1997M1 1998M1 1999M1 2000M1 2001M1 2002M1
Year
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Yen/US$
Euro/US$
Lawrence J. Lau, Stanford University 61
The Exchange Rate, the Interest Rates and the Stock Market Index
Exchange Rate, Stock Market Index and Interest RatesChina
0
20
40
60
80
100
120
140
160
180
200
01/02/97 08/06/97 03/10/98 10/12/98 05/14/99 12/16/99 07/20/00 02/21/01 09/25/01 04/29/02
0
1
2
3
4
5
6
7
8
Exchange Rate Index, 1/2/97=100
Stock Market Index, 1/2/97=100
Interest Rate (3 months) r. scale
Interest Rate (12 months) r. scale
Lawrence J. Lau, Stanford University 62
National Savings Rate as a Percent of GDP: Selected Countries and Regions
National Savings Rates of Selected Countries and Regions
0
10
20
30
40
50
60
Bra
zil
Can
ad
a
Ch
ina
Fra
nce
Ho
ng
Ko
ng
Ind
ia
Ind
on
esia
Italy
Jap
an
So
uth
Ko
rea
Mexic
o
Ph
ilipp
ines
Sin
gap
ore
Taiw
an
Th
aila
nd
Un
ited
Sta
tes
%
1982 1998
Lawrence J. Lau, Stanford University 63
The Savings Rate as a Percent of GDP: Selected East Asian Countries and Regions
The Savings Rate as a Percent of GDP
-10
0
10
20
30
40
50
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
Perc
en
t
China Hong Kong
Indonesia Korea, Republic of
Malaysia Philippines
Singapore Taiwan
Thailand Mexico
India
Lawrence J. Lau, Stanford University 64
Exports and Imports (US$):Selected Countries and Regions, 2000
Exports and Imports of Selected Countries and Regions, 2000(US$)
0
200
400
600
800
1,000
1,200
1,400
Bra
zil
Ch
ina
Fra
nce
Ind
ia
Ind
on
esia
Italy
Jap
an
Ko
rea
Mexic
o
Taiw
an
UK
US
Zo
ne E
uro
Billio
n U
S$
Exports Imports
Lawrence J. Lau, Stanford University 65
Exports and Imports per Capita (US$):Selected Countries and Regions, 2000
Exports and Imports per Capita of Selected Countries and Regions(Year 2000)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Bra
zil
Ch
ina
Fra
nce
Ind
ia
Ind
on
esia
Italy
Jap
an
Ko
rea
Mexic
o
Taiw
an
UK
US
US
$
Exports per Capita
Imports per Capita
Lawrence J. Lau, Stanford University 66
Monthly Exports of G7 Countries and ChinaMonthly Exports of G7 Countries and China
0
10
20
30
40
50
60
70
80
1990M1 1991M2 1992M3 1993M4 1994M5 1995M6 1996M7 1997M8 1998M9 1999M10 2000M11 2001M12
Month
Billio
n U
S$
Canada China
France Germany
Italy Japan
United Kingdom United States
Lawrence J. Lau, Stanford University 67
Monthly Imports of G7 Countries and ChinaMonthly Imports of G7 Countries and China
0
20
40
60
80
100
120
1990M1 1991M2 1992M3 1993M4 1994M5 1995M6 1996M7 1997M8 1998M9 1999M10 2000M11 2001M12
Month
Billio
n U
S$
Canada China
France Germany
Italy Japan
United Kingdom United States
Lawrence J. Lau, Stanford University 68
Quarterly Rates of Growth of Exports:Selected East Asian Economies
Year-over-Year Quarterly Rates of Growth of Exports in U.S.$(Percent)
-50
-40
-30
-20
-10
0
10
20
30
40
50
Q1 97 Q3 97 Q1 98 Q3 98 Q1 99 Q3 99 Q1 00 Q3 00 Q1 01 Q3 01 Q1 02
Perc
en
t p
.a.
China Hong Kong Indonesia South Korea
Malaysia Philippines Singapore Taiwan
Thailand Japan India
Lawrence J. Lau, Stanford University 69
Quarterly Rates of Growth of Imports :Selected East Asian Economies
Year-over-Year Quarterly Rates of Growth of Imports in U.S.$ (Percent)
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
Q1 97 Q3 97 Q1 98 Q3 98 Q1 99 Q3 99 Q1 00 Q3 00 Q1 01 Q3 01 Q1 02Pe
rce
nt
p.a
.
China Hong Kong Indonesia
South Korea Malaysia Philippines
Singapore Taiwan Thailand
Japan India
Lawrence J. Lau, Stanford University 70
Exports as a Percent of GDP:Selected East Asian Economies and U.S.
Exports as a Percent of GDP
0
20
40
60
80
100
120
140
160
180
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
%HONG KONG INDIA INDONESIA KOREAMALAYSIA PHILIPPINES SINGAPORE THAILANDCHINA Taiwan Japan U.S.
Lawrence J. Lau, Stanford University 71
Exports to U.S. as a Percent of Total ExportsExports to U.S. as a Percent of Total Exports
0
10
20
30
40
50
60
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
%
China Hong Kong India Indonesia Korea
Maylaysia Philippines Singapore Taiwan Thailand
Lawrence J. Lau, Stanford University 72
Chinese Exports to the United States as a Percent of Chinese GDP (Chinese Data)
Chinese Exports to U.S. as a Percent of Chinese GDP
0
1
2
3
4
5
6
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Per
cen
t
Ratio of Exports to U.S. to GDP
Lawrence J. Lau, Stanford University 73
Imports as a Percent of GDP:Selected East Asian Economies and U.S.
Imports as a Percent of GDP
0
20
40
60
80
100
120
140
160
180
200
220
240
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
%HONG KONG INDIA INDONESIA KOREAMALAYSIA PHILIPPINES SINGAPORE THAILANDCHINA, P.R. TAIWAN JAPAN UNITED STATES
Lawrence J. Lau, Stanford University 74
Imports from U.S. as a Percent of Total ImportsImports from U.S. as a Percent of Total Imports
0
5
10
15
20
25
30
35
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
%
China Hong Kong India Indonesia Korea
Maylaysia Philippines Singapore Taiwan Thailand
Lawrence J. Lau, Stanford University 75
The Current Account Surplus:Selected East Asian Economies
The Current Account Balance, Billion US$
-35
-15
5
25
45
65
85
105
125
145
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000
Billio
n U
S$
China Hong Kong Indonesia
Korea, Rep. of Malaysia Philippines
Singapore Taiwan Thailand
Mexico India Japan
Lawrence J. Lau, Stanford University 76
The Current Account Surplus:Selected East Asian Economies
The Current Account Balance, Billion US$
-50
-30
-10
10
30
50
70
90
110
130
150
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Billio
n U
S$
China Hong Kong Indonesia Korea, Rep. of Malaysia Philippines
Singapore Taiwan Thailand Mexico India Japan
Lawrence J. Lau, Stanford University 77
The Current Account Surplus as a Percent of GDP: Selected East Asian Economies
The Current Account Surplus as a Percent of GDP
-15
-5
5
15
25
35
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Perc
en
t
China Hong Kong Indonesia
Korea, Rep. of Malaysia Philippines
Singapore Taiwan Thailand
Mexico India Japan
Lawrence J. Lau, Stanford University 78
Official Foreign Exchange Reserves: Selected East Asian Economies
Official Foreign Exchange Reserves
0
50
100
150
200
250
300
350
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Billio
n U
S$
China Hong Kong Indonesia
Korea, Rep. of Malaysia Philippines
Singapore Taiwan Thailand
Mexico India Japan
Lawrence J. Lau, Stanford University 79
Foreign Exchange Reserves as a Percent of Annual Imports: Selected East Asian Economies
Foreign Exchange Reserves as a Percent of Annual Imports
0
50
100
150
200
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Perc
en
t
China Hong Kong Indonesia
Korea, Rep. of Malaysia Philippines
Singapore Taiwan Thailand
Mexico India Japan
Lawrence J. Lau, Stanford University 80
The ASEAN Free Trade Area (AFTA)u Intra-ASEAN tariff rates have been lowered to 5% on Jan.
1, 2002 with the inauguration of the ASEAN Free Trade Area (AFTA) among Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. The goal is to reach zero tariff rate within AFTA by 2010. The reduction in tariffs applies to 90% of products provided the ASEAN content of the product exceeds 40%.
u Khmer Republic, Laos, Myanmar and Vietnam are expected to join AFTA in 2006 and reach zero tariff rate within AFTA by 2015.
u Specific protection on manufactured and agricultural products still remains.
Lawrence J. Lau, Stanford University 81
The China-ASEAN Free Trade Areau Chinese Premier ZHU Rongji proposed in Brunei in November,
2001 a new free trade area, covering China and the ASEAN (Brunei, Indonesia, Khmer Republic, Laos, Malaysia, Myanmar, Philippines,Singapore, Thailand and Vietnam), to be created within ten years
u A 3 trillion US$ market and 1.7 billion consumersu Complementarity (primary raw materials) and competition (light
manufactures)u Opening the economies for trade—China will become a major export
market for the ASEAN and vice versau The free trade area will promote foreign direct investment in the
ASEAN region itself through the enlargement of the potential marketu A mutual support program for the currencies of one another, leading
possibly to a currency areau Simultaneous, coordinated expansions among the East Asian
economies can help accelerate the recovery of the depressed economies of East Asia
u Significant political implications
China without the Worldand
the World without China
Lawrence J. Lau, Stanford University 83
Foreign Direct Investment (FDI)u FDI, at US$45 billion a year, amounts to approximately 10% of the annual Chinese
aggregate gross domestic investment of approximately US$450 billion. Moreover, a significant proportion of it is what is known as “recycled” or “round-tripped” investment ultimately originated by Chinese entities and individuals. Quantitatively, FDI is not critical to the Chinese economy.
u Qualitatively, FDI is probably more important because it brings in technology, know-how, business methods, management techniques and markets that will otherwise be unavailable in China.
u FDI arrivals totaled US$40.39 billion in 1999, an 11% decline from 1998--however, the sources of the FDI were different--real FDI probably rose if “round-tripped” capital were excluded
u FDI commitments amounted to US$41.24 billion in 1999, a decline of 20.9%u FDI arrivals totaled US$40.7 billion in 2000, a 1% increase over 1999; in 2001,
FDI arrivals reached an all-time high of US$46.85 billion, a 14.9% rise from 2000u FDI commitments amounted to US$62.4 billion in 2000, a 51.3% increase over
1999, partly in response to expected Chinese accession to WTO; in 2001, FDI commitments amounted to US$69.19 billion, a 10.43 rise from 2000
u Cumulative FDI at year end 2001 amounted to US$395.47 billionu The nature of FDI has also changed--from export-oriented to domestic-market
oriented; from light industry to heavy and high-technology industries; and from small projects to large projects.
Lawrence J. Lau, Stanford University 84
Foreign Direct Investment (FDI)u Collateralized loan program as a natural hedge for foreign
direct investorsu Initial public offerings (IPOs) and listings on Chinese
stock exchanges (the second board) as a potential exit strategy for foreign direct investors
Lawrence J. Lau, Stanford University 85
FDI Arrivals in China by OriginFDI Arrivals in China by Source
0
5
10
15
20
25
30
35
40
45
50
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Bil
lio
n U
S$
FDI Arrival from Others
FDI Arrival from Japan
FDI Arrival from U.S.A.
FDI Arrival from Hong Kong
FDI Arrival from Taiwan
Lawrence J. Lau, Stanford University 86
FDI Contracted by OriginFDI Contracted in China by Source
0
20
40
60
80
100
120
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Bil
lio
n U
S$
FDI Contracted from Others
FDI Contracted from Japan
FDI Contracted from U.S.A.
FDI Contracted from Hong Kong
FDI Contracted from Taiwan
Lawrence J. Lau, Stanford University 87
Distribution of Cumulative FDI ArrivalsDistribution of Cumulative FDI Arrivals in China, 1990-2000
Taiwan8%
Hong Kong48%
U.S.A.8%
Japan8%
Other Countries28%
Lawrence J. Lau, Stanford University 88
Distribution of FDI Arrivals in 2000Shares of FDI Arrivals in China, 2000
Taiwan6%
Hong Kong
38%
U.S.A.11%
Japan
7%
Other Countries38%
Lawrence J. Lau, Stanford University 89
China’s FDI as a Percent of Gross Domestic Investment
China's FDI as a Percentage of Gross Domestic Investment
0
2
4
6
8
10
12
14
16
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Percent
Lawrence J. Lau, Stanford University 90
China’s Share of World Foreign Direct Investment
China's Share of Total World Foreign Direct Investment (BOP statistics, IFS)
0
5
10
15
20
25
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
%
Lawrence J. Lau, Stanford University 91
Globalization and Investment Diversificationu Geographical diversification has to be re-thought because of globalization
u Diversification by multinational corporations: e.g., IBM is not a U.S. risk because of its significant business around the globe; similarly, Nestle is not a Swiss risk; these are all globally diversified corporations
u Covariance due to supply-chain connections, e.g., Dell, and its sub-contractor in Taiwan, Quanta Computer, face the same risks—Quanta is not really a Taiwan risk
u Covariance of markets—the stock markets have in recent years tended to move together
u There are gains from geographical diversification only if the economic performance of the different regions of investment are uncorrelated or negatively correlated
u The apparent “home bias” of the portfolios of domestic investors may be due to legal restrictions (both outbound and inbound), explicit or implicit restrictions on foreign ownership, transactions costs (including information acquisition and monitoring), corporate governance (and available float for the general public), competitiveness and fairness of the stock market, and exchange rate risks.
u China, India, and potentially Latin America are candidates for investment if diversification is the objective because they are large economies the rates of growth of which are not very sensitive to what happens outside
Lawrence J. Lau, Stanford University 92
Investment in China by Foreign Investors:Considerationsu Covariance between East Asian and U.S. markets
u Covariance increased by globalizationu The high-technology sector versus the traditional and the non-tradable sectorsu Covariance between U.S. and China is small, hence maximum gain from diversification
u Public versus private marketsu Credibility of public markets (insider trading, manipulation, protection of minority
shareholders, disclosure and transparency)u Ease and necessity of direct financial monitoringu Casino mentality of public markets
u Portfolio versus direct investmentu Possibility of capital control and other forms of restrictions on short-term capital flowsu Necessity of continuous active direct monitoringu Choice of joint-venture partner(s), if any, criticalu Availability of depositary receipts in liquid, transparent and well-regulated markets
with no capital control u Competitive advantage
u Money alone is not sufficient because of relative abundance of domestic savings—foreign direct investors must have superior technology, know-how, knowledge or control of markets
Lawrence J. Lau, Stanford University 93
Investment in China by Foreign Investors:Considerationsu The nature of foreign direct investment (FDI) in China has
been undergoing a transformationu The nature of FDI has changed gradually from export-oriented to
domestically oriented, taking advantage of the large Chinese domestic market; from light industry to heavy and high-technology industries, and from small projects to large projects
u Foreign direct investors increasingly view China not so much as an export base but as a market for their finished products--e.g., BASF, General Motors, Motorola all plan to market at least a significant proportion of the products they produce in China in China itself
Lawrence J. Lau, Stanford University 94
The Major Components of Chinese Economic Reform (1979-the present)
u The “Open Door”u International Tradeu Foreign Direct Investment
u Marketizationu Goods Marketu Labor Marketu Foreign Exchange Marketu Housing Marketu Capital Market
u Devolution of economic decision-making power (The “Contract Responsibility System”)
u Empowering Provincial and Local Governmentsu Autonomy and Incentive at the Enterprise Levelu Professionalization of Management of Enterprises
u Creation of new, non-state-owned modes of organization for production
u Agriculture--Abolition of communes and return to a system of individual cultivators with fixed rents and taxes
u Non-Agriculture (Industry and Services)--emergence of “Township and Village” (T&V) enterprises; (foreign) joint-venture, foreign and private enterprises
Lawrence J. Lau, Stanford University 95
Economic Performance:Pre- and Post-Reform
1952-1979 1979-2000
Pre-Reform Reform
Real GDP 6.20 9.62
Real GDP/Capita 4.14 8.24
Real Gross Value of:
Agricultural Production 4.33 7.41
Light Industry 7.83 11.23
Heavy Industry 11.37 11.10
Real Personal Consumption 4.99 9.04
Real Consumption/Capita 2.96 7.70
Real Gross Fixed Capital Formation 11.43 10.90
Capital Stock 5.93 9.82
Employment 2.52 2.71
GDP Deflator 0.59 5.72
Retail Price Index 0.80 6.11
Exports (in current US Dollars) 10.98 14.83
Imports (in current US Dollars) 10.27 13.53
Average Annual Rates of Growth of Selected Economic Indicators (%)
Lawrence J. Lau, Stanford University 96
Rates of Growth of Total World Trade (US$)Rates of Growth of World Exports and Imports (Percent p.a.)
-10
0
10
20
30
40
50
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000
Year
Perc
en
t
Exports Imports
Lawrence J. Lau, Stanford University 97
Rates of Growth of Total World Exports (US$) with and without China
Growth Rates of Total World Exports with and without China (percent p.a.)
-10
-5
0
5
10
15
20
25
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Perc
en
t
World World Without China
Lawrence J. Lau, Stanford University 98
Rates of Growth of Total World Imports (US$) with and without China
Growth Rates of Total World Imports with and without China (percent p.a.)
-10
-5
0
5
10
15
20
25
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
Perc
net
World World Without China
Lawrence J. Lau, Stanford University 99
Rates of Growth of Total World Exports and Total Chinese Exports
Annual Rates of Growth of Total World Exports and Total Chinese Exports (percent p.a.)
-10
-5
0
5
10
15
20
25
30
35
40
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
Perc
en
t
World China
Lawrence J. Lau, Stanford University 100
China’s Shares of Total World TradeChina's Share in World Trade
0
1
2
3
4
5
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Perc
en
t
Exports Imports
Prospects for Future Economic Growth
Lawrence J. Lau, Stanford University 102
The Sources of Economic Growth: Findings of Kim & Lau As Reported by Krugman (1994)u Using data from the early 1950s to the late 1980s, Kim and Lau
(1992, 1994a, 1994b) find that:u (1) No technical progress in the East Asian NIEs but significant
technical progress in the industrialized economies (IEs) u (2) East Asian economic growth has been input-driven, with tangible
capital accumulation as the most important source of economic growth (the latter applying also to Japan)
u Working harder as opposed to working smarteru (3) Technical progress is the most important source of economic
growth for the IEs, followed by tangible capital, accounting for over 50% and 30% respectively, with the exception of Japan
u NOTE THE UNIQUE POSITION OF JAPAN!u (4) Technical progress is purely tangible capital-augmenting and
hence complementary to tangible capital
Lawrence J. Lau, Stanford University 103
The Sources of Economic Growth--Developing Economies in East Asiau Different types of measured inputs play different roles at different
stages of economic growthu Tangible capital accumulation is the most important source of
growth in the early stage of economic developmentu But simply accumulating tangible capital is not enough--it must also
be efficiently allocatedu Efficient tangible capital accumulation is the major accomplishment
of the East Asian NIEs in the postwar periodu Market-directed allocation of new investment, aided by export
orientation, promotes efficiencyu Private enterprises have the incentives for prompt self-correction
u Intangible capital accumulation becomes important only after a certain level of tangible capital per worker is achieved but has begun to be important for some East Asian NIEs such as South Korea andTaiwan
Lawrence J. Lau, Stanford University 104
Real Output per Labor Hour (1980 US$)Real Output per Labor Hour (1980 US$)
0
5
10
15
20
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1980 U
S$ p
er L
ab
or
Hou
r
China Hong Kong
Indonesia S. Korea
Malaysia Philippines
Singapore Taiwan
Thailand Japan
Non-Asian G5
Lawrence J. Lau, Stanford University 105
Tangible Capital Stock per Labor Hour (1980 US$): Selected Economies
Tangible Capital Stock per Labor Hour (1980 U.S.$)
0
10
20
30
40
50
60
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1980 U
S$ p
er L
ab
or
Hou
r
China Hong Kong
Indonesia S. Korea
Malaysia Philippines
Singapore Taiwan
Thailand Japan
Non-Asian G5
Lawrence J. Lau, Stanford University 106
Average Human Capital:Selected Economies
Average Human Capital (Years of Schooling per Working-Age Person)
0
2
4
6
8
10
12
14
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
Yea
rs p
er W
ork
ing-A
ge
Per
son
China Hong KongIndonesia S. KoreaMalaysia PhilippinesSingapore TaiwanThailand JapanNon-Asian G5
Lawrence J. Lau, Stanford University 107
Human Capital per Labor Hour (Years of Schooling): Selected Economies
Human Capital per Labor Hour (Years of Schooling)
0
0.002
0.004
0.006
0.008
0.01
0.012
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
Yea
rs p
er L
ab
or
Hou
r
China Hong Kong
Indonesia S. Korea
Malaysia Philippines
Singapore Taiwan
Thailand Japan
Non-Asian G5
Lawrence J. Lau, Stanford University 108
R&D Capital Stocks:Selected Economies
R&D Capital Stock (Billion 1980 US$)
0
100
200
300
400
500
600
700
800
900
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
Bil
lion
1980 U
S$
US CanadaFrance W. GermanyItaly UKJapan S. KoreaSingapore Taiwan
Lawrence J. Lau, Stanford University 109
R&D Capital Stock per Labor Hour (1980 US$): Selected Economies
R&D Capital Stock per Labor Hour (1980 US$)
0
1
2
3
4
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
19
80
US
$
US CanadaFrance W. GermanyItaly UKJapan S. KoreaSingapore Taiwan
Lawrence J. Lau, Stanford University 110
Sources of East Asian Economic Growth with Three Inputs and Technical Progress—No Breaks
Tangible Capital
Labor Human Capital Technical Progress
Hong Kong 69.37 29.08 1.55 0.00 South Korea 75.44 22.33 2.23 0.00 Singapore 59.36 38.82 1.82 0.00 Taiwan 80.83 17.37 1.80 0.00 Indonesia 77.49 17.36 5.15 0.00 Malaysia 59.48 37.68 2.83 0.00 Philippines 54.60 41.24 4.16 0.00 Thailand 73.91 22.66 3.44 0.00 China 83.75 14.12 2.13 0.00 Japan 50.44 5.70 0.56 43.30 Non-Asian G-5 Countries 37.79 3.54 0.86 57.81
Lawrence J. Lau, Stanford University 111
Sources of East Asian Economic Growth with Three Inputs and Technical Progress—With Breaks in 1985
Tangible Capital Labor Human Capital Technical Progress Hong Kong 66-95 56.89 (8.79) 23.65 (2.44) 2.51 (4.80) 16.94 South Korea 60-95 65.45 (12.28) 18.62 (3.35) 3.84 (6.31) 12.08 Singapore 64-95 53.10 (10.23) 33.94 (4.70) 3.23 (5.92) 9.73 Taiwan 53-95 71.26 (11.76) 15.61 (2.33) 3.15 (5.40) 9.99 Indonesia 70-94 71.20 (10.88) 14.59 (2.72) 9.38 (10.34) 4.83 Malaysia 70-95 54.22 (9.65) 32.47 (4.68) 5.12 (8.02) 8.19 Philippines 70-95 54.05 (5.40) 37.81 (3.94) 8.15 (7.41) -0.01 Thailand 70-94 60.84 (9.68) 18.06 (2.93) 5.65 (8.00) 15.44 China 65-95 83.87 (11.63) 11.92 (2.55) 4.21 (5.99) 0.00 Japan 57-94 49.04 (7.98) 5.23 (0.56) 1.08 (2.15) 44.65 Non-Asian G-5 Countries 57-94 37.44 (3.52) 3.36 (0.17) 1.70 (1.68) 57.49
Lawrence J. Lau, Stanford University 112
Sources of East Asian Economic Growth with Four Inputs and Technical Progress
Sample Period Tangible Capital
Labor Human Capital R&D Capital
Technical Progress
South Korea 65-95 63.35 13.61 2.10 20.94 0.00 Singapore 77-95 47.33 21.55 1.37 29.75 0.00 Taiwan 78-95 58.73 11.42 1.32 28.54 0.00 Japan 64-94 44.83 5.20 0.82 14.63 34.52 Non-Asian G-7 Countries 65-94 33.71 3.71 1.32 12.53 48.72
Lawrence J. Lau, Stanford University 113
R&D Expenditures:3 Newly Industrialized Economies
Real R&D Expenditures (3 NIEs)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
Mil
lion
s of
1980 C
on
stan
t U
S D
oll
ars
Korea R&D Expenditure
Singapore R&DExpenditure
Taiwan R&D Expenditure
Lawrence J. Lau, Stanford University 114
Patents Granted in the United States: G-7 Countries
Patents Granted Annually in the United States: G7 Countries
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
US
Japan
Germany
United Kingdom
France
Canada
Italy
Lawrence J. Lau, Stanford University 115
Patents Granted in the United States: G-6 Countries
Patents Granted Annually in the United States: G-6 Countries
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Japan
Germany
United Kingdom
France
Canada
Italy
Lawrence J. Lau, Stanford University 116
Patents Granted in the United States: China and 4 East Asian Newly Industrialized Economies
Patents Granted Annually in the United States, 4 East Asian NIEs and China
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
Nu
mb
e of
Pate
nts
Hong Kong
South Korea
Singapore
Taiwan
China
Lawrence J. Lau, Stanford University 117
R&D Capital Stock and Patents Granted in the United States: China and 4 East Asian NIEs
R&D Capital Stocks and Number of Patents Granted in the United States:4 East Asian Newly Industrialized Economies and China
0
5,000
10,000
15,000
20,000
25,000
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Mil
lion
s of
Con
stan
t 1980 U
S D
oll
ars
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Nu
mb
er o
f P
ate
nts
South Korea R&D Stock (left scale)
Singapore R&D Stock (left scale)
Taiwan R&D Stock (left scale)
Hong Kong Patents (right scale)
South Korea Patents (right scale)
Singapore Patents (right scale)
Taiwan Patents (right scale)
China Patents (right scale)
Left
Lawrence J. Lau, Stanford University 118
Patents Granted in the United States and R&D Capital Stock: Japan and 3 East Asian NIEs
Number of Patents vs. R&D Capital Stock in Millions of Constant 1980 U.S. Dollars
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Millions of Constant 1980 U.S. Dollars
Nu
mb
er o
f P
ate
nts
South Korea Patents
Singapore Patents
Taiwan Patents
Japan Patents
Lawrence J. Lau, Stanford University 119
Is East Asian Economic Growth Sustainable?u Prospects for continued economic growth in East Asia remain
good—room for continuation of tangible-inputs-driven growthu Fundamentals are sound—high savings rates, priority for education,
private-enterprise market economyu The experience of developed economies, especially that of Japan,
suggests that investment in R&D capital and other forms of intangible capital has high returns
u Because of its complementarity with tangible capital, investment in intangible capital can retard the decline in the marginal productivity of tangible capital and counteract the “Krugman effect”
u There is also evidence of positive technical progress in the more recent period
u The people of East Asia are entrepreneurial, hard-working, and thrifty--all they need is a good, market-friendly, predictable and stable environment
Lawrence J. Lau, Stanford University 120
Is East Asian Economic Growth Sustainable?u The attractiveness of investment in intangible capital depends on the
protection of intellectual property rights, which in turn depends on whether a country is a producer of intellectual property--some of the East Asian economies, e.g., Hong Kong, South Korea, Singapore and Taiwan are ahead of other East Asian economies with the possibleexception of Japan on this score
u Intangible capital is different from tangible capital in three important aspects:
u Intangible capital is freely mobile across countriesu Intangible capital is simultaneously deployable in different locations without
diminution of its effectiveness (increasing returns in the utilization of intangible capital)
u Intangible capital enhances the productivity of existing tangible capital whereas additional tangible capital diminishes the productivity of existing tangible capital
Lawrence J. Lau, Stanford University 121
Long-Term Economic Growth:Three Paradigms of Chinese Economic Growthu Domestic demand-driven growth--the domestic market paradigm a la the
United States in the 19th century. China is a large continental economy--International trade will never be as important as other, smaller countries and China must rely on internal demand for further economic growth. Value-added from exports constitutes only 6 percent of Chinese GDP.
u The "wild-geese-flying pattern" metaphor of East Asian industrial migration over time can apply to Chinese provinces and regions
u Privatizing the economy without privatization--shrinking the state sector through the growth of the non-state sector in the absence of explicit privatization--the experience of Taiwan and South Korea
u What does it take?u Availability of infrastructure (transportation and communication, including the
internet)u Continued marketization of the economyu Maintenance of a domestically open economy (the equivalent of the “interstate
commerce” clause of the U.S. constitution)u Affirmation of property rights and the rule of law (a national commercial and tax
court?)u Maintenance of an internationally open economy--the role of the "open door”
(WTO)
Lawrence J. Lau, Stanford University 122
Long-Term Economic Trendsu Aggregate GDP
u The Chinese economy is likely to continue to grow, more or less independently of what happens in the rest of the world, over the next several decades at an average annual rate of approximately 7%
u The source of this growth will come primarily from tangible capital accumulation, supported by a national savings rate of 40%, human capital accumulation, and economies of scale, and to a lesser extent on the growth of intangible capital (for example, R&D capital) and improvements in efficiency
u By 2020, aggregate Chinese GDP will exceed the aggregate GDP of Japan (and approximately half of aggregate U.S. GDP)
u By 2035, aggregate Chinese GDP will reach the same level as aggregate U.S. GDPu Per capita GDP
u However, Chinese GDP per capita will only reach US$10,000, or approximately 20% of U.S. GDP per capita, in 2035
u Chinese GDP per capita will approach the level of U.S. GDP per capita only beyond 2050
u Populationu By 2035, India will have overtaken China as the most populous nation in the world
u The currencyu The Renminbi will in time become one of the strongest currency in East Asia and a
quasi-reserve currency like the Euro
Lawrence J. Lau, Stanford University 123
Long-Term Projections
2001 2010 2020US$ (2001 prices)
Real GDP 1.16 trilll. 2.25 trill. 4.5 trillion
Real GDP/per capita 920 1,750 3,400
Lawrence J. Lau, Stanford University 124
The Structure of the Economy: GDP1999
17.3%
49.7%
32.9%
Primary Sector Secondary Sector Tertiary Sector
20207.5%
45.2%
47.2%
Lawrence J. Lau, Stanford University 125
The Structure of the Economy: Employment1999
50.1%
23.0%
26.9%
Primary Sector Secondary Sector Tertiary Sector
2020
25.0%
27.0%
48.0%
Lawrence J. Lau, Stanford University 126
Sources of Growth of Aggregate Demand: Affordable Owner-Occupied Housingu Huge pent-up demand for new affordable owner-occupied residential
housing and rebuilt and renovated residential housing—a housing boom that can last for decades
u Promotion of affordable owner-occupied residential housing investment for and by the domestic population is one of the few alternative new and durable sources of growth of aggregate demand
u Simultaneous adjustment of salaries and rents, providing purchasing power for employees not currently provided housing
u Establishment of properties (transfer) rights to residential housing similar to those already available in the rural areas
u Provision of long-term, preferably fixed rate, mortgages; development of secondary markets for such mortgages to avoid maturity mis-match; adoption of “safe-harbor” rules to over come “reluctance to lend”
u Institution of urban zoning and land use laws; absorption of land costs but maintaining fairness through land leases adjustable upon renewal
u Development of mass urban transitu Housing reform has taken root in major urban centers except Beijing
Lawrence J. Lau, Stanford University 127
Sources of Growth of Aggregate Demand:Promotion of Science and Education in Chinau Investments in information technology
u Leap-frogging traditional development in telecommunication (the experience of the wireless phone)
u E-commerce among enterprisesu New models of marketing, distribution and salesu A PC in every classroom (in every urban home) u Set-top boxes on television sets with point and click device and
numeric pad can link 400 million households to the internetu New modes of education and information disseminationu The Chinese language is uniquely suited to communication based
on a graphic interface (the experience of the fax machine)u Extension of compulsory education to 12 yearsu Investments in tertiary education and in R&D
Lawrence J. Lau, Stanford University 128
The Development of the Great West:Reducing Regional Inequalitiesu Even though all regions benefited from the economic reform since 1979, the coastal regions
benefited much more than the inland regions—there is an estimated 6 to 1 or even 8 to 1 ratio between the per capita GDP of the richest and poorest province/region.
u Interregional income inequality has risen, resulting in:u Dissatisfaction and restivenessu Deterioration of social services, especially education and health careu Massive illegal migration from the inland regions to the coastal regions, creating huge pressure on
social and physical infrastructureu Relaxation of rural-urban migration (mostly controlled by the local authorities)u Transfer payments from the central governmentu Raising agricultural incomesu Moving jobs to where people are, not people to where jobs areu Urbanization through the creation of new towns and cities, not the growth of existing towns
and citiesu Developing a truly unified national marketu Education and investment in human capital is the most effective means for reducing income
inequalityu Maintaining long-term competitiveness without devaluation; WTO accession can help by
putting pressure on enterprises to move inland to lower their costs and maintain competitiveness
u Relocation of the capital from Beijing to a city in the Western region of China can significantly accelerate the development of the Great West
Lawrence J. Lau, Stanford University 129
The New Economy and China: The Advantages of Backwardness and Sizeu The possibility of leap-frogging--there are no vested interests to
protect; no existing businesses to be cannibalized; there can be“creation without destruction”
u e.g., facsimile machines instead of telexes; video compact discs instead of VCRs; a new keyboard layout; mobile and wireless telephones instead of fixed lines; debit and credit cards instead of checks
u The possibility of influencing/setting standards--the markets are potentially large enough in China for the benefits of economies of scale to be realized and for it to have a significant influence on future standards
u e.g., Linux; wireless telephone standards (CDMA)u The possibility of local adaptation--taking advantage of local
conditionsu e.g., the Legend story—language; local supply and demand conditions, e.g.,
stability of the voltage of the electric power supplyu Transformation of the “Old Economy” through the information and
communication technology
Lawrence J. Lau, Stanford University 130
The New Economy Levels the Playing Field between Large and Small Firms
u Small firms can have access to services and supplies heretofore only available to large firms
u E.g., by bringing down the cost of securities trading, Charles Schwab and E-trade benefit small investors proportionally much more than large investors
u Rapid delivery services and warehousing facilities, e.g., Federal Express, are available to both large and small firms
u Small firms can also become more accessible to their customers and potential customers through the Internet with only marginal expenditures on advertising and public relations
u Small firms have access to large firms as potential suppliers in a global supply chain
u The Chinese economy with its high and potentially even higher concentration of smaller firms and more primitive information infrastructure (and thus the potential for leap-frogging) may benefit much more from the new economy than other more developed economies
u E.g., B2B dot.coms seem to have relatively greater success in East Asia than in the United States
Lawrence J. Lau, Stanford University 131
Implications for U. S.-China Relationsu Chinese economic growth during the next several decades will
depend mostly on internal factors and be largely unaffected by the actions of either the U.S. or other countries.
u There are numerous serious problems confronting the Chinese economy—however, these problems are not intractable.
u On the margin, U.S. involvement in the Chinese economy will makesome, but not a critical, difference; but it can be mutually beneficial for both the U.S. and China.
u Chinese GDP and GDP per capita will remain low relative to the United States for at least three or more decades.
u The share of Chinese GDP produced by the non-state-owned sector will rise from 65% to 80% in another decade.
u There is significant complementarity between the U.S. and Chinese economies--the U.S. does not export anything that China exports and China does not export anything that the U.S. exports. It is this complementarity that maximizes the potential gains from free trade between the two countries.