The Growth of China

1
The Growth of China

• Week 7

2
The extent of Chinas economy

• In dollar terms, its GDP is the sixth largest in
  the world
• In terms of purchasing-power parity it is second
  only to the United States with an 11.8 share of
  world GDP
• Last year's official growth figure of 9.1 made
  it the most dynamic large economy in the worldby
  far
• Projected growth for 2004 is 8.5
• But
• Is the economy running hot?
• Industrial capacity is growing massively
• Driven by FDI

3
2002 Worlds largest receiver of FDI
4
Concern to other producers

• It is China's strength as a trading nation that
  most worries others
• Japan accuses China of unfairly maintaining an
  undervalued currency in order to make its exports
  more competitive.
• In 2001 exports rose by 23 to 266 billion
• Accounted for 4.4 of all world exports.
• Highest level they have ever reached
• (But note Japans record of 10.1 of world
  exports in 1986)

5
Areas of trade increase

• China's trade surplus in 2001 increased to over
  30 billion.
• At 2.9 of GDP, it was relatively larger than
  Japan's (1.7) but smaller than South Korea's
  (3.2).
• China's trade surplus as a percentage of GDP has
  declined every year since 1997
• Has a substantial trade deficit with Malaysia,
  South Korea and Thailand.
• Since it joined the WTO, China's imports from
  Japan have been increasing at an annual rate of
  40-50.

6
Warning Signs?

• China's trade is nowhere near historically
  unprecedented levels.
• Since Open Door policy of 1978, the country's
  share of world trade has more or less quadrupled.
  
• But so did..
• Japan's between 1955 and 1985 and
• Asian tigers' between 1965 and 1995
• Inevitable effect of growth is impact on other
  countries competitive position
• Potential retaliation to Chinese market
  penetration

7
Retaliatory moves

• December 2003
• China has failed to live up to many of the
  obligations it undertook when it joined the World
  Trade Organization (WTO) two years ago and
  continues to favour its own companies at the
  expense of U.S. firms, the U.S. trade
  representative's office (USTR) said in a report
  released yesterday.
• November 2003
• A US move to limit imports of Chinese textiles
  has sparked protest from Beijing and could incur
  retaliation
• Several members of the Bush administration have
  hinted that the Chinese yuan is being kept
  artificially low to boost Chinese exports

8
Foreign Direct Investment

• Another current concern about China is that it is
  taking much foreign direct investment
• This could be destined elsewhere
• As stated in 2002 surpassed America as the
  world's largest recipient of FDI with 53
  billion-worth
• But that had more to do with the collapse of
  investment in America than with the rise in China
  
• Inflows into America in 1999 and 2000 were 283
  billion and 301 billion respectively
• The figures for China in the same years were 40
  billion and 41 billion

9
Is this the real picture?

• Yasheng Huang (Harvard Business School) suggests
  China's high level of FDI is a sign of weaknesses
  in China's own financial system and of an
  inability to make good use of its high level of
  domestic savings.
• He points out that since the financial reforms of
  1997, FDI has played a relatively diminishing
  role in China's economy
• Raw numbers exaggerate the picture
• A large amount of China's FDI is money that has
  been earned in mainland China but then booked to
  accounts in Hong Kong for tax reasons
• It subsequently comes back to the mainland as
  FDI, in a process of round-tripping
• Half of inward FDI comes from Hong Kong

10
Have we a Chinese Economic Miracle?

• January and February 2002
• Exports reached 40.84 billion (up 14.1 from a
  year earlier)
• Imports totalled 34.89 (up only 3.2)
• Situation replicates East Asian NIEs of the
  1970s

11
Have we a Chinese Economic Miracle?

• Cost of labour
• Manufacturing wages in China average about 60
  cents an hour
• 5 of the American average
• 10 of that in some neighbouring Asian economies
• It has a seemingly infinite supply of workers
• China looks as though it could out-compete other
  economies in the manufacturing of almost anything
  labour-intensive
• In fact in 2002 70 of China's exports were of
  garments, toys, shoes, furniture, etc.
• But in capital-intensive goods China was
  increasingly producing but not exporting

12
Production shift rise of hi-tech export trade

• January 6, 2004
• China says it exported 110 billion worth of high
  tech products in 2003, up 5 percent from 2002,
  which had been up 40 percent from 2001
• High-tech exports now account for one quarter of
  the value of all Chinese exports
• In 1998 they accounted for only 11 percent
• U.S., Japanese and Korean manufacturers of
  computers, televisions and other goods have
  outsourced much of their production to China.
• August 2003
• China exported 41,295 automobiles in the first
  half of this year, a rise of 266.4 percent over
  the same period last year

13
Is this sustainable?

• How is China funding its expansion?
• What are the impacts of expansion?
• Have a parallel with East Asia pre-1997?

14
Danger points - 1

• Labour Issues
• China must create some 12 million to 15 million
  new jobs annually just to keep up with population
  growth
• The government must deal with an estimated 270
  million unemployed or underemployed people
• A "floating population" (dis-possessed rural
  workers who have moved to the cities to find
  work) of between 100 million and 150 million is
  growing by almost 5 percent annually
• These migrants exist with no job security, no
  long-term housing, and no health care
• China has no functioning pension system
• The cost of creating one is estimated in the
  hundreds of billions of dollars

15
Danger points - 2

• Capital Issues
• Ineffective stock markets mean China does not
  have the capacity to form local capital to fund
  development
• Therefore dependence on FDI
• State banks provide 98 percent of all financing
  for local companies
• But much funding goes to support SOEs
• Banks are essentially insolvent
• Standard and Poor's estimates that it would cost
  around US518 billion (40 percent of GDP) to
  clean up their non-performing loans

16
Danger points - 3

• Government Revenue Issues
• Since 1998 the government has relied on bigger
  and bigger bond issues
• Estimates of the government's growing aggregate
  liabilities are in the range of 70 percent to
  over 150 percent of GDP
• The government's ability to collect tax revenue
  remains weak yielding less than the equivalent of
  15 percent of GDP.
• Overtrading Issues
• Fears of an investment bubble
• Caused by uncontrolled, indiscriminate and
  excessively exuberant investment and growth
• Could lead to collapse

17
Is the pegged currency a risk?

• IMF concerned about effect on Southeast Asia
  post-crisis recovery
• China is taking much of FDI that might otherwise
  have gone to Southeast Asia's
• Also continues to flout IMF advice to relax its
  currency peg
• Effect...
• In current weak dollar environment China has a
  pricing advantage over most of the rest of Asia.
• IMF and US pressure to float currency

18
The experts say No

• Robert Mundell (Nobel prize winner in economics
  stated in September 2003
• "Appreciation or floating of the renminbi would
  involve a major change in China's international
  monetary policy and have important consequences
  for growth and stability in China and the
  stability of Asia
• Fred Hu - managing director of Goldman Sachs
  (Asia)
• "China's recent export performance has been truly
  spectacular, but it is primarily driven by the
  country's decade-long trade reforms, dynamic
  private enterprises, abundance of cheap labour
  and most importantly, multinational companies'
  growing processing and assembly operations in
  China"

19
Chinese Management

• Are Chinese managers capable of operating in a
  market economy?
• Is there a unique Chinese Management?
• Is there such a thing as a Chinese Entrepreneur?

20
The effects of Modernisation Industrialisation

• Breakdown of the 'iron rice bowl
• Breakdown of the extended family
• Reductions in welfare benefits and a trend to
  individual incentives
• Political leadership accepts that more
  fundamental social and economic reforms, such as
  creating a secondary market for social welfare,
  are needed.
• In the short term, Chinese enterprises will tend
  to graft Western practices on to indigenous
  approaches
• Joint ventures and Wholly Owned Foreign
  Enterprises are serving as role models for
  domestic firms
• The Chinese will increasingly adopt foreign
  management approaches to run their businesses
• In the longer term, Chinese management norms are
  likely to converge to those in industrial and
  post-industrial economies
• Chinese management may represent the emergence of
  a 'global' set of management practices

21
The effects of Modernisation Industrialisation

• Major change in labour market replicating Western
  labour market
• Creates requirement to replicated Western labour
  management practice
• Does it replace traditional Chinese cultural
  values
• Does tradition prevent Western-style management
  innovation?

22
Guanxi

• Interpersonal connections
• Has been identified as one of the key factors
  leading to business success in China
• Viewed as long-term cooperation among business
  partners that contributes to organizational
  efficiency and sustained competitive advantage
• Connects people to form a resource coalition
  where business partners share resources and
  obtain assistance that otherwise may not be
  available
• Rooted in a culture characterized by
  interdependence and reciprocity
• People exchange favours to develop extensive
  networks of interpersonal relationships to share
  scarce resources and cope with uncertainties

23
Has guanxi a place in modern business?

• Changes from a closed to an open market system
  have disturbed the subjects values as well as
  continuing gradually to undermine Chinese
  cultural tradition
• Instead of maintaining or improving harmony
  individuals are trying to get better-paid jobs
  and raise their employability by undertaking
  further education and training.
• Competition and the guanxi mechanisms are
  mutually reinforcing
• Individuals try to extend their relationships in
  order to generate better career opportunities

24
Evidence that tradition and entrepreneurship are
not mutually exclusive