Europe’s View Of China -- A Triangular One Comments By
J. Paul Horne Independent International Market Economist To
Global Interdependence Center Philadelphia, 9 November 2005
China is for Europe a Triangular not Bilateral Problem • Most Chinese-EU issues involve key U.S. interests and reactions • Arms, trade, out-sourcing, energy supplies, capital flows, interest rates, FX – have vital implications for all 3 • EU defense, fiscal, labor, social policies increasing influenced by China • EU’s own problems make dealing with CH difficult, and often earns US enmity 2
Europe … the “Old World”
3
EU’s Medium-Term Challenges • Economic growth of 1.5% to 2.% to 2007 • UR stabilizes at 9% • EUR deficit = 3.2% • EUR slips vs USD • Biz confidence up if Merkel produces • EU budget squabbles • Trade protectionism sentiment rises
• No new constitution until French vote 07 • Accession talk delay • EU process slows • Politics move right • Anti-immigrant trend worsens • Disputes with U.S. grow in number, tone 4
EU vs. Global Economy • EU-25 economy out of “synch” : – Limited business opportunities, labor constraints, low Rate Of Return on capital = – FDI outflow to U.S., China developing world = EUR appreciation = slows export growth – EU is No. 1 U.S. trade - investment partner – China-India labor force direct threat to EU = EU policy makers get more protectionist – EU-15 Geezer Land but immigrants unwelcome 5
Real GDP to ‘06 By Region (%) • EU 2% growth trend lags US, CH, Emrg. Mkts. • China leads Asia and Emrg. Mkts.
• Source: IMF World Economic Outlook, Sep05 6
Top Importers of Merchandise, Commercial Services In 2004 30.0
% of World Total
25.0
20.0
15.0
10.0
5.0
0.0 U.S.
EU
China Merchandise
Source: WTO Statistics, Nov05
Japan
Canada
Services
7
S. Korea
EU-25’s Principal Trading Partners (USD bn in 2004) 600
500
400
Expts.
300
Impts.
200
100
0 U.S.
China (exHK)
Russia
• Source: Eurostat, Oct05
Japan
Switzerland
8
Europe’s Competitors For Oil
• Source: The Economist, 27aug05
9
Intl. Oil Demand Growth Eases (Citigroup, GEOS, 26 Oct05)
10
U.S. – China Oil Output Forecast Trend – 2002 - 2025 12
Mm. bbl. per day
10
8
U.S. China
6
4
2
4 2 02
22 2 0
20 2 0
8 2 01
6 2 01
4 2 01
2 20 1
0 2 01
8 20 0
6 20 0
4 20 0
2 0
02
0
Source: U.S. Energy Information Administration, Oct05 11
U.S. – China Oil Consumption Trends Forecast - 2002- 2025 30
Mm. bbl. per day
25
20
U.S. China
15
10
5
20 24
20 22
20 20
20 18
20 16
20 14
20 12
20 10
20 08
20 06
20 04
20 02
0
Source: U.S. Energy Information Administration, Oct05 12
Saving, Investment, C/As (%GDP)
•
Source: IMF World Economic Outlook, Sep05
13
Saving, Investment, C/As In China, East Asia (%GDP)
• Source: IMF World Economic Outlook, Sep05
14
China Saving By Sector (%GDP) • Gross domestic saving near 50% • Business unable to invest enough • Consumer spends and saves less • Even govt. saves • Source: IMF World Economic Outlook, Sep05 15
Interest Rate Differentials Fed funds vs. ECB -- 10-yr Treas. vs Bund Ylds 7.0
6.0
4.0 Fed funds ECB
3.0
2.0
1.0
0 5 O c t-
A p
J a n -0 5
r0 4
0 3 J u l-
O c t0 2
J a n -0 2
r0 1 A p
J u l0 0
9 9 O c t-
J a n -9 9
0.0
6.0 5.5 5.0 4.5 U.S. 10-yr. German 10-yr.
4.0 3.5 3.0
5 e S
n -0 J
a
y M a
• US-EUR yields diverge since May 2004 • CH capital costs affected by U.S. tightening ?
p -0
5
4 -0
3 S
e p
-0
3 J a
n
-0
-0 y M a
p -0 e S
a
n -0
1
1
2.0
2
2.5
J
Percent
5.0
• Fed tightens since June 2004 • ECB at 2.0% since June 2002
16
Dollar – Euro Waltz – 1999 – 2005 USD:EUR (red) – EUR:USD (blue) 1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70 5 -0 ct O 4-
05 nJa 4-
3
4 -0
l-0
pr A 4-
Ju 4-
2 -0 ct O 4-
1 -0
0
02 nJa 4-
pr A 4-
l-0 Ju 4-
9 -9 ct O 4-
99 nJa 4-
17
EUR TW Indices & Bilateral FX 1999 - 2005
Source: ECB, Monthly Bulletin, Oct05
18
As long as they focus on each other…
• Source: Financial Times, 28sep05
19
EU’s Declining Growth Potential
Source: CrĂŠdit Agricole, Nov 05. EU potential per Oct 05 Consensus Forecasts. ECB production function estimate, for its monetary policy, is 1.75% vs. 2.0-2.5% in 1980-2000. 20
Euro Area FDI, Portfolio Flows
• Source: ECB Monthly Bulletin, Oct 05
21
Current EU – CH Issues: • Trade (textiles, arms), capital flows and FX • Energy & metal supplies – CH competes • World labor force with China + India = structural changes forced on Europe • China lowers EU prices = disinflationary, slowing economic and job growth • FDI: CH may rival US as future pot of gold • Security issues: arm sales vs. cordon 22
Special EU – US - CH Issues • • • • • • •
H5N1 – do CH farmers get paid to cull ? Counterfeiting = patents, copyrights ? Corporate, tax and property law ? Human rights … for 1.4 billion ? Environmental issues … for everybody ? Demography – EU grays, US ages, CH ? China’s competitors tomorrow : India, Burma and … TN ?
23
Do Euro-Leaders have a clue ?
• Source: Internet, late 2004
24