the impact of the u.s. economic slowdown on china and the...

The Impact ofthe U.S. Economic Slowdown

on China and the WorldLawrence 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.

June 2001

Phone: 1-650-723-3708; Fax: 1-650-723-7145Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau

Lawrence J. Lau, Stanford University 2

The Slowdown in the U.S. Economyu The bursting of the internet “bubble”u A decline in corporate profitsu A reduction in fixed investment by corporationsu A rise in the unemployment rateu A decline in consumer confidence


Measures Undertaken to Arrest the Decline in the Rate of Growthu Reductions in the short-term rate of interestu A tax cut with immediate cash refundsu Will these reductions work?

u It depends on the confidence of businesses and consumersu A new source of investment growth is needed to replace the internet-driven

investments in the high-technology sector


How Has the "New" Economy Been Manifested in the United States?u An increase in the rate of technical progress, or growth of total factor

productivity—that is, the ability of producing output from a given quantity of inputs—over the decade of the 1990s

u A decline in the average level of changes in inventory (stocks) relative to GDP as well as in its volatility. Changes in inventory used to be a major source of business cycle fluctuations in the United States. The improvement may be attributed in part to better inventory management due to more, faster, better and cheaper information available.

u New housing starts, which also used to be a major source of business cycle fluctuations in the United States, have also been reduced in volatility in recent years, reflecting better information and faster adjustments, and institutional changes such as the introduction of adjustable-rate mortgages and securitization of mortgages.


Rates of Growth of Total Factor Productivity in the United States--Quarterly Data

Rates of Growth of Total Factor Productivity of the United States

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1959Q1 1962Q4 1966Q3 1970Q2 1974Q1 1977Q4 1981Q3 1985Q2 1989Q1 1992Q4 1996Q3 2000Q2

Year

Per

cen

t p

er a

nn

um


The Change in Inventory/GDP Ratio in the United States--Quarterly Data

Change in Inventory/GDP Ratio

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

19

47

Q3

19

49

Q2

19

51

Q1

19

52

Q4

19

54

Q3

19

56

Q2

19

58

Q1

19

59

Q4

19

61

Q3

19

63

Q2

19

65

Q1

19

66

Q4

19

68

Q3

19

70

Q2

19

72

Q1

19

73

Q4

19

75

Q3

19

77

Q2

19

79

Q1

19

80

Q4

19

82

Q3

19

84

Q2

19

86

Q1

19

87

Q4

19

89

Q3

19

91

Q2

19

93

Q1

19

94

Q4

19

96

Q3

19

98

Q2

20

00

Q1

Quarter

Per

cen

t

Change in Inventory/GDP Ratio


New Housing Starts in the United StatesNew Housing Starts (thousand units)

0

500

1,000

1,500

2,000

2,500

1959

19

61

1963

19

65

1967

19

69

1971

19

73

1975

19

77

1979

19

81

1983

19

85

1987

19

89

1991

19

93

1995

19

97

1999

Year

Th

ou

san

ds

New Housing Starts


The Effects of the "New" Economy

Average Average AverageRate of Inventory AbsoluteGrowth of Change-GDP InventoryTFP Ratio Change-GDP

Ratio1951-60 0.75% 1.09%1961-70 1.05% 0.95% 1.00%1971-80 0.82% 0.68% 0.84%1981-90 0.76% 0.43% 0.63%1991-2000 0.85% 0.48% 0.51%


How Has the “New” Economy Been Manifested in the United States?

u The rate of inflation in the United States has remained low during the past decade while the rate of unemployment has declined to levels unseen since the late 1960s, even below the so-called “natural” rate of unemployment

u This has been made possible, in part, through the productivity gains due to the information and communication revolution

u This has also been made possible, in part, because of better management of the monetary policy (by Dr. Alan Greenspan of the Federal Reserve Board) based on better and more timely information and better and faster analysis and response

u Low unemployment has been achieved without kindling high inflationu The U.S. has been the beneficiary of the East Asian currency crisis

u The price of imports remained low, helping to keep inflation downu Its status as a safe haven for capital allowed the rate of interest to remain

lowu The foreign central banks have to re-build their foreign exchange reserves

by purchasing and holding U.S. dollars


The Rates of Inflation of the United StatesRates of Inflation in the United States

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1957

Q2

1959

Q1

1960

Q4

1962

Q3

1964

Q2

1966

Q1

1967

Q4

1969

Q3

1971

Q2

1973

Q1

1974

Q4

1976

Q3

1978

Q2

1980

Q1

1981

Q4

1983

Q3

1985

Q2

1987

Q1

1988

Q4

1990

Q3

1992

Q2

1994

Q1

1995

Q4

1997

Q3

1999

Q2

Quarter

Per

cen

t p

er a

nn

um

Rate of Change of the Consumer Price Index

Rate of Change of the GDP Deflator


The Unemployment Rate of the United StatesUnemployment Rate of the United States (percent)

0%

2%

4%

6%

8%

10%

12%

1948

Q1

1950

Q1

1952

Q1

1954

Q1

1956

Q1

1958

Q1

1960

Q1

1962

Q1

1964

Q1

1966

Q1

1968

Q1

1970

Q1

1972

Q1

1974

Q1

1976

Q1

1978

Q1

1980

Q1

1982

Q1

1984

Q1

1986

Q1

1988

Q1

1990

Q1

1992

Q1

1994

Q1

1996

Q1

1998

Q1

2000

Q1

Percent

Qu

art

er

Unemployment Rate (percent)


The Relationship between the Unemployment Rate and the Rate of Change of PGDP

The Relationship between Unemployment and Inflation

0%

2%

4%

6%

8%

10%

12%

0% 2% 4% 6% 8% 10% 12% 14%

Rate of Inflation (percent per annum)

Rate

of

Un

emp

loym

ent

(per

cen

t)

1957-1973

1974-1993

1994-2000


The Relationship between the Unemployment Rate and the Rate of Change of the CPI

The Relationship between Unemployment and Inflation

0%

2%

4%

6%

8%

10%

12%

-2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Rate of Inflation (percent per annum)

Rate

of

Un

emp

loym

ent

(per

cen

t)

1957-1973

1974-1993

1994-2000


Was the U.S. Market in High-Technology Stocks a Bubble?u There is genuine added value in some firmsu However, there is also a bubbly quality to the stocks of the internet

start-ups, many of which have no established track recordu There is also significant duplication of investmentu In a sense, many of the IPOs (initial public offerings) of the past two

years represent the securitization of venture capital. These firms would not have been able to go public five years ago and would have to settle for venture capital. However, their success rate should be approximately the same as venture capital.


The Evolution of Measured Technical Progress over Timeu Some problems of the recent measures of total factor productivity

u The measurement of labor inputs is based on a standard number of hours, or hours paid, rather than hours worked--the discrepancy between hours paid and hours work for employees in the high-technology sector is believed to have risen during the high-technology boom of the past five years

u The change in the accounting practice on expenditure on software not bundled with hardware from full expensing to capitalizing will in the first few years result in a higher measured real GDP even though nothing has changed

u The hedonic price index adjustment may over-state the pecuniary benefits of purely technological innovations

u The price indexes may not have taken fully into account the shift in the composition of consumption and investment away from goods to services. The prices of services, however, have risen faster than the prices of goods

u Moreover, the deterioration in service sector quality has not been taken into account

u The pricing of upgrades of subscription type services--how to distinguish between quality improvement and pure price increase


How Important is the Wealth Effect?u Is there a wealth effect?

u The wealth effect is not as strong as some analysts believe—both the rise and fall in wealth are caused by the change in the stock market valuation of approximately 50 firms and their effects are concentrated on a very small group of people


Exports as a Percent of GDP:Selected East Asian Economies

Exports as a Percentage of GDP

0

20

40

60

80

100

120

140

160

180

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Year

%HONG KONG INDIA INDONESIA KOREA MALAYSIA PHILIPPINES

SINGAPORE THAILAND CHINA Japan Taiwan


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

Year

%

China Hong Kong India Indonesia Korea Maylaysia

Philippines Singapore Taiwan Thailand


Indexes of East Asian Exchange Rates:Local Currency per US$ (January 2, 1997=100)

Indices of East Asian Exchange Rates(Local Currency per U.S. Dollar, 1/2/97=100)

50

100

150

200

250

300

350

400

450

500

550

600

650

700

1/2/97 8/12/97 3/20/98 10/28/98 6/7/99 1/13/00 8/23/00 4/2/01

1/2

/97=100

C. Yuan HK$

I. Rupiah K. Won

RM P. Peso

S$ NT$

T. Baht Japan Yen

Indian Rupee Brazilian Real


Ratio of Short-Term Foreign-Currency Liabilities to Foreign Exchange Reservesu The potential short-term foreign exchange liabilities, that is, the

foreign exchange that can be withdrawn with little or no prior notice, consists of the stock of foreign portfolio investment and short-term foreign loans

u The stock of foreign portfolio investment can be estimated by cumulating past foreign portfolio investments; however, the existing stock may be under- or over-estimated by this procedure because of the possibilities of gains and losses from these investments

u To these may be added the current account deficit of the currentperiod

u If foreign exchange reserves are low relative to these potentialdemands on foreign exchange, the currency may be vulnerable to arun


Ratio of Short-Term Foreign-Currency Liabilities to Foreign Exchange Reserves

Ratio of Short-Term Foreign Currency Liabilities toForeign Exchange Reserves

0

500

1000

1500

2000

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

Year

%

CHINA HONG KONG

INDIA INDONESIA

KOREA MALAYSIA

MEXICO PHILIPPINES

SINGAPORE THAILAND

TAIWAN


Ratio of Short-Term Liabilities, Including Current Account Balance, to Reserves

Ratio of Short-Term Foreign Currency Liabilities, Including Current Account Balance, to Foreign Exchange Reserves

0

500

1000

1500

2000

2500

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

Year

%

CHINA HONG KONG

INDIA INDONESIA

KOREA MALAYSIA

MEXICO PHILIPPINES

SINGAPORE THAILAND

TAIWAN




-100

0

100

200

300

400

500

600

700

800

19

95

19

96

19

97

19

98

19

99

Year

%

CHINA

HONG KONG

INDONESIA

KOREA

MALAYSIA

PHILIPPINES

SINGAPORE

THAILAND

TAIWAN


Ratio of Short-Term Foreign-Currency Liabilities to Foreign Exchange Reserves

Ratio of Short-Term Foreign Currency Liabilities toForeign Exchange Reserves

0

100

200

300

400

500

600

700

800

1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 Quarter

%

CHINA HONG KONG

INDIA INDONESIA

KOREA MALAYSIA

PHILIPPINES SINGAPORE

THAILAND TAIWAN




0

100

200

300

400

500

600

700

800

1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 Year

%

CHINA HONG KONG

INDIA INDONESIA

KOREA MALAYSIA

PHILIPPINES SINGAPORE

THAILAND TAIWAN


Indexes of East Asian Stock Market Indexes:Local Currency (January 2, 1997=100)

Indexes of East Asian Stock Exchange Indexes(Local Currency, 1/2/97=100)

20

70

120

170

220

270

1/1/97 8/11/97 3/19/98 10/27/98 6/4/99 1/12/00 8/22/00 3/30/01

1/2

/97

=1

00

China Hong Kong Indonesia

Korea Malaysia Philippines

Singapore Taiwan Thailand

Japan India


Short-Term Rates of InterestShort-Term Rates of Interest, Selected East Asian Countries

(percent p.a.)

0

10

20

30

40

50

60

70

1/1/97 8/11/97 3/19/98 10/27/98 6/4/99 01/12/00 08/22/00 03/30/01

Perc

en

t p

er

an

nu

m

CHINA HONG KONG

INDONESIA KOREA

MALAYSIA PHILIPPINES

SINGAPORE TAIWAN

THAILAND JAPAN

INDIA


The Rates of Growth of Real GDP Have Begun to Turn Downwards Again

Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

19

96

Q1

19

96

Q3

19

97

Q1

19

97

Q3

19

98

Q1

19

98

Q3

19

99

Q1

19

99

Q3

20

00

Q1

20

00

Q3

Quarter

An

nu

alized

Rate

s in

Percen

t


Korea Malaysia Philippines


Japan India


Quarterly Rates of Growth of ExportsYear-over-Year Quarterly Rates of Growth of Exports in U.S. Dollars

(Percent)

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

Q1 97 Q2 97 Q3 97 Q4 97 Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00

Perc

en

t p

.a.

China Hong Kong

Indonesia South Korea

Malaysia Philippines

Singapore Taiwan

Thailand Japan

India


Quarterly Rates of Growth of ImportsYear-over-Year Quarterly Rates of Growth of Imports in U.S. Dollars

(Percent)

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Q1 97 Q2 97 Q3 97 Q4 97 Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00Perc

en

t p

.a.

China Hong Kong

Indonesia South Korea


Singapore Taiwan

Thailand Japan

India


The Current Account BalanceThe Current Account Balance, Billion US$

-40

-30

-20

-10

0

10

20

30

40

50

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Bil

lio

n U

S$


Korea, Rep. of Malaysia Philippines


Mexico India


The Current Account Balance as a Percent of GDP

The Current Account Surplus (Deficit) as a Percent of GDP

-12

-6

0

6

12

18

24

30

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Pe

rce

nt

China Hong Kong

Indonesia Korea, Rep. of


Singapore Taiwan

Thailand Mexico

India


Is Another Crisis Likely?u Based on the early warning economic indicators, the East Asian

economies are unlikely to have another crisis in the foreseeablefuture

u The savings rates have remained high while the savings-investment gaps--also reflected as the current account gaps--have largely disappeared

u The dependence on short-term foreign capital (portfolio investment--both equity and debt instruments--and loans) has been significantly reduced

u Foreign investment now consists mostly of direct rather than portfolio investment

u Both total and short-term external debts have declinedu The ratio of short-term to total external debts has also declined

u Foreign exchange reserves have risen both absolutely and as a percentage of annual imports

u Real exchange rates have depreciated significantly from their peaks in most of the affected economies


The Impact on China:The External Environment Has Deterioratedu The U.S. economy, and its high-technology sector in particular, has slowed down

rather precipitously--the rate of growth of real GDP is expected to be no higher than 1% in 2001

u The slowdown in the U.S. will have an impact on East Asia, both directly and indirectly, and in particularly in economies where the high-technology sector is important, such as South Korea, Malaysia and Taiwan

u The continuing stagnation of the Japanese economy does not help but is not expected to have a negative impact because has gone on for an entire decade

u The European economies are expected to grow somewhat faster and thus to provide a partial offset to the U.S. economic slowdown

u Chinese exports to the U.S. constitutes only 5% of Chinese GDP--the U.S. slowdown will have only an impact on Chinese economic growth of less than 0.5%, after taking into account both the direct effects of a slowdown in Chinese exports to the U.S. and the indirect effects of a slowdown in Chinese exports to other East Asian economies, due to a slowdown in these economies caused by the slowdown in the U.S.


Chinese Exports to the United States as a Percent of Chinese GDP

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

Year

Per

cen

t

Ratio of Exports to U.S. to GDP


The Effects of the Slowdown in the United States Economy on Chinau While exports is a very high percentage of GDP in Hong Kong, Malaysia,

Singapore and Taiwan, it is a relatively low percentage of the Chinese economy, amounting to approximately 20 percent

u The proportion of total exports destined for the U.S. has generally declined in the East Asian economies over the years, to less than 30 percent

u The one exception is the Chinese economy, where the proportion of Chinese exports destined for the U.S. has been rising to its current level of approximately 20 percent

u The slowdown in the U.S. economy will have a significant, but not overwhelming, negative impact on the rate of growth of real GDP in the East Asian economies--on the order of 1 percentage point decline in Hong Kong, Malaysia, Singapore and Taiwan and a less than 0.5 percentage point decline in the other East Asian economies, including China


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


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


Is There Sufficient Aggregate Demand?Consumption and Investmentu In 2001Q1, fixed investment grew 12.4% and retail sales grew

10.3%u Real personal consumption has revived as shown by the retail sales

datau Public infrastructural investment has continued


Sources of Growth of Aggregate DemandInfrastructural Investmentu Infrastructural investment (US$750 billion-1.2 trillion within the

period 1998-2001)u Infrastructural investment projects include roads and highways,

railways, telecommunications networks, irrigation and water conservancy facilities, ecological projects such as reforestation, urban infrastructure such as mass transit systems, environmentalprotection, urban and rural electricity networks, urban mass transit

u Development of the Central and Western Regionsu 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 Promotion of urban mass transit systems


Sources of Growth of Aggregate DemandPromotion 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


The Development of the Great West:Three Paradigms of Economic Growthu Growth through domestic demand--the domestic market paradigm a

la the United States in the 19th centuryu Industrial migration over time--the "wild-geese-flying pattern"

metaphor applied to Chinese provinces and regionsu Privatization is not always necessary--shrinking the state sector

without privatization--the experience of Taiwanu 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 lawu The role of the "open door”--WTO


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

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 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 integrated national marketu Maintaining long-term competitiveness without devaluation


Foreign Direct Investment (FDI)u Foreign Direct Investment

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; for 2001Q1,

FDI arrivals rose 11.7%u FDI commitments amounted to US$62.4 billion in 2000, an 51.3% increase over 1999,

partly in response to expected Chinese accession to WTO; for 2001Q1, FDI commitments rose 44.3% Y-o-Y

u The nature of FDI has also changed--from export-oriented to domestically oriented; from light industry to heavy and high-technology industries, and from small projects to large projects

u Collateralized loan program as a natural hedge for foreign direct investorsu Initial public offerings (IPOs) and listings on Chinese stock exchanges as a

potential exit strategy for foreign direct investors


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 rose 22.8% to 1.266 trillion Yuan, or 14.2% of GDP, in 2000

u The National People’s Congress has stressed the importance of fighting corruption, organized crime and cults such as the FalunGong


The Pace of Economic Growth Has Picked Up:YoY Quarterly Rates of Growth of Real GDP

YoY Quarterly Rates of Growth of Real GDP

-5%

0%

5%

10%

15%

20%

25%

1983

q1

1984

q1

1985

q1

1986

q1

1987

q1

1988

q1

1989

q1

1990

q1

1991

q1

1992

q1

1993

q1

1994

q1

1995

q1

1996

q1

1997

q1

1998

q1

1999

q1

2000

q1

2001

q1

Quarter

Per

cent

per

ann

um

GDPQ1 GDPQ2

GDPQ3 GDPQ4


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 95-08 96-01 96-06 96-11 97-04 97-09 98-02 98-07 98-12 99-05 99-10 00-03 00-08 01-01

Month

%

RPI

CPI

CPI for 36 Big Cities

Price Index for Agricultural Production Material


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 Nov-92 Sep-93 Jul-94 May-95 Mar-96 Jan-97 Nov-97 Sep-98 Jul-99 May-00 Mar-01

Month

US

$ B

illi

on

Exports Imports Trade Balance


Composition of Chinese ExportsChinese Exports by Commodities: Primary versus Manufactured Goods

Primary Goods

Manufactured Goods

0

50

100

150

200

250

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

US

$ B

illi

ons

Manufactured Goods

Primary Goods


Manufactured Exports as a Percent of Total Chinese Exports

Distribution of Chinese Manufactured Exports as Percent of Total Exports1985-1999

-

10

20

30

40

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Per

cen

t

Clothing, Footware and Toys

Machines and Transport Equipments


China and the World Trade Organization (WTO) (1)u “Permanent Normal Trade Relations” has passed the U.S. Congressu The government is committed to an “open-door” policy and national

treatment for foreign direct investors--a “level playing field” for all, including domestic non-state-owned enterprises

u Remaining obstacle in the trade of agricultural commodities and allowable domestic subsidies has been removed


The Impact of the Accession to the World Trade Organization (WTO) on China (2)u Signaling effect

u Reform and open-door policies are on track and will be continuedu Long-term benefits include:

u A permanent commitment to an openness and a lock-in to the global economyu Replacement of the current discretion-based system by a more transparent and

rule-based system in economic regulationu National treatment for all enterprises--foreign as well as domestic non-state-

owned enterprisesu Insurance for domestic economic efficiency through open global competition--

inefficient domestic monopolies will no longer be protected


The Impact of the Accession to the World Trade Organization (WTO) on China (1)u Immediate impact small but change in long-term expectations

u FDI should rise, especially in the services sector--distribution, finance, and telecommunication

u Exports and imports should rise moderately in the short and intermediate termu Massive imports of agricultural commodities unlikely because of limitations of

world market supplyu Closure and consolidation of inefficient enterprises likely even without WTO

accessionu More trade in intermediate goodsu Tariff reductions from 22% to 17% on averageu A deadline for reform of the state-owned enterprises and the banking sectoru WTO accession provides additional incentive and pressure for development of

an integrated national market not only for goods but also for factors


Internet Users in the Asia/Pacific Region

1999 2000 2001 2002 2003 2004 2005 AnnualRate ofGrowth

China 16.5 27.2 40.4 59.4 84.5 111.6 141.3 43.0Hong Kong 1.9 2.5 3.0 3.2 3.8 4.6 5.4 19.0India 3.2 6.2 11.0 18.9 30.3 42.3 62.5 64.1Indonesia 1.0 1.4 1.9 2.5 3.6 5.2 7.3 39.3South Korea 5.3 8.1 10.7 14.1 17.7 22.1 26.8 31.0Malaysia 1.2 1.7 2.4 3.5 4.7 6.2 8.1 37.5Philippines 0.6 1.1 1.6 2.7 4.1 6.3 8.6 55.9Singapore 0.8 1.0 1.3 1.5 1.7 1.9 2.4 20.1Taiwan 4.4 5.5 6.9 8.6 10.8 12.4 15.8 23.7Thailand 1.0 1.5 2.3 3.5 4.6 6.5 8.7 43.4Asia/Pacific Region 66.2 94.5 128.0 173.3 231.5 295.7 374.4 33.5

Note: 1999 figures estimated and 2000-2005 figures projected by the Yankee Group.

Internet Users in the Asia/Pacific Region (millions)


Penetration Rates in the Asia/Pacific Region

1999 2000 2001 2002 2003 2004 2005China 1.3 2.0 2.9 4.2 5.8 7.4 9.2Hong Kong 26.9 35.6 40.6 42.5 49.6 57.7 65.3India 0.3 0.6 1.0 1.7 2.7 3.6 5.2Indonesia 0.5 0.6 0.9 1.1 1.5 2.1 2.9South Korea 11.2 17.0 22.3 29.3 36.2 44.8 53.9Malaysia 5.3 7.4 10.0 13.9 18.1 23.3 29.8Philippines 0.8 1.4 2.1 3.3 4.8 7.2 9.5Singapore 24.2 29.0 37.7 42.5 47.9 54.0 66.1Taiwan 19.9 24.7 30.5 37.8 46.8 53.3 67.4Thailand 1.6 2.4 3.5 5.1 6.6 9.1 11.7Asia/Pacific Region 2.4 3.3 4.5 6.0 7.8 9.6 11.9

Note: 1999 figures estimated and 2000-2005 figures projected by the Yankee Group.

Penetration Rates in the Asia/Pacific Region (percent)


Opportunities and Challenges of the New Economyu The “New Economy” brings about a one-time permanent increase in potential

output, hence, productivityu The “New Economy” depends on both tangible and intangible capital--the

importance of complementarity of different forms of capital (tangible, infrastructural, human, R&D, knowledge)

u The “New Economy” is here to stayu The “New Economy” facilitates and encourages the process of “de-verticalization”

or “fragmentation”, which began in 1984 as a result of the economic reformu The need to identify, improve and sharpen “core competence” in order to survive;

productivity can actually be enhanced by taking advantage of the opportunities for “de-verticalization” and “out-sourcing”

u e.g., the choice amongst being a designer, manufacturer or a marketer


Opportunities and ChallengesImplications for the Chinese Economyu The “New Economy” facilitates and encourages global division of

labor--i.e., globalization of sources of supply; it also shortens the “Product Cycle”--hence new opportunities but also competitive challenges


The Possibility of Leap-Froggingu China has the ability to leap-frog--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;

u Computer/word processor/printer combination instead of typewriters;u mobile and wireless telephones instead of fixed lines;u debit and credit cards instead of checks;u internet trading of stocks and bonds;u E-commerce rather than traditional commerce (B2B and B2C, e.g., books and

magazines)


The Possibility of Influencing/Setting Standardsu 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., Linuxu wireless telephone standards (CDMA)u Promotion of experiments with other, non-PC-based access devices to the

internet--television sets, web TV type devices, digital set-top boxes, screen phones and wireless


The Possibility of Local Adaptationu The possibility of local adaptation--taking advantage of local

conditionsu e.g., the Legend story

u languageu local supply and demand conditions, e.g., stability of the voltage of the

electric power supplyu The Chinese language is uniquely suited to communication based on a graphic

interface (the experience of the fax machine)u Set-top boxes on television sets with point and click device and numeric

pad can link 400 million households to the internetu Transformation of the “Old Economy” through the information and

communication technology, especially in light of the accession to the World Trade Organization (WTO)


The New Economy Levels the Playing Field between Large and Small Firmsu Small firms can have access to services and supplies heretofore only available to

large firmsu E.g., Charles Schwab and E-trade benefit small investors by bringing down the cost of

securities trading proportionally much more than large investorsu Rapid delivery services and warehousing facilities, e.g., FedEx, are available to both

large and small firmsu 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 economies

u E.g., B2B dot.coms seem to have relatively greater success in East Asia than in the United States

the impact of the u.s. economic slowdown on china and the...

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