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.

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The Growth of China

Week 7

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The extent of China’s 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 world—by far

Projected growth for 2004 is 8.5% But: Is the economy running hot? Industrial capacity is growing massively Driven by FDI

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2002 – World’s largest receiver of FDI

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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 Japan’s record of 10.1% of world

exports in 1986)

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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%.

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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

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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

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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

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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

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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 1970’s

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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

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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

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Is this sustainable?

How is China funding its expansion?

What are the impacts of expansion?

Have a parallel with East Asia pre-1997?

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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

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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 US$518 billion (40 percent of GDP) to clean up their non-performing loans

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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

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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

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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"

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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?

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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

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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?

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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

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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

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Evidence that tradition and entrepreneurship are not mutually exclusive