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How China is Reorganizing the World Economy Mgr. Martin Tomanek From Mao’s Revolution to Modernization • Mao Zedong: The Great Leap Forward and Cultural Revolution unique autarkic, anti-capitalist and anti-market policies 1959–1962: one of the worst famines in human history (over twenty million people died) • • • • China had fought a war with the United States in Korea Military confrontations over the Taiwan Reoccupation of Xinjiang and Tibet Sino-Indian War (1962) Deng Xiaoping: Reform and Opening Up • Radical shifts in policy – e.g. abolition of the commune system in the countryside de facto privatized family farming • China embraced traditional Western economic principles associated with Ricardian theories of comparative advantage development of trading relations • reforms were characterized by gradualism, decentralization and experimentalism • Special Economic Zones FDI by overseas multinational companies (tax holidays,..) • Gradual privatization of the SOEs • 2001: China member of the World Trade Organization Chinese Economy at present • In less than three decades, China has grown from having a negligible role in world trade to being one of the world’s largest exporters and substantial importer of raw materials and goods. • Per capita GDP growth rates have averaged close on 10 % per annum for twenty-five years. • China’s rapid growth since 1980 has allowed more than 400 million of its citizens to pull themselves above the poverty line. China as the world’s largest exporter • In 2009 China surpassed Germany to become the world’s largest exporter. • A large part of Chinese exports involves contracting manufacturing so-called processing trade involves importing inputs into China, which are assembled there and then exported again (classic example: iPhone) • Processing trade accounts for nearly half of China’s exports. Rising Sophistication of China’s Exports The composition of exports by technology intensity, 1995 vs 2007 (in % of total exports) China Japan US EU 15 NMS 12 Latin America NIE ASEAN RoW high-tech 1995 medium low-tech 7% 16% 45% 8% 4% 6% 15% 10% 13% 24% 82% 44% 67% 52% 28% 63% 18% 39% 69% 2% 11% 25% 44% 66% 22% 72% 48% high-tech 2007 medium low-tech 33% 20% 51% 11% 8% 11% 28% 23% 9% 33% 78% 44% 71% 68% 41% 68% 32% 57% 34% 1% 4% 17% 24% 48% 4% 45% 34% Source: own calculations based on COMEXT Latin-America: Mexico, Brazil, Argentina; NIEs:Korea, Singapore, Taiwan; ASEANs: Indonesia, Philippines, Malaysia, Thailand, Vietnam Calculation based on the OECD’s classification of industries by technology intensity. High-tech: pharmaceuticals, office and computer, electrical appliances (radio, TV), medical, optical appliances Medium- tech: basic chemicals, machinery, electrical machinery, transport machinery, rubber and plastic, non-metals, basic and processed metal, Low-tech: food, textile, clothes, footwear paper and furniture, other manufacturing Study of European Central Bank (2011) Conclusions: • China has gained quality competitiveness relative to other competitors since 1995. • The overall quality of China’s exports to EU markets is high relative to other developing economies. • Relative to other competitors, China’s exports are under-priced given their quality level. China is the world’s largest creditor nation • China is the biggest foreign creditor of the USA • Huge trade and current-account surpluses China has accumulated more than 3 trillion dollars in foreign currency reserves! • Most of those reserves are held in dollars investments in Treasury bonds and other dollar-denominated securities • Only U.S. bond market is big and liquid enough to absorb China’s foreign money. • Beijing has tried to diversify its foreign exchange portfolio Acquisition of natural resources, sovereign weatlh fund,.. The vast majority of reserves continue to be destined for U.S. bond market China is the world’s largest creditor nation „Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option . . . . We know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.“ ----- Luo Ping, director-general at the China Banking Regulatory Commission ----- 2% 1% 1% 1% 2% 2% 2% 3% 4% 5% 47% 6% 8% 8% 8% Switzerland Taiwan Caribbean Banking Centers Brazil Oil Exporters Insurance Companies Depository Institutions The United Kingdom U.S. State and Local Governments Mutual Funds Pension Funds Japan Other Investors/Savings Bonds China Federal Reserve and Intragovernmental Holdings How Dangerous Is U.S. Government Debt? • 1961: Belgian economist Robert Triffin described the dilemma faced by the country at the center of the international monetary system • Dilemma: to supply the world’s risk-free asset, the center country must run a current account deficit and in doing so become ever more indebted to foreigners • The world will buy so much of that asset that its issuer will become unsustainably burdened • Endgame to Triffin’s paradox: global sell-off of center country’s securities Higher interest rates (yields) and slower economic growth The Myth of China’s Giant Fiscal Deposits Indian-American economist Jagdish Bhagwati: • The Chinese population is rapidly aging (one-child policy) The Economist: China is still likely to be the first country to grow old before it gets rich • growing need for social security need for huge fiscal reserves • Dani Rodrik: „Domestic consumer [in China] will demand more health care, housing and entertainment – not more steel or electronics...“ • China will not save wealthy Europe!!! • Social security or instability and social unrest! China’s Trade with the World, 2001–2010 ($ billion) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Exports 266 326 438 593 762 969 1218 1431 1202 1578 % change 7 22 35 35 28 27 26 18 -16 31 244 295 413 561 660 792 956 1133 1006 1395 8 21 40 36 18 20 21 19 -11 39 510 621 851 1155 1422 1760 2174 2563 2208 2973 % change 8 22 37 36 23 24 24 18 -14 35 Balance 23 30 26 32 102 178 262 298 196 183 Imports % change Total Source: US-China Business Council China’s Top Trade Partners, 2010 Rank Country/region Volume % change over 2009 1 United States 385 29 2 Japan 298 30 3 Hong Kong 231 32 4 South Korea 207 33 5 Taiwan 145 37 6 Germany 142 35 7 Australia 88 47 8 Malaysia 74 43 9 Brazil 63 48 10 India 62 42 Source: US-China Business Council China’s Top Exports, 2010 ($ billion) HS Commodity description Volume % change over 2009 85 Electrical machinery and equipment 389 29 84 Power generation equipment 310 31 61,62 Apparel 121 21 72,73 Iron and steel 68 44 90 Optics and medical equipment 52 34 94 Furniture 51 30 28,29 Inorganic and organic chemicals 43 35 89 Ships and boats 40 42 87 Vehicles, excluding rail 38 38 10 Footwear 36 27 Source: US-China Business Council