ted chu nov 0905

04/25/23 China – global interdependence 11 2005.ppt 1Global Market & Industry Analysis

Emerging China:Strength and Weakness

Ted Chu

November 9, 2005


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India Brazil United States

Forecast

Real GDP per capita (1970 = 1)


Total Motor Vehicle Sales(1970 – 2011)

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70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

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Germany

Japan

China

India

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RussiaBrazil


China’s unexpected demand surge was a big reason for doubling oil prices from $30 in 2002 to $60 in 2005

Growth in world oil demand

Rest of the world0.34

8.3%

Middle East 0.18

4.4%

Developing Asia0.60

14.7%

China1.41

34.5%

Europe0.31

7.6%

North America1.25

30.6%

From 2002 to 2004 (% of total growth)Figures on graph show millions of barrels per day (annual

average)World total: 4.09 million barrels per day

Source: IEA - Monthly Oil Market Report (Aug 11, 2005)

Oil imports as % of Global Total(2004)China 6.3Japan 11.3USA 26.9


• Rapid growth is a reflection of China’s openness• Also a reflection of underdeveloped domestic demand

Trade (Exports+Imports) Share of GDP

0%

10%

20%

30%

40%

50%

60%

70%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

China United States

Germany Japan

Brazil India

Source: IMF, national data / Haver Analytics


Globalization of ManufacturingRegional Architecture of Personal Computer Production

United States:Core systems software, specialized chip design

United States:Core systems software, specialized chip design

China and ASEAN:Standardized peripheral equipment, low-end manufacturing

Japan:Key components design and manufacturing

Singapore, South Korea, Taiwan:Peripheral equipment design and semiconductor chip manufacturing

Source: Institute for the Future• China is a low-end link in the global supply chain


Manufacturing Jobs: From US to China?

Manufacturing jobs in China:54m in 1994, 30m in 2004


China’s reserves and U.S. trade deficits

26%25%24%24%22%21%25%33%

41%34%31%28%32%

-900

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700

900

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(e)

Billion, US$

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300%

U.S. Trade Balance: Rest of the World

U.S. Trade Balance: China(Mainland) + HK

China (Mainland): Foreign Exchange Reserves (EOP)

China+HK's share in U.S. Trade Balance

Source:People's Bank of China, U.S. Census Bureau / Haver Analytics


The same story of Japan in the 80s

37% 31%41%

58% 53%34% 30% 37% 40% 37%

-200

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-100

-50

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1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Billion, US$

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100%

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U.S. Trade Balance: Rest of the World

U.S. Trade Balance: Japan

Japan: Foreign Exchange Reserves (EOP)

Japan's share in U.S. Trade Balance

Source: IMF, U.S. Census Bureau / Haver Analytics


American exports to China is growing fastwith much potential ahead

• In 2004, U.S. exports to China totaled $35 billion, nearly double the total for 2001. In fact, from 2001 to 2004, U.S. exports to China increased nearly eight times faster than U.S. exports to the rest of the world. As a result, China rose from our ninth largest export market in 2001 to our fifth largest export market in 2004. During that same time, of course, China's exports to the United States (and to the rest of the world) have also exploded. In 2004, imports from China totaled $197 billion, nearly double the total for 2001, and China is now the United States' second largest supplier.


The Sharp Decline of Term Premium:Fed creditability or China?

Federal Reserve Board paper

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Blue Chip

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar

-90

Mar

-91

Mar

-92

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-93

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-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

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Mar

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Mar

-04

Mar

-05

Source: MacroAdvisors


China: What Westerners think they know

• Fast GDP growth• Industrialization/urbanization• High savings rate• Cheap labor: strong exports

• Strong FDI inflows• Surging demand for energy• Rising education

• Dictator control: stability• WTO market opening• Rising economic power

• Widening inequalities• Environmental pollution• Overinvestment• Mercantilist policies: low RMB

• Serious IPR issues• Aggressive grab of assets• Rapidly aging population

• Human rights violations• Corruption/financial sector mess• Rising military threat/ideological

conflict


The conventional wisdom of China

• China’s chief competitive advantage is its cheap labor– 200 million surplus labor– China has manipulated its currency to keep its costs low

• China will get old before it gets rich– By 2020, the demographic ratio will be the worst in the world

• China is a communist dictator state– Hence its goals are at odds with the democratic West

Like the image of the dragon, this image of China that provokes fear and awe does not exist in reality


Costs and Competitiveness

Expensive and Competitive

United StatesUnited Kingdom

Australia

South Korea

Inexpensive and Competitive

China, India, ThailandRomania, Czech Rep.

Russia, South Africa

Expensive and Uncompetitive

GermanyItaly

Japan

Inexpensive and Uncompetitive

Most African countries Argentina, Peru, Uruguay


The Schumpeterian World


New Meiji: China’s massive import of ideas• International accounting standards• British, U.S., and Hong Kong security laws• French military acquisition systems• A central bank modeled after the Fed• Exchange rate system modeled after Singapore• Regulation for foreign portfolio investment like Taiwan• Environmental regulations after Western Europe

• The elite has adopted English as their second language• Education abroad is comparable to the Romans turning over

their children to the Greeks

• First and foremost, China views the U.S. as the role model

Source: Rand


China’s Global Integration and Resistance

BarriersHuman movement

Language / CulturalSpecial interest groups

National interest

International threatHunger for energy

rising military power

Ideas“Spiritual pollution”

ExportsFX, market opening

Anti-dumping

Foreign Direct InvestmentIntellectual property rights

Market opening

China Rest of the world


Conclusions

• China’s strength is not cheap labor, but its openness

• China’s weakness is its current condition

• What determines China’s future is not demographics or natural resources, but its adoption of better ideas

• China represents a challenge to the U.S. that is fundamentally different from the Soviets or Japan


Knowledge Imports and Goods Exports

Knowledge “Imports”:U.S., Japan, and Western Europe are sources of know-how that China draws upon

Goods “Exports”:China exports back, manufactured goods to the U.S., Japan, Western Europe as well as the rest of the world.

Energy / Commodity “Imports”: Middle East, Canada, Russia, Latin America

• Capital and knowledge (HR and technology) flow to the best managed places,• Increasing global economic growth potential• Providing discipline on badly managed places• This is happening on regional, national, provincial, and corporate levels

ted chu nov 0905

Documents

image of china

emerging china

chinas exports

samerican exports

largest export market

chinas unexpected demand

core systems software

specialized chip designchina