the rise of china presented to financial executives international orange county chapter may 9, 2007
TRANSCRIPT
INTRODUCTION
“It now appears that global stock market corrections are made in China.”
Stephen Roach of Morgan Stanley
GLOBAL ECONOMY
Revolutionize the relative prices of labor, capital, goods and assets
Oil price high, yet no inflation Manufactured low-priced goods Lid on wages Excess liquidity – low interest rates – high
asset prices Bond yields low
POLITICAL LEADERS
1949: Chinese Communist Party 1st generation: Mao Zedong 2nd generation: Deng Xiaoping (1978-97) 3rd generation: Jiang Zemin 4th generation: Hu Jintao (March 2003)
DENG XIAOPING
1978-1997 Policy of “Socialism with Chinese
Characteristics” Economic openness and foreign trade Iron grip on politics 1989: Tiananmen Incident
JIANG ZEMIN
Prime Minister: Zhu Rongzhi Role of capitalism 1992: FDI exploded July 1997: Hong Kong turnover 2001: WTO membership
Open to more foreign investment and tradeIncrease the pace of privatization – only a third is under
state controlled Global economic force - Double its share of global
manufacturing output
HU JINTAO
Nov 2002: Hu Jintao was named Prime Minister: Wen Jiabao Steps toward financial transparency 2008: Olympic games 2010: Shanghai World Trade
REFORMS
“Three Representatives” - farmers, workers, and businessmen to be represented in the CCP
Freedom of information rule – require government to make any unclassified info public w/in 15 days
Expected to pass a controversial law enshrining private property rights
Reduce inequality
DEMOGRAPHY
Jan 2005: Population 1.3 billion One Child Policy Gender: 100 males to 70 females Middle-class – 25m, just 2% of the population, not big
enough to impact globally China’s middle class would soon outnumber US
population
1970: 80% rural, 50% illiteratePresent: 40% urbanized, 90% literate
MACROECONOMIC DATA(2006 estimate)
Inflation rate – 1.5% Unemployment rate – 4.2% Labor force – 798.1 million
Agriculture – 45% Industry – 24% Services – 31%
GDP growth – 10.5% Agriculture – 12.46% Industry – 47.28% Services – 40.26%
NATIONAL OUTPUT
World’s 4th largest economy (nominal GDP = $2.68 trillion)Expects GDP to top America by 2027
2nd in Purchasing Power Parity terms = $10 trillionIn just 4 years, China is likely to become #1
GDP per capita (nominal) = $2034 (Rank 105th) GDP per capita (PPP) = $7593 (Rank 80th) Wealthiest cities: around $7000 in 2006
US: 1839-86 (double per capita GDP)China: 1978-87, 1987-96
ECONOMIC CLOUT
Currency and trade imbalances – source of political irritations
Dec 2006 : First semi-annual “Strategic Economic Dialogue”
High-level delegation US-China mutual interdependence
TRADE
China’s current account surplus - around 8% of GDP 2006: US trade deficit in goods reached $836 billion Countries/regions that account for most of the deficit:
China ($233 billion)
European Union ($117 billion)
Japan ($88 billion) 70% of exports from China to the US are being done
by US MNCs Exports to China grew by 31.7% to $55.2 billion,
making it the No. 4 destination for U.S. exports
TRADING PARTNERS(2005)
Exports = $974 billion f.o.b. (2006) US – 21.4% Hong Kong – 16.3% Japan – 11% South Korea – 4.6% Germany – 4.3%
Imports = $777.9 billion f.o.b. (2006) Japan – 15.2% South Korea – 11.6% Taiwan – 11.2% U.S. – 7.4% Germany – 4.6%
FX RESERVES
China's massive hoard is the result of large current-account surplus significant inward foreign direct investment huge inflows of speculative capital over the past
couple of years
Explosion in reserves creates excess liquidity risks fuelling higher inflation asset-price bubbles imprudent bank lending
LOWER YUAN
By keeping the Yuan down China is feeding a trade surplus that is
creating a growing political backlash in America and Europe
G7 urged Beijing to let the Yuan rise to help ease serious "imbalances" in global finance
DOLLAR OR EURO
About 70% of its FX is invested in dollars, mainly Treasury securities
Propped up the dollar and reduced American bond yields
Need to diversify reserves out of dollars Increase in reserves into euros and emerging
Asian currencies Shifting money into euros would push down
the dollar
MANAGED FLOAT
A big shift out of dollars could push up bond yields and hence mortgage rates
Help U.S. manufacturers by raising their competitors‘ costs
Pegged to the dollar into ‘managed float’ Yuan rising at an annual rate of almost 7%
against dollar since September 2006 On November 13th the yuan hit a new high of
7.864 to the dollar
MARKET
Population – 1.3 billion Rapid urbanization Rising standard of living Increasing demand for consumer goods Think Yao, not Mao MNC – imperative to have China strategy
MANUFACTURING
Cheap labor Average factory worker makes $207 a month Manufacture simple to sophisticated goods Wal-Martization Service outsourcing hub Intel plans to open a $2.5 billion factory in
Dalian by 2010
FINANCIAL MARKET
Weakest link State-owned banks Loans are made on the basis of non-market
considerations Banking sector – still murky Limits foreign ownership to 25% High saving rate explains why deposits have
grown faster than loans
STOCK MARKET
2007: Open its financial sector to foreign competition and investment
Require companies listed in Shanghai and Shenzhen stock markets to adopt norms similar to the International Financial Reporting Standards
Need foreign expertise and technology to meet international financing reporting standards
BANKING SERVICES
Foreign financial houses spent about $23b to offer a wide range of banking services – credit cards, mortgages, personal finance
More than $1.8 trillion in personal savings -- and a savings rate of close to 50% -- could become the financial market of the 21st century
OTHER ISSUES
Corruption Lack of transparency Intellectual Property Rights Underdeveloped legal infrastructure China premium (20-30% lower) valuation of
risk