1 understanding chinese economy professor jianwei wu tongji university 2014
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1
Understanding Chinese economy
Professor JIANWEI WU
TONGJI University
2014
33
Chinese economic features
Fastest growing economy in the world, GDP much larger than GNP, thanks for FDI
Save more, invest more and consumer less Hundreds million people swing between the
East and West regions, or on the way A poor developing country with huge amount
USD reserves, GDP per capita ranks the poorest 30%, while foreign currency reserve reached 3.82 trillion USD on 31, 2013
No luxury brand is designed by Chinese, most of them made in China and half of them shipped back to China
44
Chinese economic features
One of the most polluted countries managed to produce solar and wind generators
A socialist country trapped in monopoly industries, struggling to build market system
GDP per capita is $6920 in 2013 Four wheels of the economy: cheap labor,
open door policy, reform, urbanization;
energy driven: from high saving rate to high rate of investment
55
Introduction of Chinese macroeconomic environment, political factor
Earliest market regime in the world Property heritage system formed an inward
looking society Emperors Wen and Jing only taxed 1/15 to
1/30 of people’s income Leading roles of Chinese Communism party
can be found in the various administration levels, real decision makers
State and regional governments regulate economic affairs and share tax revenue – 49.4% to 50.6% in year 2012.
6
Major sources of tax revenue China, Bn yuan
Year Total
Domestic Business Domestic CorporateIndivid
ual
Value-added
TaxConsump
tionTariffs Income Income
Tax Tax Tax Tax
2003 2002 724 284 118 92 292 142
2006 3480 1278 513 189 114 704 245
2009 5952 1848 901 476 148 1154 395
20121172
52641.5 1575 788 437 1965 582
7
0
2
4
6
8
10
12
14
9 2K 1 2 3 4 5 6 7 8 9 10 11 12
Fiscal balance, trillion RMB
expenditure
revenue
88
Extra 30% from selling land!Tax revenue as % GDP, Chi na
11. 9 12. 7 14 14. 7 14. 716. 1 16. 8 17. 8
19. 8 19. 2 20. 4 19. 4 19 19. 4
0
5
10
15
20
25
99 2K 1 2 3 4 5 6 7 8 9 10 11 12
Governments get 30% extra revenue from selling land
9
Economic and social factor of urbanization and mega cities
Economy of scale, scope, industrial cluster and economic networking
High value added industry in CBD: finance, services and entertainment
Face to face communication (dating and appointment), emotional needs, social networking
Tank of skills and talents Employment and recruitment opportunities
1010
Cardinal challenges and opportunities to modern
Chinese economy are urbanization and employment
Up to 53.7% of residents are categorized as city and town citizens and 46.3% as farmers, respectively in 2012. Hundred million youth migrates from inland China, particularly countryside to cities and coast areas, looking for jobs.
More than 60% of the Chinese will be settled in urban area by year 2020. Therefore, there have to be enough jobs, shelters and infrastructure to accommodate new immigrates.
Number of cities with one million or more population are 150 in China in 2010.
11
Labor force and employment
Working forces (age between 15-64) was 644 million in 1980 and 941 million in the peak year 2011. Labor force shrink 3.5 million since 2012.
The ratios of labor to total population are:1980 64.4%; 2009 72.4%; 2030 67.4%; 2050 63%
12
Urbanization and road communication in China
Rapid train system, over 10000 Km and competing with airlines
1313
Hi ghway, Chi na, Mn Km
1. 35 1. 41. 7 1. 77 1. 81 1. 87
3. 35 3. 46 3. 58 3. 73 3. 86 4. 01 4. 11
00. 5
11. 5
22. 5
33. 5
44. 5
9 2K 1 2 3 4 5 6 7 8 9 10 11
14
Expressway, Chi na, 1000Km
11. 616. 3 19. 4
25. 129. 7 34. 3
41 45. 353. 9
60. 365. 1
74. 184. 9
0102030405060708090
9 2K 1 2 3 4 5 6 7 8 9 10 11
1515
(continued)
The total turnover of cargos in harbors is 3.42 billion tons in 2006 and 9.47 billion tons in 2012.
The national highway project “7918” will be
constructed based on the planning of Ministry of Transportation, namely 7 routes radiating centered in Beijing, 9 North-South and 18 East-West rotes cross mainland China, making total mileage of 85000 km. All 319 cities which have population more than 200,000 will be connected in year 2020.
16
0%
20%
40%
60%
80%
100%
1952 1960 1970 1980 1990 2000 2020
Urban Rural
Distribution of Chinese population
17
Total population mn and percentage of senior citizen in China
Year195
01960 1970 1980 1990
2000
Total Population
552 662 830 987 1,1431,27
3
Population 65 +
2 3.5 4.1 4.9 5.8 7
Year201
02020 2030 2033 2050
Total Population
1,300
1,445 1,460 1,500 1,453
Population 65 +
8.7 12 16.2 21 23.1
18
Widening distribution of income between
coastal and inland, urban and countryside The gaps of income between coast areas and
inland China are huge and still enlarging. Gini coefficient was 0.28 in early 1980s, increasing to 0.38 in 1995, 0.458 in 2001 and over 0.47 in 2012.
Social stability, comparison between China, India and Brazil (0.515 in year 2008)
Disposable income per person in cities and towns were RMB8472 in 2003, 26955 in year 2013. By contrast, average net income of rural residents was only RMB 2622 in 2003; 8896 in year 2013 .
Social welfare coverage is close to 100% but at very basic level
19
Everlasting unemployment issue
Because of limited arable land, people ages between 15 to 50 move to cities to find jobs.
Left home ages and children, not only an economic issue
The hidden unemployment is a serious problem, but it provides abundant supply of labor.
Supply of employment posts in the near future should come from the service sectors and near major cities.
The development of Chinese industry has constraint of shortage of skilled labor
2020
Minimum wage US$Vietnam 2011
1002 Spain 2010 11426
Indonesia 2011
1027 US 2009 15080
Shanghai 2011
2430Switzerland 2008
15457
Russia 2008 2812France 2011
17701
Brazil 2012 4350Australia2011
20027
Chile 2010 5484 Denmark 23277
2121
Empl oyment i n Chi nese fi rms, %, 2011
18. 6
1. 7
59. 1
6 7. 6
SOE Col l ect i ve Corporat i on FDI Sel f
22
Profi t di st r i but i on i n Chi nese i ndust ry, %, 2006
10. 3
27. 6
62. 1
SOEFDIothers
Profi t di st r i but i on i n Chi nese i ndust ry, %, 2011
5. 8
25. 2
69
SOEFDIothers
23
24
Industrial performance in year 2005 and 2013
Electricity bn KW/hour, 2474.7 to 5397.6, shortage
Coal mn tons, 2190 to 3680, transportation problem, slowing down
Steel mn tons, 352 to 779, over capacity and constrained on ores importing
Cement mn tons,1060 to 2420, pollution Car million, 5.7 to 22.12, mild growing Construction value added bn, 690 to 3900,
demands slow in real estate and more on infrastructure
25
(con’t)
Investment for real estate bn, 1543 to 8601, growth rate slowing down
Consumer retail 6718bn to 23781bn, booming sector
Saving in financial institutes 30 trillion to 94.3 trillion, slowdown since year 2010
Money supply of M2 29.9 trillion to 110.7 trillion. hard to get loan
China is facing the threaten of the bubble economy and deflation
2626
GDP in 2011, where does fuel come from? GDP = C + I + G + (X – M)=49.1(C+G)+48.3(I)+2.6X High level of saving in banks, liquidation mismatch problem,
SME is hunger for loan, loan for the poor (Shanghai miracle in the 1920s and Bangladesh country banks)
Insufficient development of financial market, bond and other security markets
Less enthusiasm of consumption Overheating of regional government investment and expenditure Underground economy Surging in foreign currency reserve, over export and flowing in
speculative money Price index and interest rate
2727
29
Continuous growth of Chinese economy
Divergent interests of central government versus regional governments, increasing gaps of development
Potential of the service industry: the road from secondary position to leading sector of GDP; value of emotion and information, from GE to IBM, from physical manufactures to the new economy
Resurging of commodity economy, materials and agriculture and economic products
Further opening up industrial sectors to private and foreign investors
Why do we need a ever growing model, pollution also cost 10% of GDP
30
31
A long way from OEM to ODM and self-owned intellectual property
The cost of intellectual property, barriers for catching up economies, overwhelming patent applications from the overseas
Emerging of ODM in the coast regions Insufficient input on R & D, case of the
Chinese pharmaceutical industry Lessons learned from pattern of development
in South American
32
R&D as % of GDP
33
Can growth of Chinese economy rest on soaring prices of raw materials in the global markets?
Sustainability of resource-based model in China
Who enjoys large stake of economic fruits: China, MNCs, developed countries, resource-rich nations?
Political, environment and financial risks and challenge for Chinese firms through mining in the overseas
34Value composition of Boeing, where exists real value?
35
Global value chain and ladders
Material supplied in resource rich countries Processing nations Assembly basis Call centers Logistic and harbors Trading centers Financial centers, monetary markets: gold,
currency issue and circulation, FX market
36
Global value chain and ladders
R & D centers Information processing centers: software,
media, culture products Design centers Industrial code and standards: visa group International organization Value circle, environment friendly
production
37
38
Tour i st hotel i n Chi na
73588880
975110888
1188812751
13583 14099
0
20004000
60008000
10000
1200014000
16000
1 2 3 4 5 6 7 8
39
Chinese energy industry
Choosing a right industry is the key of business success in emerging economies
The energy industry in China: bottleneck or business opportunities
What business opportunities can you observe from the growing demand for energy supply in China: investment for shares listed in the major stock markets, consulting, technology transfer, trading in oil, environment protection?
4040
Composition of Chinese energy consumption,%
Coal Crude Oil Natural Gas Others
1978 70.3 23.7 2.9 3.1
1995 75.3 16.6 1.9 6.2
2005 77.6 12.0 3.0 7.4
2011 77.8 9.1 4.3 8.8
4141
China Petroleum Balance Sheet, Mn tons
1990 1995 2000 2005 2010
Item
Output 138.3 150.1 163.0 181.4 203.0
Imports 7.6 36.7 97.5 171.6 294.4
Exports (-) 31.1 24.5 21.7 28.9 40.8
42
4343
Mobi l phone users i n Chi na, Mn. Tool s of market i ng andsoci al communi cat i on
0. 0031. 5 2. 7 13 34 101206 269
340 393 455547
643 692859
9861112
0
200
400
600
800
1000
1200
87 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12
44
The rapid development of automobile industry,
acceleration of urbanization
Cars manufactures have been growing dramatically
Causing sever problem of traffic congestion. Lifestyle changing and urban spending Limited space of parking space in residential
blocks and CBD Vehicle purchase, tariff and toll gates,
experience in Sydney
4545
PC output , Chi na, Mn
6. 7 8. 8 14. 6 32. 259. 7
80. 8 93. 3120. 7136. 7
182. 2
245. 8
320. 4354. 1
050
100150200250300350400
2K 1 2 3 4 5 6 7 8 9 10 11 12
46
Average resi dent i al SQ meter per capi ta, Shanghai
11. 8 12. 5 13. 1 13. 8 14. 6 14. 9 15. 2 15. 5 15. 9 16. 4 16. 7 17 17. 3
0
5
10
15
20
2k 1 2 3 4 5 6 7 8 9 10 11 12
4747
Housing price and income ratio in ShanghaiShanghai housing
3326 3659 4007 49806386 6698 7039 8253
13411 14106
22282 22432 21412
14.1 14.2 15.1 16.719.1 18 17 17.5
25 24.5
3531
26.6
0
5000
10000
15000
20000
25000
2k 1 2 3 4 5 6 7 8 9 10 11 12
0510152025303540
pr i ce per SQ meter set housi ng pr i ce/ year f ami l y di sposabl e i ncome
Price per SQ meter: Inner circle 55518; middle 29281; out circle 16541
4848
Chi nese resi dent i al const ruct i on, Bn SQ meters
0. 94 1. 04 1. 14 1. 24 1. 43 1. 66 1. 882. 26
2. 673. 12
3. 77
4. 654. 29
0. 55 0. 57 0. 6 0. 55 0. 57 0. 66 0. 63 0. 69 0. 76 0. 82 0. 87 1. 03 0. 79
0
1
2
3
4
5
2K 1 2 3 4 5 6 7 8 9 10 11 12
const ruct i on compl eted
4949
M2, Tr i l l i on RMB
3. 54. 7 6. 17. 69. 110. 512 13. 515. 818. 522. 125. 429. 934. 640. 347. 5
60. 672. 6
85. 297. 4
0
20
40
60
80
100
120
3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12
50
Annual Compound growth rate of M2, %
37. 334. 4
29. 625. 2
19. 614. 814. 7
12. 2
17. 616. 919. 6
14. 917. 615. 716. 717. 8
27. 6
19. 717. 3
14. 4
05
10152025303540
3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12
51
Resi dent i al deposi t as % of M2
0
10
20
30
40
50
60
3 4 5 6 7 8 9 2K 1 2 3 4 5 6 7 8 9 10 11 12
5252
I nterest rate f or 1 year deposi t savi ng
3. 87 3. 6
2. 52 2. 25 2. 5 2. 75 3 3. 25 3. 5
00. 5
11. 5
22. 5
33. 5
44. 5
53
Major facts of FDI in China
Approved FDI firms are over 800,000 and accumulated investment over $1300 bn by the end of March 2013
99.8% of FDI have been approved by regional and local governments, 0.2% by the Ministry of Commerce
5454
I nfl ow FDI i n Chi na, proj ects
0100002000030000400005000060000700008000090000
91 92 93 94 95 96 97 98 99 2k 1 2 3 4 5 6 7 8 9 10 11 12
5555
I nfl ow FDI i n Chi na, Bn$
0
20
40
60
80
100
120
140
91 92 93 94 95 96 97 98 99 2k 1 2 3 4 5 6 7 8 9 10 11 12
5656
I nfl ow FDI i n Chi na, Mn$ per proj ect
0
1
2
3
4
5
91 2 3 4 5 6 7 8 9 2k 1 2 3 4 5 6 7 8 9 10 11 12
57
Chinese FX reserves and the end of year in 100 million US$ and growth rate
5858
5959
Types of foreign investment in Shanghai %
joint co-op fully own
1990 61 37.9 1.1
1995 54 33.5 11.2
2000 40.9 0.9 49.6
2007 12.1 0.6 87.3
2010 11.4 0.4 88.2
6060
2009 2011 2009 2011
HK 51 60 US 3 2
Virgin Is 13 9Cayman
3 2
JP 5 6Samoan
2 2
EU 6 5 TW 2 2
SG 4 5 other 8 5
SK 3 2
Sources of FDI in China, %
6161
2006 2011 2006 2011
Manufacturing 63.6 44.9R&D,
technical serv
0.8 2.1
Real estate 13.1 23.2 Utility 2 1.8
Wholesale & retail
2.8 7.3Agricultur
e1 1.7
Leasing & business
6.7 7.2Service
Household
0.8 1.6
Transportation 3.1 2.8Financial intermed
<0.1 1.6
IT 1.7 2.3 Others 5.4 3.5
FDI in China by sectors, %
6363
64
Flood in hot money
Overseas mutual funds: strategic moves Appreciation of RMB: pro and con, but
inevitable, case of investment of water business
High margin of interests between loan and saving account: 3.0% in year 2012
Business reaction: speculation, gamble and investment
Firm’s decision: going to abroad?
65
Chinese invest in the overseas
Property in Hong Kong, Australia, US and Canada
Firms Resources, forests, oil, mining field Antiques and art Labs Stocks Wine Sovereignty debt
66
67
68
Understand Chinese traditional and buying behavior
Aesthetics, big is better, auto Face value, mianzi and courtesy International homogeneous behavior or
differentiation in local market Role of family in decision making Class and status of wealth Buying behavior of new generation
69
Chi nese consumer%, 2012, by Chen Zeqi
91
88
88
82
73
60
56
50
58
68
47
51
31
23
26
19
0 20 40 60 80 100
Web i nf网上信息 W O mouth口碑
Offi cal Web官方网页
Shop i nf店内信息 Pri t AD平面广告
Web AD网络广告
TV AD电视广告 Mai l / Tel Mrt直邮电话
Channel use deci si on base
7070
Emerging middle class in China Definition: family annual income RMB80k+
(E$10k) in year 2012; population is 220m, and expected to 800m and 58% by 2020
Standard of middle class varied significantly between different tiers of cities and regions
Up middle class: ages from 25 to 44; family annual income 120k to 200k (in year 2011), total population reached 13 million in 2011, and 76 million by 2015
7171
Emerging affluent class and lower middle class in China
Affluent class: family assets for investment annual income is more than 6 million, total population is 2.7 million in year 2012. Their average assets is 50 million, spend 1.5 million in consumption, and average age is 39.
Their demand for banking services are tour, health services and children education.
Population of family assets more than 100 million is estimated 63500.
7272
Emerging middle class in China
Lower middle class – ignorable consumers: family annual income 30k to 60k, total population is over 300 million in 2010 and 500 million by 2020
Very fragile to social security, less covered by social welfare, then hesitate to spend money
China is the third largest consumer market, 9% of the world market share; will be the second largest market and 14% in 2015 and 22% in 2020
Residents are willing to consume more in small and medium size cities than in large cities
73
Social class and their income in Shanghai in 2014
Current wages and salaries of employees working in enterprises are as follows (in RMB per month per person):
Senior management personnel 50k and more, Ordinary management personnel 8k-50k, Skilled labor 6k-20k Ordinary labor 1.82k-6k Social average 4.8k per person
7474
Cash consumpt i on per capi ta i n ci ty and town, RMB, 2011
2510221984 20252 20437 18424 16782 16661
11189 10955 10399
05000
1000015000200002500030000
7575
Motor
wash machine
refrigerator
color TV
Hificamera
air conditioner
PCmobile
car
2000
18.8 90.5 80.1 117 22.2 38.4 30.8 9.7 19.5 0.5
2008
21.4 94.7 93.6 133 27.4 45.1 95.1 53.8165.
26.1
2011
20.1 97.1 97.2 135 24 44.5 122 81.9205.
318.6
Chinese household per 100
76
The luxury industry in China: Eden or hell for international corporations?
Second largest market of luxury goods in the world, are expected to reach 30% of the world market in year 2015
Regular buyers are 10 to 13 million in 2005, and 180 million by 2015
Potential in 30 secondary citiesLimitation of growth: less qualified
servants, expensive shops, logistics, cultural difference (Danish china plates)
77
The luxury industry in China: Eden or hell for international corporations?
Cluster of world famous brandsFace value and showing off societyTax incentives: antique and art worksGift giving societyDomestic jewelry market is 279 billion
RMB in year 2011, second largest in the world
78
79
8080
Consumption by tourists in the overseas in
year 2012, billion $
Chinese 102 （ 72.6 in 2011），German 83.8 （ 85.9 in 2011），American 83.7, British 52.3, Russia 42.8
The World Tourism Organization (UNWTO/OMT)
81
Law of ownership of land
Ownership of land by the State is not affected by the transfer of land use rights for valuable consideration.
Unless otherwise stated in the grant contract, or disallowed for planning reasons, the term may be extended on application by the grantee; the land use right may be assigned or mortgaged by the grantee, as well as inherited.
82
The maximum terms for granting of land use right:
For residential purpose 70 years
For industrial purpose 50 years
For the purpose of education, scientific research,
culture, public health and sport 50 years
For commercial, tourism and recreational purpose40
years
For comprehensive purpose or other use 50 years
83
Sum up
Cultural communication skills, face value and social contacts
Talent personnel and high turnover Regional differences, potential in rural areas Availability of infrastructure Emerging industries Increasing labor costs Opportunities in luxury industries, examples Branding orientation From OEM to OBM