Chinese Economy-The Project

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CHINA's Growth Story-The Way Forward....THE BIG QUESTION: Will the economic miracle run out of steam?

Chinas growth story so far has been

spectacular to say the least. According to datareleased on 16th of August, the worlds no. 1exporter has surpassed Japan to become the2nd largest economy; just behind the U.S.-Japan had managed to keep its second spotin terms of economic muscle for the last 43

years, so dethroning Japan was a significant milestone. But wait before youthink everythings fine with the dragon economy-it is slowly, but surelylosing its steam.

Theres no denying the fact that it had recorded a massive 11.9% GDPgrowth in the first quarter of 2010. But Q2 figures havent been thatencouraging-10.3% is the growth rate, a sharp fall of about 1.5%. There areseveral economic threats that are haunting the Chinese economy.

A major contributor to the slowdown has been the Real estate bubblethat has been building up. Excessive investment and speculative purchasesis driving prices in the real estate sectors to unsustainably high levels. Thegovernment has phased out $586-billion stimulus spending, tightening curbs

on lending and checking spiraling property prices, and thereby coolinggrowth in the property sector. Curbs on spending would directly andproportionally affect growth in the coming time.

Second factor that seems to plaguing the Chinese economy is the apparentupsurge in workers who have begun pushing for higher wages and betterworking conditions. According to estimates by Deutsche Bank theminimum wage increase is to be around 20 per cent in most provinces andcities. Another report by World Bank mentioned that the average ruralwages rose 16.4 per cent in the first quarter of the 2010 from a year earlier.

The third problem that China faces is rising rawmaterial prices. China's export growth remainsstrong, though rising costs for raw materials haveeroded the country's cost advantage. It would beworthwhile to note here that during the first half of

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2010, the total value of imports and exports, accounted for nearly 37 percentof the Chinese GDP.

Other factors include the steep fall in Industrial Production. It

experienced a surprisingly sharp slowdown to a growth rate of 13.7%, downfrom 16.5% in May 2010. Some economists are also worried that stagflation-- inflation coupled with lower growth -- could emerge, although it seemshighly unlikely.

It is imperative for China to raise the bar when it comes to the quality ofeconomic development. In 2009, Chinas urbanrural divide widened to its highest since 1978. Thefact of the matter remains that China is still a

developing nation over 40 million below thepoverty line. Overtaking Japan in terms of GDP isnot going to change the basic truth. Chinas percapita income is over 10 times lower than Japansand its population is 10 times bigger. It is arapidly ageing country and its one child policyshows signs of becoming a burden.

Chinas growth is not sustainable. It haspolluted rivers, severe air pollution & large scale

deforestation. By 2020, China is expected to have400 million tonnes of rubbish, which is equal tothe entire waste generated on the planet in 1997.

Despite all this, the Chinese are optimistic about their economy. Thegovernment has said that a slowdown is good in the long-term aspolicymakers try to reduce the country's heavy reliance on exports andinvestment to drive growth. The government sees this phrase as mid coursecorrection period rather than a slowdown of the economy. The focus is nowbeing shifted to domestic markets to compensate for slowing of export

markets. China has more than one million-millionaires today. Relativelystrong job creation in the recent times has helped support robust consumerdemand which is strengthening Chinas inward growth.

A long-term estimate by the World Bank research suggests that China'sannual economic growth rate will fall to an average of 7 per cent in 2016-2020 - about the level the government has said is its target for sustainablegrowth.

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So, to sum it all, China faces a lot of economic challenges in the form ofabove mentioned problems. However through effective policy formulation,they can slowly get back on the track of growth-growth which is bothsustainable and inclusive.

-Tejas Singh

(Dated: 25-8-10)

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The Curious Case of Chinese Currency-Yuan..

These days, i have been catching up on a lot ofnews concerning China. I have been fascinatedby the astute manner in which they come outwith different strategies-be it politics,economics or foreign affairs.

There are many strategic instances which canbe quoted, like how smartly China has slowlyand steadily made Tibet as part of theirterritory. And very recently their have been

talks between Zardari and his Chinesecounterpart Hu Jintao to build a railway line from China to Pakistan whichwould enable China to have a stronghold on the Indian border [withincreased military base to attack if needed]

But, what i am going to discuss in detail is the changing phase of Chineseeconomy. Their currency, Yuan [Also known as Remnibibi] was in thespotlight recently. As we all know Chinese products are known for beingcheap and quite a large chunk of the Chinese economy relies on exports. Ithad been pegged 6.83 to the USD since July 2008. Recently it was under

heavy criticism from the US for not allowing Yuan to appreciate. China wasaccused of being a monopolist in the export industry [as they were literallystealing away the export business of other countries]. But things are slowlychanging. I read a lot in the newspapers about how China is under pressurefrom other countries including India and US to allow Yuan to appreciate.Come to think of it, is China really "losing out" if Yuan appreciates? If you gotyour economics right- not so much, especially not the people of China. Readon, you will know why..

Ask yourself a question,

essentially what are exports? Theyare -global demand for goods andservices in the economy. Toomuch reliance on any componentof demand is bad, in this case it isthe exports. For instance, if thereis a slump in global demand dueto recessionary trends, Chinese

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exports will suffer and therefore the demand. Now if Yuan appreciates, thedomestic demand would increase as the purchasing power of people in Chinawould increase [taking the assumption that the Chinese are purchasingimports to satisfy their domestic consumption]. This would help the Chineseeconomy to reduce its dependence on exports. This would also mean more

income in the hands of poor labourers which are paid abysmally low [which ishow the Chinese are able to export products at such a cheap rate].

Now, it remains to be seen at what rate People's bank of China allow theYuan to appreciate. China can play a clever game here, if the rate at whichtheir currency appreciates is low, they can still maintain their world leaderstatus as far as export market is concerned. Side by side, they would alsosteadily increase their domestic demand. This would further strengthen theChinese economy. It's because of such clever strategies that i like to addressChina as- "our shrewd neighbour-China!!"

-Tejas Singh

(Dated 8-7-2010)

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The Growth Story in facts and figures,

What do the Statistics Reveal?

Era Growth in NationalIncome

Growth in Per CapitaIncome

1) 1901-1950 0.3% -0.3%2) 1951-1980 5% 3%3) 1981-2008 10% 8.8%

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Income Distribution-A grave problem- income distribution in China has

worsened at an unprecedented pace when compared with experience elsewhere orearlier.

The first manifestation-Gini Coefficient

Economists measure such inequality with the Gini coefficient which has a

value of one when all the income in an economy accrues to one person and

zero when every person in an economy has the same, equal, income.

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In China, this Gini coefficient rose from 0.29 in 1980 to 0.36 in 1990, 0.39 in

2000 and 0.47 in 2004, from among the lowest to among the highest in

countries of the world in just 25 years.

The second manifestation is distribution of income between wages and profits.

Between the late 1990s and the late 2000s, in a short span of a decade, the

share of wages in GDP fell from around 53 per cent in the late 1990s to 40

per cent in the late 2000s, while the share of profits in GDP rose from about

19 per cent to almost 32 per cent.

This was an outcome of a strong bias in policies. Interest rates on household

bank deposits are very low so that corporations can get cheap credit.

Inputs such as energy, natural resources and land are also cheap for

corporations, while taxes are low and state-owned firms do not pay much in

the form of dividends to the government.

Doing Business in China

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The communist government:

advantage or disadvantage for

doing business in China?

The upside (the socialist

advantage)

Chinese firms risk

political fallout if they

fail. Their sense of

mission makes them

transparent

The downside (power behind

the chair)

With stricter governmental controls, the following quote aptly

summarizes the disadvantage of doing business in China..

In China youre dealing with the government, says another. In

India youre dealing with companies.

Advice to China

Go beyond digging stuff out of the ground!

Although Chinas manufacturing muscle cannot be doubted,

business environment for creative & complex consumer

industries is more conducive in other emerging markets like India

and Brazil. These countries have private sector credentials &

cosmopolitan cultures

Chinese companies often have surplus cash and banks surplus

deposits. Today those savings are recycled into rich countries via

sovereign-wealth funds and the central bank, which act as portfolio

investors, buying mainly bonds. But China may and probably

should diversify. That shift will be accelerated by Chinas political

aims: to acquire inputs, such as raw materials, labour and land; to

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build up technical and commercial expertise; and to gain access to

foreign markets

In order to succeed at large cross border deals, Chinese companies

need to

diffuse private shareholding pattern and

increased independence from the state

Cometh the dragon

Nov 12th 2010, 15:00 by The Economist online

China is beginning to spend its cash

CHINA'S share of the world's foreign direct investment (FDI) has risen from

1% in 1991 to just under 6% in 2009. FDI flows tend to go hand in hand with

economic clout. Britain was a big exporter of capital in the mid-19th century.

America played this role for part of the 20th century: its share of FDI peakedat 50% in 1967 but has since declined to 23%. China's share will no doubt

keep growing. But it seems unlikely that it will be as generous an exporter of

capital as Britain and America have been, at least in the medium term.

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Just yuan more

Nov 5th 2010, 15:50 by The Economist online

The Economist's real yuan-dollar exchange rate

LISTEN to some Americans and you might believe that the under-valued

yuan is the source of all that is wrong in the 50 states. But this is only part of

the picture. The real exchange rate adjusts the nominal exchange ratethe

one you normally see quotedby taking into account changes in the price

levels in the two countries involved. Chinese prices have risen much faster

than American prices over the last few years, and that has meant a large

adjustment in the real exchange rate. China's goods may still be somewhat

undervalued in American markets. But the real shift in costs faced by

consumers and firms has been a lot larger in recent years than the nominal

exchange rate would lead you to believe.

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Shanghai declares 1-family, 1-homelimit

Source:http://www.msnbc.msn.com/id/39566883/ns/business-world_business/

Authorities in China's largest city have ordered that families be allowed to only purchase

one home each, part of a series of moves aimed at cooling surging property prices.

"One family in Shanghai, whether local or migrant, can only buy one new home,

including a secondhand one, for the time being," said a notice issued late Thursday by

the municipal government, citing a need to curb "irrational demand."

Their investment options limited by various government restrictions, many urban

Chinese families purchase apartments in hopes of getting higher returns on their

savings than the paltry interest paid by banks on savings accounts.

Many of the apartments, often owned by out-of-towners, sit empty. That limits supply

relative to demand and is blamed for driving prices beyond the reach of many families, a

trend seen as a threat both to political stability and to the financial system.

Overall, housing prices in 70 major Chinese cities rose 9.3 percent in August from the

year before.

The new rule for Shanghai, a city of more than 20 million, took effect Thursday. China's

capital, Beijing, imposed a similar one home per family restriction in April.

The city government said it was preparing to impose a property tax, another measure

due to be rolled out on a trial basis in several major cities.

The notice also said property developers would be charged a land-appreciation tax of 5

percent on the selling price of residential buildings sold at an average price that is more

than twice the average price of the previous year in the same area.

It did not give exact details on how such prices would be calculated.

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Late last month, the government suspended bank loans for third-home purchases and

raised required downpayments for purchases of first and second homes.

Big Mac alert!

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Nov 17th 2010, 13:40 by R.A. | LONDON

HERE at HQ, the alarms that sound

whenever the price of a Big Mac rises

anywhere in the world have been

clanging away this morning:

More inflation warnings on Wednesday in

China, this time from a highly symbolic

source. The price of a Big Mac has risen

from Rmb14 to Rmb15 at the branch of

McDonalds around the corner from the

FTs Beijing bureau - part of an across-

the-board price hike that the US fast food

chain blamed on rising costs of

ingredients - even if that is still less thantwo-thirds of the price of a Big Mac in the

US.

Why has the price of a Big Mac gone up?

Why, indeed, are many prices in China

going up? You can see the main reason

at right. According to our latest Big Mac

index, the RMB is undervalued by 40%:

A weak currency, despite its appeal to exporters and politicians, is no freelunch. But it can provide a cheap one. In China, for example, a McDonalds

Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the

equivalent of $2.18 at market exchange rates. In America, in contrast, the

same burger averages $3.71.

That makes Chinas yuan one of the most undervalued currencies in the Big

Mac index...The index is based on the idea of purchasing-power parity, which

says that a currencys price should reflect the amount of goods and services

it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should

be worth $0.26 on the foreign-exchange market. In fact, it costs just $0.15,suggesting that it is undervalued by about 40%.

You'll notice that the national average price of a Beijing Big Mac was 14.5

RMB in October, so hungry FTstaffers were actually getting a bit of a deal.

Here in London, the research team tells me that taking into account the price

increase the yuan is now undervalued by just...39%.

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Markets have been signalling for years that the Chinese currency really

ought to appreciate. If the adjustment isn't made through the nominal

exchange rate, then it will occur through the real exchange rate, via

increases in the price level.

INFLATION: China

LENIN thought inflation a subversive force, as damaging to capitalism as any

Bolshevik revolutionary. Certainly, his heirs in the Chinese Communist Party

are taking no chances. On November 17th the State Council, Chinas cabinet,

promised forceful measures to stabilise prices. It said it would drum up

supply and crack down on hoarders and speculators. It even threatened to

interfere with the prices of daily necessities, which might include grains,

cooking oils, sugar and cotton.

Inflation is not yet a threat to the republic. But consumer prices rose by 4.4%

in the year to October, the fastest rise for over two years. Food prices, which

account for more than a third of the consumer-price index, are largely to

blame: vegetables are almost a third more expensive than they were a year

ago. Even the most exotic commodities have been affected (see article). As

Chinas prices rise, consumer confidence and the stockmarket are falling.Shanghai shares have fallen by a tenth since the inflation figures came out.

Rising food prices may explain Chinas inflation, but what is behind their

rise? Floods, including a deluge in Hainan province last month, hurt some

crops. Harvests have also disappointed elsewhere in the world: the UNs

Food and Agriculture Organisation said this week that the cost of the worlds

food imports may exceed $1 trillion this year, only $5 billion short of the

record bill in 2008.

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The macroeconomic weather has also played a role. Chinas banks appear

determined to breach their quota of 7.5 trillion yuan ($1.1 trillion) of new

loans this year. The Peoples Bank of China raised their reserve requirements

this month for the fourth time this year and lifted interest rates in October

for the first time since 2007. But neither step will do much to constrain banks

swimming in deposits and lending to an economy growing, in nominal terms,

by 15% a year.

And so the government is reaching for less conventional weapons. To shield

the vulnerable, it urged local governments to raise unemployment benefits,

pensions and the minimum wage in line with inflation. It also promises to

increase shipments of cotton from the western region of Xinjiang, and to cut

the price of electricity, gas and rail transport for fertiliser makers. To keep

the population sweet, on November 22nd it will sell 200,000 tonnes of sugar.

If extra supplies do not curb prices, the government may set caps. It may

repeat the kinds of measures it imposed in 2008, when food inflation topped

23% after an outbreak of disease killed many of Chinas pigs. Then, the

government required sellers of pork, rice, noodles, cooking oil and other

staples to ask permission before raising their prices.

Such controls serve as an extreme signal of the governments

determination to fight inflation, note Mark Williams and Qinwei Wang of

Capital Economics. That may help quash self-fulfilling expectations of higher

prices. But beyond that, price controls have little to commend them. If

sellers cannot fetch a good price, they will limit the supply of what they offer,

or adulterate the quality. Whenever the government stops petrol prices from

rising in line with oil prices, queues at the pump merely lengthen.

Inflation undermines capitalism, according to Keynes, in part because it

discredits entrepreneurs. They become profiteers in the eyes of those hurt

by rising prices. Chinas leaders promise to hunt down and punish hoarders

and speculators. According to Andy Rothman of CLSA, a broker, some traders

are taking possession of agricultural commodities in the hopes that prices

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will rise. But how to stop households buying two bottles of cooking oil rather

than one?

As Asia's growth titans China and India race to modernise and urbanise theircountries, ties between them could be increasingly tested as they compete

to realise their economic ambitions.

In both national and per capita income terms, the two countries were more

or less in a dead heat two decades ago, but a mixture of policy,

demographics and external factors has since catapulted China ahead.

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China India Comparison

Its economy is now nearly four times that of India's, and is widely regarded

by economists as the world's second biggest economy, compared with Indiawhich was the eleventh biggest, according to World Bank figures for 2009.

But India's growth rate is now beginning to catch up to China's and its

younger population, if managed well, could provide the fuel for it to close the

gap in coming years.

Below are some statistics on how the two economies compare.

Gross domestic prodcut (GDP), at current prices

China USD 356.9 bn in 1990, USD 1.20 tn in 2000 and USD 4.98 tn in2009

India USD 317.5 bn in 1990, USD 460.2 bn in 2000 and USD 1.31 tn in

2009

GDP per capita, at current prices

China USD 314 in 1990, USD 949 in 2000 and USD 3,744 in 2009

India USD 374 in 1990, USD 453 in 2000 and USD 1,134 in 2009

Annual GDP growth

China 3.8% in 1990, 8.4% in 2000 and 9.1% in 2009

India 5.5% in 1990, 4.0% in 2000 and 7.7% in 2009

Foreign direct investment inflows

China USD 3.5 bn IN 1990, USD 38.4 bn in 2000 and USD 78.2 bn in

2009

India USD 236.7 mn in 1990, USD 3.6 bn in 2000 and USD 34.6 bn in

2009

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BIBLOGRAPHY

http://www.economist.com/node/21012447/?fsrc=scn/fb/wl/by/chinaecon

http://www.economist.com/blogs/dailychart/2010/11/economists_real_yuan-

dollar_exchange_rate?fsrc=scn/fb/wl/bl/juanmore

http://www.mckinseyquarterly.com/Strategy/Globalization/A_truer_picture_of

_Chinas_export_machine_2676?gp=1

http://www.economist.com/blogs/dailychart/2010/11/foreign_direct_investment?

fsrc=scn/fb/wl/dc/comethdragon

http://www.economist.com/node/17460954?

fsrc=scn/fb/wl/ar/chinesetakeovers

http://articles.latimes.com/2010/oct/19/business/la-fi-china-rates-20101020

http://economictimes.indiatimes.com/news/international-business/China-to-

boost-grain-supplies-to-combat-inflation/articleshow/6958629.cms

http://www.economist.com/blogs/freeexchange/2010/11/exchange_rates

http://www.economist.com/node/17528136

http://www.moneycontrol.com/news/features/howchineseindian-economies-

stack-up_505077.html