HUNTER, CONSTANCE June 1310

China in 2010 Constance L. Hunter Chief Economist chunter@aladdincapital.com June 2010

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Overview

• China’s economic weight is growing and along with it the linkages to the global economy are increasing •

China is still a centrally directed economy

•

China’s trade with the rest of the world is becoming two-way

•

Can China’s policies impact the rest of the world?

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China’s Recent Economic History

• Slower GDP is still above 9% per year

• Compared to 2000 at 7% , China is now 13% of global GDP • China’s stimulus helped the global economy in 2009

• Recent wage increases (30% at Foxconn) bode well for domestic demand • Will China export inflation or deflation to the global economy?

• If China has economic problems will they spread to the world?

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China’s Recent Economic History

China: Key Economic Measures

(1)

2006 GDP (SA Real) CPI (SAS) Industrial Production

2007

2008

2009

2010*

11.7%

13.0%

9.0%

9.4%

10.8%

1.8%

4.8%

6.0%

-0.7%

2.5%

14.7%

17.4%

5.7%

18.5%

22.0%

*Estimates (1) Source: Bloomberg, IMF Data - GDP Based on PPP Valuation of GDP Current Dollar.

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China’s Recent Economic History

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China’s Recent Economic History China GDP (Real, constant, chained GDP) China Required Reserve Ratio China CPI y/y% 14

75

12

50

10

25

8

0

6

-25 00 01 02 03 04 Sources: CNBSH, PBC/CM /Haver

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05

06

07

08

09

10

6

China’s economic weight is growing and along with it the linkages to the global economy are increasing

China in the World

(1)

2000

2007

2008

2009

2010*

2015*

China (% of World GDP)

7%

11%

11%

13%

13%

17%

CE Europe (% of World GDP)

3%

4%

4%

4%

3%

3%

Euro Area (% of World GDP)

18%

16%

16%

15%

15%

13%

United States (% of World GDP)

24%

21%

21%

20%

20%

18%

*Estimates (1) Source: Bloomberg, IMF Data - GDP Based on PPP Valuation of GDP Current Dollar.

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China is still a centrally directed economy Command Economics VS Market Economics

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China is still a centrally directed economy

China: Investment in Fixed Assets {cumulative} NSA, 100 Mil.Yuan

200000

200000

160000

160000

120000

120000

80000

80000

40000

40000

0

0 99 00 01 02 03 04 05 06 07 Source: China National Bureau of Statistics /Haver Analytics

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08

09

9

China’s trade with the rest of the world is becoming two-way

Export Composition (Past 12 Months) Food and Live Animals, 3% Others, 3%

Import Composition (Past 12 Months)

Chemicals & Related Products, 5%

Misc. Manufactured Articles, 8%

Others, 3%

Crude Material, Inedible, Except Fuel, 15%

Manufactured Goods, 15%

Misc. Mfg. Articles, 24%

Mineral Fuels, Lubricants & Material, 13%

Machinery & Transport Equipment, 50%

Machinery and Transport Equipment, 40%

Chemicals & Related Products, 11%

Manufactured Goods, 10%

Source: UBS, June 7, 2010

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China’s trade with the rest of the world is becoming two-way China’s Imports fell in 08 but have more than recovered

CN: Imports: EU USD Mn 15000

15000

12500

12500

10000

10000

7500

7500

5000

5000

2500

2500

0

0 99 00 01 02 03 04 05 06 07 08 Source: China General Administration of Customs/SAFE /Haver Analytics

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China’s trade with the rest of the world is becoming two-way While China’s exports to Europe have recovered only somewhat

CN: Exports: EU USD Mn 30000

30000

25000

25000

20000

20000

15000

15000

10000

10000

5000

5000

0

0 99 00 01 02 03 04 05 06 07 08 Source: China General Administration of Customs/SAFE /Haver Analytics

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China’s trade with the rest of the world is becoming two-way Mineral Product exports to Europe are still at 2005 levels

CN: Exports hs: EU: Mineral Products {MP} USD Mn 500

500

400

400

300

300

200

200

100

100

0

0 99 00 01 02 03 04 05 06 07 08 Source: China General Administration of Customs/SAFE /Haver Analytics

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China’s trade with the rest of the world is becoming two-way While China’s imports from Europe are

CN: Imports hs: EU: Mineral Products {MP} USD Mn 240

240

200

200

160

160

120

120

80

80

40

40

0

0 99 00 01 02 03 04 05 06 07 08 Source: China General Administration of Customs/SAFE /Haver Analytics

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Conclusion

• China is the only country left with fire power • China’s weight in global economy will continue to increase • Policy mistakes are quite possible

• Will the China model prove most successful? For controlling growth rates it is possible, but for total quality of life and quality of products we think not •

Watch the reserve requirements, Industrial Production, Sales from GOME, Parkson and other retailers

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