Emerging China: Strength and Weakness
Ted Chu November 9, 2005
Global Market & Industry Analysis
Real GDP per capita (1970 = 1) 22 20
China
Japan
Germany
India
Brazil
United States
Forecast
18 16 14 12 10 8 6 4 2 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Global Market & Industry Analysis
Total Motor Vehicle Sales (1970 – 2011)
Millions 12
Forecast
10 China 8
Japan
6
Germany
4
Brazil
2
Russia India
0 70
72 74
Global Market & Industry Analysis
76 78 80 82
84 86
88 90 92
94
96 98 00
02
04 06 08 10 12
China’s unexpected demand surge was a big reason for doubling oil prices from $30 in 2002 to $60 in 2005 Growth in world oil demand From 2002 to 2004 (% of total growth) Figures on graph show millions of barrels per day (annual average) World total: 4.09 million barrels per day Middle East 0.18 4.4%
Rest of the world 0.34 8.3%
Oil imports as % of Global Total North America 1.25 30.6%
Developing Asia 0.60 14.7%
China 1.41 34.5%
(2004) China
6.3
Japan
11.3
USA
26.9
Europe 0.31 7.6%
Source: IEA - Monthly Oil Market Report (Aug 11, 2005)
Global Market & Industry Analysis
Trade (Exports+Imports) Share of GDP 70%
60%
China
United States
Germany
Japan
Brazil
India
50%
40%
30%
20%
10%
0% 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: IMF, national data / Haver Analytics
• •
Rapid growth is a reflection of China’s openness Also a reflection of underdeveloped domestic demand
Global Market & Industry Analysis
Globalization of Manufacturing Regional Architecture of Personal Computer Production China Chinaand andASEAN: ASEAN: Standardized Standardized peripheral peripheralequipment, equipment, low-end manufacturing low-end manufacturing
United UnitedStates: States: Core systems Core systems software, software,specialized specialized chip design chip design
United UnitedStates: States: Japan: Japan: Core systems Core systems Key design Keycomponents components design software, specialized software, specialized and manufacturing and manufacturing chip chipdesign design Singapore, Singapore,South SouthKorea, Korea, Taiwan: Taiwan: Peripheral Peripheralequipment equipmentdesign design and semiconductor chip and semiconductor chip manufacturing manufacturing
•
China is a low-end link in the global supply chain
Global Market & Industry Analysis
Source: Institute for the Future
Manufacturing Jobs: From US to China?
Manufacturing jobs in China: 54m in 1994, 30m in 2004 Global Market & Industry Analysis
China’s reserves and U.S. trade deficits Billion, US$ 900
300% U.S. Trade Balance: Rest of the World
700
U.S. Trade Balance: China(Mainland) + HK 250%
China (Mainland): Foreign Exchange Reserves (EOP)
500
China+HK's share in U.S. Trade Balance
300
200%
100 150% -100 -300
100%
-500 50% -700 32%
28%
31%
34%
41%
33%
25%
-900 1993
1994
1995
1996
1997
1998
1999
21%
22%
24%
24%
2000
2001
2002
2003
25%
26% 0%
2004 2005(e)
Source:People's Bank of China, U.S. Census Bureau / Haver Analytics
Global Market & Industry Analysis
The same story of Japan in the 80s Billion, US$ 100
400%
350% 50 300% 0 250%
-50
200% U.S. Trade Balance: Rest of the World 150%
U.S. Trade Balance: Japan
-100
Japan: Foreign Exchange Reserves (EOP) 100%
Japan's share in U.S. Trade Balance -150 58% 37% -200 1978
31% 1979
41% 1980
50% 53% 34%
1981
1982
1983
30% 1984
37%
40%
37% 0%
1985
1986
1987
Source: IMF, U.S. Census Bureau / Haver Analytics
Global Market & Industry Analysis
American exports to China is growing fast with 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.
Global Market & Industry Analysis
Global Market & Industry Analysis
-1.0 3/10/2005
3/10/2004
3/10/2003
3/10/2002
3/10/2001
3/10/2000
3/10/1999
3/10/1998
3/10/1997
3/10/1996
3/10/1995
3.0
3/10/1994
0.5
3/10/1993
1.0
3/10/1992
1.5
3/10/1991
Blue Chip
3/10/1990
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
3.0
Mar-96
Mar-95
Mar-94
Mar-93
Mar-92
Mar-91
Mar-90
The Sharp Decline of Term Premium: Fed creditability or China?
2.5
Federal Reserve Board paper
2.5
2.0
2.0
1.5
1.0
0.0 0.5
-0.5
0.0
Source: MacroAdvisors
China: What Westerners think they know • • • •
Fast GDP growth Industrialization/urbanization High savings rate Cheap labor: strong exports
• • • •
Widening inequalities Environmental pollution Overinvestment Mercantilist policies: low RMB
• • •
Strong FDI inflows Surging demand for energy Rising education
• • •
Serious IPR issues Aggressive grab of assets Rapidly aging population
• • •
Dictator control: stability WTO market opening Rising economic power
• • •
Human rights violations Corruption/financial sector mess Rising military threat/ideological conflict
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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 Global Market & Industry Analysis
Costs and Competitiveness Expensive and Competitive United States United Kingdom Australia
Expensive and Uncompetitive Germany Italy Japan
South Korea
Inexpensive and Competitive China, India, Thailand Romania, Czech Rep. Russia, South Africa
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Inexpensive and Uncompetitive Most African countries Argentina, Peru, Uruguay
The Schumpeterian World
Global Market & Industry Analysis
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
Global Market & Industry Analysis
China’s Global Integration and Resistance China
Ideas Ideas “Spiritual “Spiritualpollution” pollution”
Exports Exports FX, market FX, marketopening opening Anti-dumping Anti-dumping
Foreign ForeignDirect DirectInvestment Investment Intellectual property Intellectual propertyrights rights Market Marketopening opening
International Internationalthreat threat Hunger for energy Hunger for energy rising risingmilitary militarypower power
Barriers Barriers Human Humanmovement movement Language Language/ /Cultural Cultural Special Specialinterest interestgroups groups National interest National interest
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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
Global Market & Industry Analysis
Knowledge Imports and Goods Exports
Knowledge Knowledge“Imports”: “Imports”: U.S., Japan, and U.S., Japan, andWestern Western Europe are sources Europe are sourcesofofknowknowhow that China draws upon how that China draws upon
Energy Energy/ /Commodity Commodity“Imports”: “Imports”: Middle East, Canada, Russia, Middle East, Canada, Russia,Latin Latin America America
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Goods Goods“Exports”: “Exports”: China exports China exportsback, back, manufactured goods manufactured goodstotothe the U.S., Japan, Western Europe U.S., Japan, Western Europe as aswell wellas asthe therest restofofthe theworld. world.
•
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