1

Understanding Chinese economy

Professor JIANWEI WU

TONGJI University 2014

2

Map of P.R. China

3 3

Chinese economic features

¡  Fastest growing economy in the world, GDP much larger than GNP, thanks for FDI

¡  Save more, invest more and consumer less ¡  Hundreds million people swing between the

East and West regions, or on the way ¡  A poor developing country with huge amount

USD reserves, GDP per capita ranks the poorest 30%, while foreign currency reserve reached 3.82 trillion USD on 31, 2013

¡  No luxury brand is designed by Chinese, most of them made in China and half of them shipped back to China

4 4

Chinese economic features

¡  One of the most polluted countries managed to produce solar and wind generators

¡  A socialist country trapped in monopoly industries, struggling to build market system

¡  GDP per capita is $6920 in 2013 ¡  Four wheels of the economy: cheap labor,

open door policy, reform, urbanization; energy driven: from high saving rate to high rate of investment

5 5

Introduction of Chinese macroeconomic environment, political factor

¡  Earliest market regime in the world ¡  Property heritage system formed an inward

looking society ¡  Emperors Wen and Jing only taxed 1/15 to

1/30 of people’s income ¡  Leading roles of Chinese Communism party

can be found in the various administration levels, real decision makers

¡  State and regional governments regulate economic affairs and share tax revenue – 49.4% to 50.6% in year 2012.

6

Major sources of tax revenue China, Bn yuan

Year Total

　 　 　 　 　 　

Domestic Business Domestic 　 Corporate Individual

Value-added Tax Consump

tion Tariffs Income Income

Tax 　 Tax 　 Tax Tax

2003 2002 724 284 118 92 292 142

2006 3480 1278 513 189 114 704 245

2009 5952 1848 901 476 148 1154 395

2012 11725 2641.5 1575 788 437 1965 582

　 　 　 　 　 　 　 　

7

0

2

4

6

8

10

12

14

9 2K 1 2 3 4 5 6 7 8 9 10 11 12

Fiscal  balance,  trillion  RMB

expenditure

revenue

8 8

Extra 30% from selling land! Tax revenue as % GDP, China

11.9 12.714 14.7 14.7

16.1 16.8 17.819.8 19.2

20.4 19.4 19 19.4

0

5

10

15

20

25

99 2K 1 2 3 4 5 6 7 8 9 10 11 12

Governments get 30% extra revenue from selling land

9

Economic and social factor of urbanization and mega cities

¡  Economy of scale, scope, industrial cluster and economic networking

¡  High value added industry in CBD: finance, services and entertainment

¡  Face to face communication (dating and appointment), emotional needs, social networking

¡  Tank of skills and talents ¡  Employment and recruitment opportunities

10 10

Cardinal challenges and opportunities to modern Chinese economy are urbanization and employment

¡  Up to 53.7% of residents are categorized as city and town citizens and 46.3% as farmers, respectively in 2012. Hundred million youth migrates from inland China, particularly countryside to cities and coast areas, looking for jobs.

¡  More than 60% of the Chinese will be settled in urban area by year 2020. Therefore, there have to be enough jobs, shelters and infrastructure to accommodate new immigrates.

¡  Number of cities with one million or more population are 150 in China in 2010.

11

Labor force and employment

¡  Working forces (age between 15-64) was 644 million in 1980 and 941 million in the peak year 2011. Labor force shrink 3.5 million since 2012.

¡  The ratios of labor to total population are: 1980 64.4%; 2009 72.4%; 2030 67.4%; 2050 63%

12

Urbanization and road communication in China

¡  Rapid train system, over 10000 Km and competing with airlines

13 13

Highway, China, Mn Km

1.35 1.41.7 1.77 1.81 1.87

3.35 3.46 3.58 3.73 3.86 4.01 4.11

00.5

11.5

2

2.53

3.54

4.5

9 2K 1 2 3 4 5 6 7 8 9 10 11

14

Expressway, China, 1000Km

11.616.3 19.4

25.129.7

34.341

45.353.9

60.365.1

74.1

84.9

010203040

5060708090

9 2K 1 2 3 4 5 6 7 8 9 10 11

15 15

(continued)

¡  The total turnover of cargos in harbors is 3.42 billion tons in 2006 and 9.47 billion tons in 2012.

¡  The national highway project “7918” will be

constructed based on the planning of Ministry of Transportation, namely 7 routes radiating centered in Beijing, 9 North-South and 18 East-West rotes cross mainland China, making total mileage of 85000 km. All 319 cities which have population more than 200,000 will be connected in year 2020.

16

0%

20%

40%

60%

80%

100%

1952 1960 1970 1980 1990 2000 2020

Urban Rural

Distribution of Chinese population

17

Total population mn and percentage of senior citizen in China

Year 1950 1960 1970 1980 1990 2000 Total Population 552 662 830 987 1,143 1,273

Population 65 + 2 3.5 4.1 4.9 5.8 7

Year 2010 2020 2030 2033 2050 Total Population 1,300 1,445 1,460 1,500 1,453

Population 65 + 8.7 12 16.2 21 23.1

18

Widening distribution of income between coastal and inland, urban and countryside

¡  The gaps of income between coast areas and inland China are huge and still enlarging. Gini coefficient was 0.28 in early 1980s, increasing to 0.38 in 1995, 0.458 in 2001 and over 0.47 in 2012.

¡  Social stability, comparison between China, India and Brazil (0.515 in year 2008)

¡  Disposable income per person in cities and towns were RMB8472 in 2003, 26955 in year 2013. By contrast, average net income of rural residents was only RMB 2622 in 2003; 8896 in year 2013 .

¡  Social welfare coverage is close to 100% but at very basic level

19

Everlasting unemployment issue ¡  Because of limited arable land, people ages

between 15 to 50 move to cities to find jobs. ¡  Left home ages and children, not only an

economic issue ¡  The hidden unemployment is a serious problem,

but it provides abundant supply of labor. ¡  Supply of employment posts in the near future

should come from the service sectors and near major cities.

¡  The development of Chinese industry has constraint of shortage of skilled labor

20 20

Minimum wage US$

Vietnam 2011 1002 Spain 2010 11426

Indonesia 2011 1027 US 2009 15080

Shanghai 2011 2430 Switzerland 2008 15457

Russia 2008 2812 France 2011 17701

Brazil 2012 4350 Australia 2011 20027

Chile 2010 5484 Denmark 23277

21 21

Employment in Chinese firms, %, 2011

18.6

1.7

59.1

67.6

SOE Collective Corporation FDI Self

22

Profit distribution in Chinese industry, %, 2006

10.3

27.6

62.1

SOE

FDI

others

Profit distribution in Chinese industry, %, 2011

5.8

25.2

69

SOE

FDI

others

23 0

2

4

6

8

10

12

14

16

78 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12 13

Compound growth rate, GDP, %

24

Industrial performance in year 2005 and 2013

¡  Electricity bn KW/hour, 2474.7 to 5397.6, shortage

¡  Coal mn tons, 2190 to 3680, transportation problem, slowing down

¡  Steel mn tons, 352 to 779, over capacity and constrained on ores importing

¡  Cement mn tons,1060 to 2420, pollution ¡  Car million, 5.7 to 22.12, mild growing ¡  Construction value added bn, 690 to 3900,

demands slow in real estate and more on infrastructure

25

(con’t)

¡  Investment for real estate bn, 1543 to 8601, growth rate slowing down

¡  Consumer retail 6718bn to 23781bn, booming sector

¡  Saving in financial institutes 30 trillion to 94.3 trillion, slowdown since year 2010

¡  Money supply of M2 29.9 trillion to 110.7 trillion. hard to get loan

¡  China is facing the threaten of the bubble economy and deflation

26 26

GDP in 2011, where does fuel come from? ¡  GDP = C + I + G + (X – M)=49.1(C+G)+48.3(I)+2.6X ¡  High level of saving in banks, liquidation mismatch

problem, SME is hunger for loan, loan for the poor (Shanghai miracle in the 1920s and Bangladesh country banks)

¡  Insufficient development of financial market, bond and other security markets

¡  Less enthusiasm of consumption ¡  Overheating of regional government investment and

expenditure ¡  Underground economy ¡  Surging in foreign currency reserve, over export and

flowing in speculative money ¡  Price index and interest rate

27 27

29

Continuous growth of Chinese economy

¡  Divergent interests of central government versus regional governments, increasing gaps of development

¡  Potential of the service industry: the road from secondary position to leading sector of GDP; value of emotion and information, from GE to IBM, from physical manufactures to the new economy

¡  Resurging of commodity economy, materials and agriculture and economic products

¡  Further opening up industrial sectors to private and foreign investors

¡  Why do we need a ever growing model, pollution also cost 10% of GDP

30

31

A long way from OEM to ODM and self-owned intellectual property

¡  The cost of intellectual property, barriers for catching up economies, overwhelming patent applications from the overseas

¡  Emerging of ODM in the coast regions ¡  Insufficient input on R & D, case of the

Chinese pharmaceutical industry ¡  Lessons learned from pattern of development

in South American

32 0

0.5

1

1.5

2

2.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

R&D as % of GDP

33

¡  Can growth of Chinese economy rest on soaring prices of raw materials in the global markets?

¡  Sustainability of resource-based model in China

¡  Who enjoys large stake of economic fruits: China, MNCs, developed countries, resource-rich nations?

¡  Political, environment and financial risks and challenge for Chinese firms through mining in the overseas

34 Value composition of Boeing, where exists real value?

35

Global value chain and ladders

¡  Material supplied in resource rich countries ¡  Processing nations ¡  Assembly basis ¡  Call centers ¡  Logistic and harbors ¡  Trading centers ¡  Financial centers, monetary markets: gold,

currency issue and circulation, FX market

36

Global value chain and ladders

¡  R & D centers ¡  Information processing centers: software,

media, culture products ¡  Design centers ¡  Industrial code and standards: visa group ¡  International organization ¡  Value circle, environment friendly

production

37 0

0.5

1

1.5

2

2.5

3

3.5

99 0 1 2 3 4 5 6 7 8 9 10 11 12 13

Chinese domestic visitors, Bn

38

Tourist hotel in China

73588880

975110888

1188812751

13583 14099

0

2000

4000

6000

8000

10000

12000

14000

16000

1 2 3 4 5 6 7 8

39

Chinese energy industry

¡  Choosing a right industry is the key of business success in emerging economies

¡  The energy industry in China: bottleneck or business opportunities

¡  What business opportunities can you observe from the growing demand for energy supply in China: investment for shares listed in the major stock markets, consulting, technology transfer, trading in oil, environment protection?

40 40

Composition of Chinese energy consumption,%

Coal Crude Oil Natural Gas Others

1978 70.3 23.7 2.9 3.1

1995 75.3 16.6 1.9 6.2

2005 77.6 12.0 3.0 7.4

2011 77.8 9.1 4.3 8.8

41 41

China Petroleum Balance Sheet, Mn tons

　

　 1990 1995 2000 2005 2010

Item 　 　 　 　 　

Output 138.3 150.1 163.0 181.4 203.0

Imports 7.6 36.7 97.5 171.6 294.4

Exports (-) 31.1 24.5 21.7 28.9 40.8

42 0

5

10

15

20

25

2K 1 2 3 4 5 6 7 8 9 10 11 12 13

Chinese car output, Mn

43 43

Mobil phone users in China, Mn. Tools of marketing andsocial communication

0.0031.5 2.7 13 34101

206 269340 393

455547

643 692

859986

1112

0

200

400

600

800

1000

1200

87 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12

44

The rapid development of automobile industry,

acceleration of urbanization Cars manufactures have been growing

dramatically ¡  Causing sever problem of traffic congestion. ¡  Lifestyle changing and urban spending ¡  Limited space of parking space in residential

blocks and CBD ¡  Vehicle purchase, tariff and toll gates,

experience in Sydney

45 45

PC output, China, Mn

6.7 8.8 14.6 32.259.7

80.8 93.3120.7 136.7

182.2

245.8

320.4354.1

0

50

100

150

200

250

300

350

400

2K 1 2 3 4 5 6 7 8 9 10 11 12

46

Average residential SQ meter per capita, Shanghai

11.8 12.5 13.1 13.8 14.6 14.9 15.2 15.5 15.9 16.4 16.7 17 17.3

0

5

10

15

20

2k 1 2 3 4 5 6 7 8 9 10 11 12

47 47

Housing price and income ratio in Shanghai Shanghai housing

3326 3659 4007 49806386 6698 7039 8253

13411 14106

22282 22432 21412

14.1 14.2 15.1 16.7 19.1 18 17 17.5

25 24.5

3531

26.6

0

5000

10000

15000

20000

25000

2k 1 2 3 4 5 6 7 8 9 10 11 12

0510152025303540

price per SQ meter set housing price/year family disposable income

Price per SQ meter: Inner circle 55518; middle 29281; out circle 16541

48 48

Chinese residential construction, Bn SQ meters

0.94 1.04 1.14 1.24 1.43 1.66 1.882.26

2.673.12

3.77

4.654.29

0.55 0.57 0.6 0.55 0.57 0.66 0.63 0.69 0.76 0.82 0.87 1.03 0.79

0

1

2

3

4

5

2K 1 2 3 4 5 6 7 8 9 10 11 12

construction completed

49 49

M2, Trillion RMB

3.5 4.7 6.1 7.6 9.110.512 13.515.818.5

22.125.429.934.6

40.347.5

60.672.6

85.297.4

0

20

40

60

80

100

120

3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12

50

Annual Compound growth rate of M2, %

37.334.4

29.625.2

19.6

14.814.712.2

17.616.919.6

14.917.6

15.716.717.8

27.6

19.717.3

14.4

0

5

10

15

20

25

30

35

40

3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12

51

Residential deposit as % of M2

0

10

20

30

40

50

60

3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12

52 52

Interest rate for 1 year deposit saving

3.873.6

2.522.25 2.5 2.75 3 3.25 3.5

00.5

11.5

22.5

33.5

44.5

08.10.9

08.10.30

08.11.27

08.12.23

10.10.20

10.10.26

11.2.9

11.4.6

11.7.7

53

Major facts of FDI in China

¡  Approved FDI firms are over 800,000 and accumulated investment over $1300 bn by the end of March 2013

¡  99.8% of FDI have been approved by regional and local governments, 0.2% by the Ministry of Commerce

54 54

Inflow FDI in China, projects

010000200003000040000

5000060000700008000090000

91 92 93 94 95 96 97 98 99 2k 1 2 3 4 5 6 7 8 9 10 11 12

55 55

Inflow FDI in China, Bn$

0

20

40

60

80

100

120

140

91 92 93 94 95 96 97 98 99 2k 1 2 3 4 5 6 7 8 9 10 11 12

56 56

Inflow FDI in China, Mn$ per project

0

1

2

3

4

5

91 2 3 4 5 6 7 8 9 2k 1 2 3 4 5 6 7 8 9 10 11 12

57

Chinese FX reserves and the end of year in 100 million US$ and growth rate

58 58

Accumulated FDI in Shanghai 311.1 Bn$ at the end of 2010, % by region

HK 29.2

JP 12.4

US 8.4

SG 4.9

GM 4.7

TW 3.6

Others 36.7

59 59

Types of foreign investment in Shanghai %

joint co-op fully own

1990 61 37.9 1.1

1995 54 33.5 11.2

2000 40.9 0.9 49.6

2007 12.1 0.6 87.3

2010 11.4 0.4 88.2

60 60

2009 2011 2009 2011

HK 51 60 US 3 2

Virgin Is 13 9 Cayman 3 2

JP 5 6 Samoan 2 2

EU 6 5 TW 2 2

SG 4 5 other 8 5

SK 3 2

Sources of FDI in China, %

61 61

2006 2011 2006 2011

Manufacturing 63.6 44.9 R&D,

technical serv

0.8 2.1

Real estate 13.1 23.2 Utility 2 1.8

Wholesale & retail 2.8 7.3 Agriculture 1 1.7

Leasing & business 6.7 7.2 Service Household 0.8 1.6

Transportation 3.1 2.8 Financial intermed <0.1 1.6

IT 1.7 2.3 Others 5.4 3.5

FDI in China by sectors, %

0

10

20

30

40

50

60

70

80

90

100

3 4 5 6 7 8 9 10 11 12 13

Chinese outbound FDI, Bn $

63 63

57%

7%

6%

6% 4%

3% 3%

2% 12%

Accumulate Chinese outbound FDI, Bn $ 531.9， 2012

HK EU Virgin Is. Cayman Is Africa US Australia Singapore others

64

Flood in hot money

¡  Overseas mutual funds: strategic moves ¡  Appreciation of RMB: pro and con, but

inevitable, case of investment of water business

¡  High margin of interests between loan and saving account: 3.0% in year 2012

¡  Business reaction: speculation, gamble and investment

¡  Firm’s decision: going to abroad?

65

Chinese invest in the overseas

¡  Property in Hong Kong, Australia, US and Canada

¡  Firms ¡  Resources, forests, oil, mining field ¡  Antiques and art ¡  Labs ¡  Stocks ¡  Wine ¡  Sovereignty debt

66 0

500

1000

1500

2000

2500

8 9 90 1 2 3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12 13

Chinese foreign trade, Bn$

expotrs imports

67 -50

0

50

100

150

200

250

300

350

8 9 90 1 2 3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12 13

Chinese foreign trade, balance, Bn $

68

Understand Chinese traditional and buying behavior

¡  Aesthetics, big is better, auto ¡  Face value, mianzi and courtesy ¡  International homogeneous behavior or

differentiation in local market ¡  Role of family in decision making ¡  Class and status of wealth ¡  Buying behavior of new generation

69

Chinese consumer%, 2012, by Chen Zeqi

91

88

88

82

73

60

56

50

58

68

47

51

31

23

26

19

0 20 40 60 80 100

网上信息 Web inf

口碑 W O mouth

官方网页 Offical Web

店内信息 Shop inf

平面广告 Prit AD

网络广告 Web AD

电视广告 TV AD

直邮电话 Mail/Tel Mrt

Channel use decision base

70 70

Emerging middle class in China ¡  Definition: family annual income RMB80k+ (E

$10k) in year 2012; population is 220m, and expected to 800m and 58% by 2020

¡  Standard of middle class varied significantly between different tiers of cities and regions

¡  Up middle class: ages from 25 to 44; family annual income 120k to 200k (in year 2011), total population reached 13 million in 2011, and 76 million by 2015

71 71

Emerging affluent class and lower middle class in China

¡  Affluent class: family assets for investment annual income is more than 6 million, total population is 2.7 million in year 2012. Their average assets is 50 million, spend 1.5 million in consumption, and average age is 39.

¡  Their demand for banking services are tour, health services and children education.

¡  Population of family assets more than 100 million is estimated 63500.

72 72

Emerging middle class in China ¡  Lower middle class – ignorable consumers: family

annual income 30k to 60k, total population is over 300 million in 2010 and 500 million by 2020

¡  Very fragile to social security, less covered by social welfare, then hesitate to spend money

¡  China is the third largest consumer market, 9% of the world market share; will be the second largest market and 14% in 2015 and 22% in 2020

¡  Residents are willing to consume more in small and medium size cities than in large cities

73

Social class and their income in Shanghai in 2014

¡  Current wages and salaries of employees working in enterprises are as follows (in RMB per month per person):

¡  Senior management personnel 50k and more, ¡  Ordinary management personnel 8k-50k, ¡  Skilled labor 6k-20k ¡  Ordinary labor 1.82k-6k ¡  Social average 4.8k per person

74 74

Cash consumption per capita in city and town, RMB,2011

2510221984 20252 20437

18424 16782 16661

11189 10955 10399

0

5000

10000

15000

20000

25000

30000

Shanghai

Beijing

Guangdong

Zhejaing

Tianjin

Jiangsu

Fujian

Gansu

Qinhai

Tibet

75 75

Mo tor

wash machine

refrigerator

color TV Hifi came

ra

air conditioner

PC mobi le car

2000 18.8 90.5 80.1 117 22.2 38.4 30.8 9.7 19.5 0.5

2008 21.4 94.7 93.6 133 27.4 45.1 95.1 53.8 165.2 6.1

2011 20.1 97.1 97.2 135 24 44.5 122 81.9 205.3 18.6

Chinese household per 100

76

The luxury industry in China: Eden or hell for international corporations?

¡ Second largest market of luxury goods in the world, are expected to reach 30% of the world market in year 2015

¡ Regular buyers are 10 to 13 million in 2005, and 180 million by 2015

¡ Potential in 30 secondary cities ¡ Limitation of growth: less qualified

servants, expensive shops, logistics, cultural difference (Danish china plates)

77

The luxury industry in China: Eden or hell for international corporations?

¡  Cluster of world famous brands ¡ Face value and showing off society ¡ Tax incentives: antique and art works ¡ Gift giving society ¡ Domestic jewelry market is 279 billion

RMB in year 2011, second largest in the world

78

12

26.5

48.3

70

2010 2011 2012 2013

Online imports, Bn RMB

79

0

20

40

60

80

100

120

140

99 0 1 2 3 4 5 6 7 8 9 10 11 12 13

tourists, Mn

overseas visitors Chinese going abroad

80 80

Consumption by tourists in the overseas in year 2012, billion $

Chinese 102（72.6 in 2011）， German 83.8（85.9 in 2011）， American 83.7, British 52.3, Russia 42.8

The World Tourism Organization (UNWTO/OMT)

81

Law of ownership of land ¡  Ownership of land by the State is not affected by the

transfer of land use rights for valuable consideration. ¡  Unless otherwise stated in the grant contract, or

disallowed for planning reasons, the term may be extended on application by the grantee; the land use right may be assigned or mortgaged by the grantee, as well as inherited.

82

The maximum terms for granting of land use right:

For residential purpose 70 years

For industrial purpose 50 years

For the purpose of education, scientific research,

culture, public health and sport 50 years

For commercial, tourism and recreational purpose 40 years

For comprehensive purpose or other use 50 years

83

Sum up ¡  Cultural communication skills, face value and social

contacts ¡  Talent personnel and high turnover ¡  Regional differences, potential in rural areas ¡  Availability of infrastructure ¡  Emerging industries ¡  Increasing labor costs ¡  Opportunities in luxury industries, examples ¡  Branding orientation ¡  From OEM to OBM