Transcript China

China
Should we fear the red
dragon?
China first entered the international stage in the 1800s. There was
increasing European demand for tea, silk, and porcelain from China, but
the Chinese didn’t want anything the Europeans had to offer ….the
problems was solved by including India
Tea, Silk
Textiles
Cotton
Opium
The emperor tried to end
the opium trade by seizing
opium imports. The
British responded by
crushing the Chinese (the
Opium War) – The British
were awarded the island of
Hong Kong
A left turn
On October 1, 1949, the People's
Republic of China was formally
established, with its national
capital at Beijing. The country
was led by the Chinese
Communist Party under the
Chairmanship of Mao Zedong
China adopted “Five Year Plans” to achieve industrialization and
agricultural collectivism. The most noted of these plans was the
“Great Leap Forward” which was a disaster!
Modern Day China…
Hu Jintao became head of China's ruling Communist
Party in late 2002
GDP (2005): $8.182T (#4)
Population: 1.314B (#1)
GDP per Capita: $6,300
GDP Growth: 9.7%
Trade Position: $120B Surplus (1.47% of GDP)
Gross Investment: $3.567T (43% of GDP)
By far, the fastest growing sector in China is
manufacturing
12
10
8
6
4
2
0
Agriculture
Manufacturing
Services
Aggregate
The largest growing component of the Chinese economy is its
external accounts (import & exports). This is not by accident, but by
design.
30
25
20
15
10
5
0
Consumption
Government
Investment
Import/Export
The Chinese are spending like drunken sailors!
 China has accounted for 25-30% of the growth in
total world consumption – most notable raw
materials and energy
 Oil prices have risen as high as $72
 The index of metals prices is up 50% over last year
 Shipping activity is double what it was last year
In recent years, China outspent the US in virtually every
commodity!!
The “neutral” rate if interest is defined as the interest rate that
maintains full employment without accelerating inflation
The “neutral” real interest rate should be approximately
equal to the rate of productivity growth plus the rate of
labor growth
Official Output Growth: 9.7%
Capital Growth: 5.5%
Labor Growth: 1.1%
TFP (Productivity Growth): 3%
Inflation = 6%
Implied “Neutral” Interest
Rate: 10.1%
The one year lending rate in China is currently around 5%. Note that with a
6% interest rate, the real (inflation adjusted) interest rate is negative!!
The Chinese are spending like drunken sailors!
Low or negative real interest
rates promote excessive
borrowing and artificially inflate
investment. The eventual
excess capacity causes falling
prices and debt defaults
Rapid investment creates
supply bottlenecks that
contribute to inflation – with
wages unable to keep up.
Why is China keeping interest
rates so low?
To promote exports, China has followed a system of pegging their
currency to the dollar. To keep the Yuan weak, the Chinese continue to
buy US Treasuries. They currently own about $609B. (They increased
their holdings by $100B in the last year!
8.19 Yuan = $1
People’s Bank of China
Assets
$900B (Foreign Reserves
$5B (Gold)
296B Yuan (Gov’t Bonds)
Liabilities
2.3T Yuan (Currency)
3.3T Yuan (Reserve)
2.0T Yuan (Other)
7.8T Yuan (Total Assets)
7.8T Yuan (Total Liabilities)
($953 Billion)
($940 Billion)
Is the Red Dragon Heading for Trouble?
Recent Productivity gains (with the exception
of Telecommunications) is less than stellar!
Year
Total Factor Productivity Growth
1991
Agriculture
Industry
Construction
Transportation Services
1992
-2%
9%
35%
-16%
10%
1993
-1%
8%
30%
-11%
7%
1994
0%
6%
24%
-5%
4%
1995
1%
4%
18%
1%
1%
1996
3%
2%
13%
6%
-2%
1997
4%
1%
7%
12%
-5%
1998
5%
-1%
2%
17%
-8%
The Red are in the Red!
Government Deficit (% of GDP)
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1983
1993
2002
2003
China’s Financial System is Extremely
Fragile!
The Chinese financial system is dominated by
four state run banks
According to Beijing, the NPL (non-performing loans) ratio
of the Big Four state banks is 30% of assets
More objective private financial analysts say NPLs
represent 50% of the total assets of the Big Four banks
Fitch IBCA and Moody's say the Big Four state banks are
technically insolvent.
Could China’s Trade Position Reverse
itself ?


Entry into the WTO has forced China to slash trade barriers
China operates as an “assembly line” economy. It imports
components and puts them together to sell to the west as finished
goods – no recognizable brand names
Country
Taiwan
Korea
ASEAN
Japan
Trade Deficit (B)
$31.5
$13.1
$7.6
$5.0
Could China’s Trade Position Reverse
itself ?
China’s trade
surplus has
shrunk since
1996
Much of China’s growth is a result of imported foreign capital. If economic
conditions in China start to turn, those capital flows will reverse themselves.
•Persistent inflation
•High Money Growth
Bad Signs
•Low Economic Growth
•Large Deficits
•Public
•Private
Just the
facts
ma’am.
Luckily, most of China’s capital inflow is
FDI (US companies setting up
subsidiaries). IF economic conditions
change, FDI is not easy to reverse
quickly.