Transcript Document

China: Macroeconomic Cycles
and Impact on World Economies
Todd C. Lee
Managing Director
Asia Macroeconomics Group
Global Insight Forum
Atlanta Breakfast Seminar
May 11, 2004
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China 2003 Report Card
 Macroeconomic Performance




Real GDP rose 9.1%
Industrial production up 12.6%
Fixed investment up 26.7%
Trade up 37.1%--exports 34.6%, imports 39.9%
 Microeconomic Impact
 Steel imports up 52% (world’s #1 steel importer); Consumed
33% of world finished steel
 Crude oil import up 31% (world’s #2 crude oil demand)
 Consumed 50% of world cement production
 Passenger car production rose 85%
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Presentation Outline
 Why China is having such impact?
 Size, policy, and growth matter
 Supply side impact
 Demand side impact
 China’s impact is accentuated with each up-cycle
 Driving force behind China’s macro cycles
 Is this current cycle different?
 How will it end?
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China’s Market Reform Marked by Openness to
Trade Policy
(Percent, share of nominal GDP)
40
30
20
10
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Exports
Imports
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Tariff Reduction Already Substantial
(Average tariffs, percent)
60
55.6
50
43.3
40
43.7
44.1
43.2
39.9
35.9
30
23.0
20
17.0
16.4
15.3
9.7
10
0
1982 1985 1988 1991 1992 1993 1994 1996 1997 2000 2001 2005
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Supply Side Impact
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China’s Manufacturing Wage Competitiveness
(Manufacturing wages, $ per hour, 2001)
Japan
United States
Europe
Singapore
Korea
Taiwan
Mexico
Brazil
China Hi (Shanghai)
China (National)
United States: $16.14
China: $0.66
Shanghai: $1.26
0
2
4
6
8
10
12
14
16
18
Sources: U.S. Bureau of Labor Statistics, China’s National Bureau of Statistics
China data are 2002 wage rates
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China’s Human Capital Quality – Size Matters
China
U.S.
Literacy Rate
86%
97%
High School Graduates (aged 25+)
18%
84%
(232 mil.)*
(245 mil.)*
5%
26%
(65 mil.)*
(76 mil.)*
5.6
54.1
(7.2 mil.)*
(15.8 mil.)*
College Graduates (aged 25+)
University Students (per 1,000 people)
Source: Federal Reserve Bank of Dallas, Southwest Economy, Sept./Oct. 2003
* Absolute level
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China Becomes FDI Magnet Due to WTO Entry
(Percent of Japanese multi-national corp. finding country as favorable FDI destination)
Rank
2000 Survey
Ratio
2001 Survey
Ratio
1
2
3
4
5
6
7
8
9
10
China
U.S.
Thailand
Indonesia
Malaysia
Taiwan
India
Vietnam
Korea
Philippines
65
41
24
15
12
11
10
9
9
8
China
U.S.
Thailand
Indonesia
India
Vietnam
Taiwan
Korea
Malaysia
Singapore
82
32
25
14
13
12
11
8
8
6
Source: United Nations Conference on Trade and Development (2002)
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China Trade’s Sharp Rise after WTO Entry
(Billions of U.S. dollars)
50
40
30
20
10
WTO
Entry
0
1999
2000
2001
Imports
2002
2003
Exports
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China Becomes Asia’s Export Platform after WTO
(Monthly trade balance, billions of U.S. dollars)
8
6
4
2
0
-2
WTO
Entry
-4
-6
1999
2000
Japan
2001
Asia Excl. Japan
2002
United States
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2003
European Union
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Demand Side Impact
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China Already a Major Import Market by 2002
(Billions of U.S. dollars)
11. China (domestic)
10. Netherlands
9. Belgium
8. Canada
7. Italy
6. China
5. France
4. Japan
3. UK
2. Germany
1. USA
173
295
0
200
400
600
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800
1,000
1,200
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China Becoming A Dominant Import Market in 2003
(Billions of U.S. dollars)
10. Hong Kong
9. Belgium
8. Canada
7a. China (Domestic)
7. Italy
6. Japan
5. France
4. UK
3. China
2. Germany
1. USA
250
413
0
200
400
600
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800
1,000 1,200 1,400
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China’s Macro Cycles since Reform Began
(Percent change from a year earlier)
25
20
15
1984
Peak
?
1994
Plateau
1988
Peak
2004
Peak?
10
?
5
?
?
0
-5
1980
?
1985
1990
Real GDP
1995
2000
2005
CPI
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China’s Advancement with Each Cycle
GDP
Per Capita
Imports
Imports
GDP
(Bil. current $)
(current $)
(Bil. current $)
(World rank)
1984
309
298
24
17
1988
401
364
55
11
1994
542
455
116
11
2003
1,564
1,203
413
3
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China’s Vigor/Chaos Cycles
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China’s Current Cycle Tame Compared with Past
(Percent change from a year earlier)
25
24.2
?
19.1
20
15.3
15
?
14.2
12.2 11.6
9.1
10
5
1.2
0
-5
1980
1985
1990
Real GDP
1995
2000
?
?
?
2005
CPI
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Causes of China’s Macroeconomic Cycles
 Gradualist reform creates mismatches between
liberalized and non-liberalized parts of the economy
 Once government partially relaxes control, such
mismatches would generate:
 Excessive growth and growth bottleneck – high growth not
matched in efficiency advancement
 High inflation
 Strain on banking sector – mounting nonperforming loans
 Corruption
 Government then is forced to tighten credit and retrench
liberalization
 Economic hard-landing ensues
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Post Reform Vigor-Chaos Macro Cycles
RETRENCHMENT
STERILITY
CHAOS
LIBERALIZATION
VIGOR
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China’s Macro Cycles in Comparison
Aggregate
demand
dominated by
Possible cause
Policy Response
Landing
 retail sales
 fixed
investment
excessive investment,
wage, and credit
increases
 credit policy tightened
 interest rates increased
soft, but short lived
1986-90
 retail sales
 exports
relaxation of financial
policies in, public
panic buying in
response to admin
price increases
 monetary and credit
policy tightened
 investment reduced
sharply
 price reform halted and
partially reversed
hard
1991-99
 fixed
investment
 retail sales
 exports
investment push by
central and local
authorities
 monetary and credit
policy tightened
 investment growth
gradually lowered
soft (IMF as of 1997).
hard (by 1999)
2003-?
 fixed
investment
 exports
central government
relaxation of credit
expansion
 monetary and credit
policy tightened
 admin crackdown on
overheated sectors
???
Cycle
1982-86
Source: Oppers, Erik S. (1997), “Macroeconomic Cycles in China,” IMF Working Paper 97/135 .
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What Drove The 2003 Cycle?
(Percent change from a year earlier)
2000
Jan.
GDP
Exports
Retail Sales
State Investment
Real 1 Yr Lending Rate (%)
Money Supply (M2)
Loans
2003
Dec.
Sep. 02
8.0
27.9
9.7
9.2
5.50
6.05
9.1
34.6
9.4
28.2
4.60
4.35
6.01
16.1
16.3
2.11*
19.2
15.4
16.6
13.8
12.8
Dec. 03
19.6
19.6
13.4
14.2
21.1
* Hovered above 4% until October 2003.
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Credit Growth Did Not Accelerate until Late 2002
(Monthly data, percent change a year earlier)
30
25
State Investment
Stimulus Began
Political Leadership
Transition Began
12
10
20
8
15
6
10
4
5
2
0
1998
0
1999
2000
2001
Loan (Left Scale)
2002
2003
2004
Real Lending Rate (Right Scale)
Real lending rate equals one year lending rate less CPI inflation.
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But Why Is The Current Cycle So Tame?
(Percent change from a year earlier)
25
24.2
?
19.1
20
15.3
15
?
14.2
12.2 11.6
9.1
10
5
1.2
0
-5
1980
1985
1990
Real GDP
1995
2000
?
?
?
2005
CPI
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But Why Is The Current Cycle So Tame?
 Mismatches between liberalized and non-liberalized
parts of the economy have narrowed
 Domestic demand possesses structural weakness
 Inefficient SOEs’ need to restructure
– Massive layoffs (or the prospect of which) depresses demand
 Structurally flawed financial intermediation
– Non-state investment difficult to be funded through bank
lending—non-state under-investment
– Banks too scared to lend due to banking reforms
– Impact of financial system problem just as serious as SOE
problem, but less publicized and well understood
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Coexistence of “Hot” and “Cold” in China
(Percent change a year earlier)
25
20
15
10
5
0
-5
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Industrial Production
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Jul-03
Jan-04
WPI
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Coexistence of “Hot” and “Cold” in China Part II
(Percent change a year earlier)
60
50
40
30
20
10
0
-10
Jan-01
Jul-01
Jan-02
Exports
Jul-02
Jan-03
Jul-03
Jan-04
Retail Sales
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Saving Deposits’ Rapid Rise Reflects Weak Private
Domestic Demand
(Billion yuan)
(Percent change a year earlier)
12,000
25
10,000
20
8,000
15
6,000
10
4,000
5
2,000
1998
0
1999
2000
Level (Left Scale)
2001
2002
2003
2004
Growth (Right Scale)
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Short-term Macroeconomic Policy Dilemma
 Investment-led overheating
 Overheating in select sectors (e.g. steel, construction)
 Mounting bad loans (surging bank lending to SOEs)
 Corruption
 Persistent deflationary forces
 Excess-capacity, especially in labor (unemployment
continues to climb)
 Private sector under-investment
 Weak consumer demand
 Mounting revaluation pressure on currency
 Growing trade surplus with US
 Surging foreign exchange reserves
 Hot money inflow
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Beijing’s Policy Response and Effectiveness
 Government’s response so far
 Keep fixed exchange rate, while use other means to relieve
revaluation pressure (ongoing)
 Used $45 billion of forex reserves to recap state banks (Dec. 03)
 Raising reserve requirement ratio by 1%, to 7% (Sep. 03)
 Admin crackdown on overheating sectors (late 03)
 Allowing central bank lending rate to float 0.63% above target
(Mar. 04)
 Raising rrr by 0.5% on troubled banks (Mar. 04)
 Harsher admin crackdown on overheating sectors (late Apr. 04)
 Policies ineffective thus far
 Investment surged 43% in 2004 Q1
 Industrial production up 18%
 Money and loan growth remained around 20%
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How Will This Cycle End?
 Moderate policies so far because stability is key to the government
 No need for extreme measures yet because inflation is still tame
 Main concern is wasteful lending’s impact on the banking sector’s bad
loan problem
 Likely additional measures:
 More admin crackdown
 Modest lending rate hike, but no deposit rate increase
 Plug holes from hot money inflow, keep fixed exchange rate policy
 If investment expansion does not slowdown in the next quarter,
Beijing will adopt much harsher measures
 Soft-landing is still the baseline, due to tame inflation
 Hard-landing is possible, but unlikely: will happen if harsh crackdown
coincides with a global recovery retrenchment
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