Download Lecture 1 The Chinese Economy

China’s Economy: Development Trends
BRUSSELS INSTITUTE OF CONTEMPORARY CHINA STUDIES
Duncan Freeman
March 2015
[email protected]
CHINA’S NEW NORMAL
PRC GDP Growth 1978-2014 (%)
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
• Although average growth of GDP has been high (about 10%), the actual rate has varied
considerably from year to year. What has been “normal”?
• Stimulus sustained growth after crisis in US and EU through stimulus, but it has declined
subsequently. In 2014 GDP growth 7.4%. After arrival of Xi Jinping in power, has China arrived at a
“New Normal”? China’s growth rates have declined before, is there anything different this time?
CHINA’S NEW NORMAL
• China’s New Normal. What does it mean?
• Lower growth. Lower government targets. At NPC target for
2015 set at “about” 7%.
• Generally forecasts predict lower growth in China. IMF
forecast 7.1% in 2015, declining to 6.3% in 2019.
• Why lower growth? Government policy, but also long-term
trends. Simple mathematics? Population structure? Declining
labour inputs. “Lewis turning point”?
• No doubt that double-digit growth is highly unlikely to return.
• But also quality of growth preferred over quantity of growth.
Need for new growth model. Shift from investment, exports,
manufacturing focus.
REBALANCING OF CHINA’S ECONOMY
Share of GDP by Sector (%)
Contribution to GDP Growth (%)
60
10
9
50
8
7
40
6
30
5
4
20
3
2
10
1
Primary
Secondary
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
Tertiary
Primary
Secondary
Tertiary
• The structure of China’s economy has changed since reform began.
• The previous emphasis on heavy industry has been replaced by a more diversified economy. Secondary
industry (manufacturing) is very important.
• The role of primary industry (agriculture, fisheries, forestry, mining) has declined, while tertiary industry
(services) have expanded. Services have been growing faster than other sectors. But still they are much
smaller than in developed economies.
Duncan Freeman BICCS
REBALANCING OF CHINA’S ECONOMY
Share of GDP by Expenditure (%)
Contribution of GDP Growth (%)
70
12
60
10
8
50
6
40
4
30
2
20
0
-2
10
-10
-8
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-6
Final consumption
Net exports
•
•
•
Gross capital formation
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-4
0
Final consumption
Gross capital formation
Net exports
GDP growth has depended on investment in recent years. Recognized need to shift from investment
dependence.
There are signs that this is occurring. Rise in share of consumption in GDP. In 2014 51.2%, compared
to low of 48.2% in 2010.
Falling share of net exports in GDP.
REBALANCING OF CHINA’S ECONOMY
Fixed Asset Investment Monthly Change y-o-y 2003-2014
In past growth rates
depended on fixed asset
investment. But fixed
asset investment now
growing at slowest rate
in many years.
Government under Xi
Jinping has not returned
to investment stimulus.
80
70
60
50
40
30
20
10
0
Fixed asset investment change y-o-y
3 per. Zw. Gem. (Fixed asset investment change y-o-y)
Share of SOEs in Fixed Asset Investment (%)
70
60
50
40
30
20
10
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Other aspects of
changing structure
include declining role in
economy for state
owned enterprises. Nonstate enterprises
growing faster than
SOEs.
INDICATORS SUGGEST CONTRACTIONARY TREND
China Real Interest Rates (%)
China Real Effective Exchange Rate Index
(2010 = 100)
7
6
140
5
120
4
100
3
2
80
1
60
0
40
-1
20
-2
-3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
China Monthly Money Supply (M2) Growth
Y-o-Y 2000-2014
35
30
25
20
15
10
5
Apr-14
Jul-13
Oct-12
Jan-12
Jul-10
Apr-11
Oct-09
Jan-09
Apr-08
Jul-07
Oct-06
Jan-06
Apr-05
Jul-04
Jan-03
Oct-03
Apr-02
Jul-01
Oct-00
Jan-00
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Indicators suggest that China has
undergone a contractionary period.
Rising real interest rates. Real
exchange rate appreciation the biggest
of any major economy. Money supply
growth slowest for many years.
Counterbalanced by some targeted
policy measures, but no general
stimulus like 2009.
CHINA’S GROWING IMPORTANCE
GDP based on PPP % of world
China has had a GDP growth rate higher
than any other major economy over the
past three decades. Share world GDP has
increased. According to IMF, on PPP basis
China is now largest economy in the
world.
35
30
25
20
15
10
Even at current slower growth rates,
China contributes more growth to the
global economy than any other major
economy. Slower growth does not mean
China is less important.
5
0
Brazil
China
India
Japan
Russia
US
EU
Share of Global GDP Growth (PPP)
2013/2012
China
2007-2013
1991-2000
37.3
38.9
17.9
Germany
0.1
0.7
2.7
Euro area
-2.1
-1.5
12.8
0.4
-0.3
18.0
India
10.5
12.7
7.4
Japan
2.4
0.2
2.1
11.8
5.3
24.6
European Union
United States
Every year China’s GDP added annually
at current growth rates is roughly
equivalent to half the UK annual GDP, or
one third of Germany’s annual GDP.
CHINA’S TRADE
China Foreign Trade (US$ million)
Miljarden
2500000
EU-China Trade (Euro bil)
2000000
400
300
200
1500000
100
1000000
0
500000
-100
0
-200
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Exports
Imports
Balance
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Imports
Exports
Balance
• Rebalancing has an impact on trade.
• Until the mid-2000s China did not have large trade surpluses. For much of the earlier period it had
trade deficits.
• The crisis impacted both exports and imports which are closely related. Short-term cyclical effects.
• Rebalancing will have long-term effects on China’s trade.
• Trade growth slowing. In 2014 exports grew by 6.1%, imports by 0.4%. Exports impacted by weak
markets. Imports impacted by slower growth, especially in key commodity sectors, also falling prices of
commodities.
• EU deficit with China has declined. Since crisis, strong export and weak import growth, result of
economic conditions in EU and China.
EU-CHINA TRADE
Share of Extra EU Imports (%)
Share of Extra EU Exports (%)
25
30
United States
20
25
China
Russia
15
China
20
Switzerland
Norway
Japan
Brazil
5
•
•
Brazil
India
0
•
Japan
South Korea
India
0
Norway
Turkey
10
South Korea
5
Russia
Switzerland
15
Turkey
10
United States
China has become the EU’s largest source of imports. The importance of major developed
economies like the US and Japan has declined. China has displaced imports from other
economies, ie Japan (processing trade).
Will China be displaced in turn? Share of EU imports not growing as before.
Increasing importance as export market. Will it be sustained?
EU-CHINA TRADE
Share of EU Exports to China 2014
2% 2%
2%
6%
GERMANY
2%
UK
FRANCE
3%
ITALY
4%
46%
5%
NETHERLANDS
BELGIUM
SWEDEN
SPAIN
6%
AUSTRIA
DENMARK
10%
FINLAND
Others
12%
• Germany accounts for nearly half of EU exports to China.
• Germany has benefited from growth (stimulus in response to crisis in
US and EU) in China in recent years. Slowing growth in China, less
demand for German exports?
EU-CHINA UNEQUAL TRADE
France-China Trade (Euro bil)
80
Miljarden
Miljarden
Germany-China Trade (Euro bil)
60
40
20
0
30
25
20
15
Imports
10
Imports
Exports
5
Exports
0
Balance
Balance
-5
-20
-10
-40
-15
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Belgium-China Trade (Euro bil)
40
Miljarden
Miljarden
Italy-China Trade (Euro bil)
30
20
20
15
10
10
Imports
5
Imports
0
Exports
0
Exports
Balance
-10
-20
Balance
-5
-10
-30
-15
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Different patterns of trade with China in recent years.
Germany in surplus – reduced/slowed imports, rapid increase in exports
Italy/southern Europe – reduced deficit, imports reduced, slight increase in exports
France – reduced deficit, imports/exports increase/plateau.
EU-CHINA TRADE
Structure of EU Imports from China
100%
COMMODITIES AND TRANSACTIONS NOT
CLASSIFIED ELSEWHERE IN THE SITC
90%
MISCELLANEOUS MANUFACTURED ARTICLES
80%
MACHINERY AND TRANSPORT EQUIPMENT
70%
MANUFACTURED GOODS CLASSIFIED CHIEFLY
BY MATERIAL
60%
CHEMICALS AND RELATED PRODUCTS, N.E.S.
50%
40%
ANIMAL AND VEGETABLE OILS, FATS AND
WAXES
30%
MINERAL FUELS, LUBRICANTS AND RELATED
MATERIALS
CRUDE MATERIALS, INEDIBLE, EXCEPT FUELS
20%
BEVERAGES AND TOBACCO
10%
FOOD AND LIVE ANIMALS
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
•EU imports from China are increasingly accounted for by machinery,
electronics and high-value added goods.
•The share of imports such as textiles and footwear has declined.
COMPOSITION OF EU EXPORTS TO CHINA
Structure of EU Exports to China
100%
90%
COMMODITIES AND TRANSACTIONS NOT
CLASSIFIED ELSEWHERE IN THE SITC
80%
MISCELLANEOUS MANUFACTURED
ARTICLES
MACHINERY AND TRANSPORT EQUIPMENT
70%
60%
MANUFACTURED GOODS CLASSIFIED
CHIEFLY BY MATERIAL
50%
CHEMICALS AND RELATED PRODUCTS,
N.E.S.
40%
ANIMAL AND VEGETABLE OILS, FATS AND
WAXES
30%
MINERAL FUELS, LUBRICANTS AND
RELATED MATERIALS
20%
CRUDE MATERIALS, INEDIBLE, EXCEPT
FUELS
BEVERAGES AND TOBACCO
10%
FOOD AND LIVE ANIMALS
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
•EU exports to China are dominated by manufactured goods, including
machinery and transport equipment, and some high-end materials such
as chemicals.
CHINA TO BECOME NET OUTWARD INVESTOR?
China Investment Flows MOFCOM
China Investment Flows SAFE
300000
140000
280000
260000
120000
240000
220000
200000
US$ million
US$ mi;ion
100000
80000
60000
180000
160000
140000
120000
100000
40000
80000
60000
20000
40000
20000
0
0
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
ODI
•
•
•
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
IFDI
ODI
IFDI
China for many years major destination of FDI.
Over past decade there has been rapid growth of outward investment. Widely predicted that ODI
will soon exceed IFDI. But balance of payments tell different story. (MOFCOM data exclude
reinvested earnings)
ODI growing but still remains relatively small.
Duncan Freeman BICCS
CHINA-EU INVESTMENT FLOWS
China FDI Flows to the EU (Euro mil)
9000
EU FDI Flows to China (Euro mil)
25000
8000
20000
7000
6000
15000
5000
4000
10000
3000
2000
5000
1000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-1000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Investment between the EU and China has grown, but is volatile. Volatility
results from conditions in EU, China and global economy. Flows from China to
the EU are still small. But importance will grow. Increasing diversity of
investment and locations. Latest data suggest Chinese ODI to EU increased in
2014. Investment will increase but will remain relatively small.
NEW SILK ROAD - “ONE BELT, ONE ROAD’
The New Silk Road (One Belt,
One Road) idea was launched
personally by Xi Jinping in 2013.
The policy is still in development,
but is considered a major
initiative by the Chinese
government. Has domestic and
international importance.
Both land and sea routes reach
all the way to Europe.
Links already being created, but
realization faces challenges,
infrastructure, politics, institutions,
security, etc.
At NPC Foreign Minister Wang Yi
stated that the Silk Road would
be a main foreign policy priority in
2015.
REFORM PROCESS
• 18th Party Congress, 3rd Plenum – comprehensive reform outline
covering many aspects for economic, government, society, etc.
• Since then, reforms have been initiated in many key areas.
• Reform in China is gradual and experimental, not “big bang”.
• On going progress in taxation, fiscal system..
• Government administration. Removal or delegation of
administrative approval requirements.
• Local government finances and systems.
• Hukou system.
• Land ownership system.
• Reforms for foreign trade and investment. Shanghai Free Trade
Zone. Negative lists.
2015 ECONOMIC POLICY
• Xi Jinping – 2015 a key year for reform. Focus on structural problems not short-term growth
targets.
• At NPC targets announced - increase GDP by approximately 7%. Increase in CPI at around 3%.
Increase imports and exports by around 6%. Fixed asset investment to grow by 15%.
• Continue to implement proactive fiscal policy and prudent monetary policy. M2 money supply
to grow by around 12%, but actual supply may be slightly higher.
• Reforms to continue.
• Tax reductions, reforms.
• Financing costs and reforms.
• Accelerate price reform.
• Land reform.
• Encourage private investors in small and medium-sized banks and other financial institutions.
• Oversight of real estate, local government debt, shadow banking.
• Encourage consumption and domestic demand.
• RMB exchange rate at an appropriate and balanced level and allow it to float more freely
• Foreign investment reforms, eg “halve the number of industries in which foreign investment is
restricted”.
• Move faster to strengthen infrastructure connectivity with neighboring countries.
• Reform of legal system, government approvals.