Transcript china in the global economy - Financial Executives International

THE RISE OF CHINA
Presented to
Financial Executives International
Orange County Chapter
May 9, 2007
TOPICS
 INTRODUCTION
 POLITICAL SITUATION
 ECONOMIC CONDITION
 FINANCIAL ENVIRONMENT
 CONCLUSION
INTRODUCTION
“It now appears that global stock market
corrections are made in China.”
Stephen Roach of Morgan Stanley
GLOBAL ECONOMY
Revolutionize the relative prices of labor,
capital, goods and assets
 Oil price high, yet no inflation
 Manufactured low-priced goods
 Lid on wages
 Excess liquidity – low interest rates – high
asset prices
 Bond yields low
POLITICAL LEADERS
1949: Chinese Communist Party
 1st generation: Mao Zedong
 2nd generation: Deng Xiaoping (1978-97)
 3rd generation: Jiang Zemin
 4th generation: Hu Jintao (March 2003)
DENG XIAOPING
1978-1997
 Policy of “Socialism with Chinese
Characteristics”
 Economic openness and foreign trade
 Iron grip on politics
 1989: Tiananmen Incident
JIANG ZEMIN
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Prime Minister: Zhu Rongzhi
Role of capitalism
1992: FDI exploded
July 1997: Hong Kong turnover
2001: WTO membership
Open to more foreign investment and trade
Increase the pace of privatization – only a third is under
state controlled
Global economic force - Double its share of global
manufacturing output
HU JINTAO
 Nov 2002: Hu Jintao was named
 Prime Minister: Wen Jiabao
 Steps toward financial transparency
 2008: Olympic games
 2010: Shanghai World Trade
REFORMS
 “Three Representatives” - farmers, workers, and
businessmen to be represented in the CCP
 Freedom of information rule – require
government to make any unclassified info public
w/in 15 days
 Expected to pass a controversial law enshrining
private property rights
 Reduce inequality
DEMOGRAPHY
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Jan 2005: Population 1.3 billion
One Child Policy
Gender: 100 males to 70 females
Middle-class – 25m, just 2% of the population, not big
enough to impact globally
 China’s middle class would soon outnumber US
population
 1970: 80% rural, 50% illiterate
Present: 40% urbanized, 90% literate
MACROECONOMIC DATA
(2006 estimate)
 Inflation rate – 1.5%
 Unemployment rate – 4.2%
 Labor force – 798.1 million
 Agriculture – 45%
 Industry – 24%
 Services – 31%
 GDP growth – 10.5%
 Agriculture – 12.46%
 Industry – 47.28%
 Services – 40.26%
NATIONAL OUTPUT
World’s 4th largest economy (nominal GDP = $2.68 trillion)
Expects GDP to top America by 2027
2nd in Purchasing Power Parity terms = $10 trillion
In just 4 years, China is likely to become #1
GDP per capita (nominal) = $2034 (Rank 105th)
GDP per capita (PPP) = $7593 (Rank 80th)
Wealthiest cities: around $7000 in 2006
US: 1839-86 (double per capita GDP)
China: 1978-87, 1987-96
ECONOMIC CLOUT
 Currency and trade imbalances – source of
political irritations
 Dec 2006 : First semi-annual “Strategic
Economic Dialogue”
 High-level delegation
 US-China mutual interdependence
TRADE
 China’s current account surplus - around 8% of GDP
 2006: US trade deficit in goods reached $836 billion
 Countries/regions that account for most of the deficit:
China ($233 billion)
European Union ($117 billion)
Japan ($88 billion)
 70% of exports from China to the US are being done
by US MNCs
 Exports to China grew by 31.7% to $55.2 billion,
making it the No. 4 destination for U.S. exports
TRADING PARTNERS
(2005)
 Exports = $974 billion f.o.b. (2006)
 US – 21.4%
 Hong Kong – 16.3%
 Japan – 11%
 South Korea – 4.6%
 Germany – 4.3%
 Imports = $777.9 billion f.o.b. (2006)
 Japan – 15.2%
 South Korea – 11.6%
 Taiwan – 11.2%
 U.S. – 7.4%
 Germany – 4.6%
FX RESERVES
China's massive hoard is the result of
 large current-account surplus
 significant inward foreign direct investment
 huge inflows of speculative capital over the past
couple of years
Explosion in reserves creates excess liquidity
 risks fuelling higher inflation
 asset-price bubbles
 imprudent bank lending
LOWER YUAN
By keeping the Yuan down
 China is feeding a trade surplus that is
creating a growing political backlash in
America and Europe
 G7 urged Beijing to let the Yuan rise to help
ease serious "imbalances" in global finance
DOLLAR OR EURO
 About 70% of its FX is invested in dollars,
mainly Treasury securities
 Propped up the dollar and reduced American
bond yields
 Need to diversify reserves out of dollars
 Increase in reserves into euros and emerging
Asian currencies
 Shifting money into euros would push down
the dollar
MANAGED FLOAT
 A big shift out of dollars could push up bond
yields and hence mortgage rates
 Help U.S. manufacturers by raising their
competitors‘ costs
 Pegged to the dollar into ‘managed float’
 Yuan rising at an annual rate of almost 7%
against dollar since September 2006
 On November 13th the yuan hit a new high of
7.864 to the dollar
MARKET
 Population – 1.3 billion
 Rapid urbanization
 Rising standard of living
 Increasing demand for consumer goods
 Think Yao, not Mao
 MNC – imperative to have China strategy
MANUFACTURING
 Cheap labor
 Average factory worker makes $207 a month
 Manufacture simple to sophisticated goods
 Wal-Martization
 Service outsourcing hub
 Intel plans to open a $2.5 billion factory in
Dalian by 2010
FINANCIAL MARKET
 Weakest link
 State-owned banks
 Loans are made on the basis of non-market
considerations
 Banking sector – still murky
 Limits foreign ownership to 25%
 High saving rate explains why deposits have
grown faster than loans
STOCK MARKET
 2007: Open its financial sector to foreign
competition and investment
 Require companies listed in Shanghai and
Shenzhen stock markets to adopt norms
similar to the International Financial
Reporting Standards
 Need foreign expertise and technology to
meet international financing reporting
standards
BANKING SERVICES
 Foreign financial houses spent about $23b to
offer a wide range of banking services –
credit cards, mortgages, personal finance
 More than $1.8 trillion in personal savings -and a savings rate of close to 50% -- could
become the financial market of the 21st
century
OTHER ISSUES
 Corruption
 Lack of transparency
 Intellectual Property Rights
 Underdeveloped legal infrastructure
 China premium (20-30% lower) valuation of
risk
THANK YOU