Transcript China

China
Taming the Dragon
A little History…
China Proper was unified for
the first time in 221 B.C.
Once the king of Qin
consolidated his power, he
took the title Shi Huangdi
(First Emperor)
A little History…
To fend off barbarian intrusion
from the north, fortification walls
were connected to make a 5,000kilometer-long great wall. (What
is commonly referred to as the
Great Wall is actually four great
walls rebuilt or extended during
the Western Han, Sui, Jin, and
Ming periods)
A little History…
Genghis Khan (1167?-1227)
supreme leader of all Mongol
tribes invades China in the mid
13th century
Kublai Khan, grandson of
Genghis Khan establishes the
first alien dynasty to rule all
China--the Yuan (1279-1368).
A Little History…
Marco Polo visits China in 1271
A little History…
Emperor Tai Zu, founded the
Ming Dynasty in 1368. He first
applied himself to the task of
expelling the Mongols. The Great
Wall was rebuilt to the form that
we know it today.
The Ming dynasty ended upon the arrival of the
Manchus, who were invited to end a domestic rebellion,
but decided instead to stay and take over the country!
Arrival of the Europeans…
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
The Beginning of Modern
China…
Frequent uprisings and rebellions
ultimately ended the dynastic system.
The republican revolution broke out on
October 10, 1911. On March 10, in
Beijing, Yuan Shikai was sworn in as
provisional president of the Republic of
China
Leaning to one side…
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 (2004): $1.409T (#7)
Population: 1.288B (#1)
GDP per Capita: $1,100
Current Account Balance (% of GDP): 3.2
Annual FDI: $55B
China has become the world’s largest
consumer
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China has accounted for 25-30% of the growth in
total world consumption – most notable raw
materials and energy
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Oil prices have risen as high as $59
The index of metals prices is up 50% over last year
Shipping activity is double what it was last year
Recently, China outspent the US in virtually every
commodity!!
Modern Day China…
3%
14%
12%
34%
40%
52%
Agriculture
Services
Manufacturing
52%
Consumption
Government
Investment
Net Exports
Economic Growth (% Annual)
12
10
8
6
4
2
0
Agriculture
Manufacturing
Services
Aggregate
Economic Growth (% Annual)
30
25
20
15
10
5
0
Consumption
Government
Investment
Import/Export
Problem: Is growth measured correctly
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Many industries are still using 1980 as a base
year for calculating prices. Due to a large
drop in industrial prices, this will understate
inflation (overstate real output)
Most industrial sectors have incentives to
overstate output.
These two effects combined result in a 1.52% overstatement of real output growth
The Chinese Economy
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Nominal GDP in China has averaged 9% real
growth over the last 15 years
Inflation is heading towards 6%
Credit/GDP has almost doubled to 166% over
the last year
The one year lending rate is around 5%
Negative Real Interest Rates
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The real (inflation
adjusted) interest
rate is equal to the
nominal interest rate
minus the inflation
rate.
Negative Real Interest Rates Destabilize
the Economy
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A “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: 9.1%
Negative Real Interest Rates
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Low or negative real interest rates promote
borrowing and artificially inflate investment
(including residential) – eventual oversupply,
excess capacity and falling prices causes debt
defaults
Rapid investment creates supply bottlenecks
that contribute to inflation – with wages unable to
keep up, average purchasing power drops as
wealth is redistributed to those few who borrow
money.
Why is China keeping interest rates so low?
Pegging the Yuan
8.28 Yuan = $1
People’s Bank of China
Assets
Liabilities
$900B (Foreign Reserves
$5B (Gold)
296B Yuan (Gov’t Bonds)
2.3T Yuan (Currency)
7.8T Yuan (Total Assets)
7.8T Yuan (Total Liabilities)
($940 Billion)
($940 Billion)
3.3T Yuan (Reserve)
2.0T Yuan (Other)
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!
Is China Slowing Down?
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Second quarter GDP in China was reported
to be 9.7%
Industrial production is still growing at 12%
(well above the long run trend of 8-10%)
Fixed investment 25% - down from its peak of
53%
Inflation is still around 5-6%
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 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 ?
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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
Country
Taiwan
Korea
ASEAN
Trade Deficit (B)
$31.5
$13.1
$7.6
Japan
$5.0
Could China’s Trade Position Reverse
itself ?
China’s trade
surplus has
shrunk since
1996
Is all this starting to sound
familiar?
•Persistent inflation
•High Money Growth
Bad Policy
•Low Economic Growth
•Large Deficits
•Public
•Private
Just the facts
ma’am.
•Political Events
Bad Luck
•Natural Disasters
•Market Sentiment
China has an “Ace” up it’s sleeve!
Most of China’s capital inflow is FDI (US
companies setting up subsidiaries). IF
economic conditions change, FDI is not easy
to reverse quickly.