China – a new economic power

September 16, 2011

Charles Mo & Company

Topics

Overview of the China Economy What does it mean to be number 2? Largest companies in China Issues in China

Impact of the 585 billion Chinese stimulus program, Difference between the US and Chinese stimulus programs Trade tension between the US and China US trade restrictions imposed on Chinese products A potential stock market bubble in China Overseas hunt for energy resources Conflict with international politics Environmental pollution Undervaluation of the RMB Changing workforce

Success and failure stories of American firms

Economic Statistics of China

Currency Yuan (CNY); also referred to as the Renminbi (RMB)

Exchange rate(av) (8/24/2011) Rmb:$ USD  = 6.39Rmb:¥ JPY100 = 7.940Rmb:€ EUR  = 9.24Rmb:£ GBP  = 10.54

Fiscal year Calendar year(01 Jan to 31 Dec)

Trade organizations WTO, APEC ,G-20

GDP (Nominal) (2007) $3.42 trillion (ranked 3rd) (2008) $4.42 trillion (official data)(2009) $4.7 trillion(2010) $5.7 trillion

GDP (PPP) (2010) $10.7 trillion (ranked 2nd)

GDP per capita (Nominal) (2010) $4,283 (ranked 95th)Source: IMF

GDP per capita (PPP) (2010) $7,518 (ranked 91th)

GDP growth rate (2009) (2010)

11.5% (official data)10.3%

GDP by sector (2008) agriculture (primary) (11.3%) industry (secondary) (48.6%)services (tertiary) (40.1%) note: industry includes construction ( 5.5%)

GDP by components, % (2006) Private consumption (36.4)Government consumption (13.7)Gross fixed investment (40.9) Exports of goods/services (39.7) Imports of goods/services (-31.9)

Interest rates (2011-4-11) One-year benchmark deposit rate: 6.31%One-year lending rate: 7.47 %

Inflation rate (CPI) 4.6% 2010-1.2% ( Jan-Aug 2009 average)4.9%[1] (Feb 07 - Feb 08)4.5% (2007 average)1.7% (2006 average)

What does it mean to be the second largest economy? 8-24-2011 – China nabs the top spot in PC market 2-14.2011 - China topped Japan as the second largest economy in the world. Wsj 7-20-2010 - China has passed the US to become the world’ biggest energy consumer. In 2009, China overtook the US as the number one auto market with 45% increase to 13.1

million cars. In December, 2009, China overtook Germany's US$917 billion export to become the top

exporter with export valued at US$957 billion (Wall Street Journal) Apr. 2009 - Largest mobile phone network with 679 million phones In 2009, Boeing predicts China will be the largest market for commercial air travel outside the

US for the next 20 years In 2008, China replaced the US as the world’s largest internet user Since 2006, China has been the largest global steel producer and consumer ICBC – largest bank in the world in terms of market cap, China Construction Bank(3), Bank of

China(5) Petro China – largest market cap oil company The US is poised to lose its 110-year run as the world's biggest manufacturing nation by output

in 2011 to China - though it still claimed the top spot last year - according to IHS Global Insight figures released on Monday, Financial Times reported. The US created 19.9% of world manufacturing output last year, compared with 18.6% in China, despite the global downturn.

Being No 2 brought more changes to China

Higher wages – in 2010 alone, wages for factory workers in 20 major exporting provinces raised 20-30%. Wages will continue to increase in double digits in the years to come.

Higher commodities price – cotton price increased 40% in 2010 and expected to increase another 50% next year.

Overall increase in prices – gasoline, water, utility, and real estate Increased R&D spend – from 0.5% of GDP a decade ago to 1.5% of

GDP. China now outspends Japan in R&D. Industries and businesses are moving inland. Higher export costs

Continued 3.2 trillion in foreign exchange reserves, August, 2011 3.0 trillion in foreign exchange reserves, March, 2011 801 billion of US treasury, Dec, 2009 750 billion of US treasury, Jan 2010 895 billion of US treasury, March, 2010 900.2 billion of US Treasury, April, 2010(Japan 795.5) 1,154 billion of US Treasury, February, 2011

Feb Jan Dec Nov Oct Sep Aug Jul Jun Jun May Apr Mar Feb Country 2011 2011 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ China, 1154.1 1154.7 1160.1 1164.1 1175.3 1151.9 1136.8 1115.1 1112.1 843.7 867.7 900.2 895.2 877.5 Japan 890.3 885.9 882.3 875.9 873.6 860.8 832.5 817.3 799.9 801.2 784.8 793.8 783.3 768.2 UK 295.5 277.9 271.6 242.5 209.0 190.5 181.0 107.2 94.5 363.6 350.7 321.1 279.0 233.5 Oil Exp 218.8 215.5 211.9 204.3 207.8 215.4 211.7 209.3 210.2 216.3 228.6 232.9 223.4 211.9 Brazil 194.3 197.6 186.1 189.8 183.0 181.0 170.5 167.7 163.8 158.5 161.5 164.4 164.5 170.9 Carib Bnk 169.4 166.5 168.1 158.8 146.3 157.7 172.6 164.1 178.9 165.9 166.3 153.2 148.2 144.4 Taiwan 155.9 157.2 155.1 154.4 154.5 153.3 153.4 153.8 151.9 128.6 126.2 126.9 124.8 121.4 Russia 130.5 139.3 151.0 167.3 176.3 173.3 173.7 175.7 168.2 123.4 126.8 113.1 120.1 120.2 Hong Kon124.6 128.1 134.2 134.9 135.2 131.9 133.9 131.2 137.0 141.0 145.7 151.8 150.9 152.4 Switzerlan110.4 107.6 107.0 107.0 107.7 110.0 113.0 111.8 106.5 100.1 84.4 80.0 78.8 81.8 Canada 92.9 86.5 76.7 76.7 66.1 56.5 44.9 43.0 35.9 93.7 84.8 81.9 77.1 67.1 Luxembou 81.0 83.0 86.4 81.9 78.5 86.1 79.0 98.9 97.6 96.6 75.6 76.9 83.9 77.8 Singapore 66.7 57.8 72.9 62.2 66.4 56.7 55.4 55.3 53.3 50.5 40.6 42.4 45.5 42.6 Germany 58.3 61.1 60.5 58.6 58.2 57.9 56.8 55.3 52.2 54.0 55.8 54.8 53.7 50.0 Thailand 57.6 56.5 52.0 52.2 52.7 50.4 47.3 40.8 35.7 49.3 46.3 46.9 43.5 42.1 Ireland 42.0 44.4 45.8 50.0 48.9 51.5 49.5 51.1 55.7 48.3 48.0 45.7 43.3 38.7 India 40.3 40.6 40.5 39.7 40.1 40.0 37.9 38.4 35.4 36.4 29.3 31.0 32.0 31.6

2010 nominal GDP

k Fort500

Name Headquarters

Revenue(Millions. $)

Profit(Millions. $)

Employees Industry

1 17 Sinopec Beijing 131,636.0 3,703.1 681,900 Oil

2. 24. Petroleum China National

Beijing 110,520.2 13,265.3 1,086,966 Oil

3. 29. State Grid Corporation

Beijing 107,185.5 2,237.7 1,504,000 Utilities

4. 170. Industrial and Commercial Bank of China

Beijing 36,832.9 6,179.2 351,448 Banking

5. 180 China Mobile Limited Beijing 35,913.7 6,259.7 130,637 Telecom

6. 192 China Life Insurance Beijing 33,711.5 173.9 77,660 Insurance

7 215 Bank of China Beijing 30,750.8 5,372.3 232,632 Banking

8 230 China Construction Bank

Beijing 28,532.3 5,810.3 297,506 Banking

9 237. China Southern Power Grid

Guangzhou

27,966.1 1,074.1 178,053 Utilities

10

275 China Telecom Beijing 24,791.3 2,279.7 400,299 Telecom

Four Trillion RMB Stimulus Program Announced in November, 2008, largest stimulus program at the time Resulted in a budget deficit of 3% of GDP in 2009

1998 1.1% deficit of GDP 1999 1.9% 2000 2.5%

Central government contributed 1.18 trillion 2009 & 2010 600 billion each Rest of the fund from private sectors and local governments

Budget deficit 3% China2009 12.3% US 2009

China’s 4 Trillion RMB (US$585 Billion)Stimulus Program China objective - it will keep its own economy in good shape China’s stimulus program totals 18% of its 2008 GDP Paulson’s 700 billion TARP bailout and Obama’s 785 billion stimulus

program together amounts to 10.7% of 2008 GDP After the initial 585 b stimulus program was announced, BJ requested

local governments to submit proposal and the returned request totaled 1 trillion, over twice the stimulus amount

Central government encouraged banks to lend to identified 10 industries Total yearly government expenditure in China for 2009 is below 20% of

GDP US government expenditure in 2009 now amounts to 20% of GDP

Boosting the economyBreakdown of China’s stimulus packageTotal spending:4 trillion yuan ($585.76 billion)

45% 25% 9.25% 8.75% 7% 4% 1%Railways. Highwaysairports, power grids

Post disasterreconstruction

RuralDevelopmentAnd infrastructureProjects

EcologyAndEnvironment

Housing Security

Independent Innovation

HealthCultureAnd education

The US and the China Stimulus Program

US 700 B & 785 B China 585 B% of GDP 10.7% 20%

Government Spend per year

20% of GDP 20% of GDP

Tax Credit/reduction

1/3 or 295 B VAT on imports

Infrastructure 33% 45%

Healthcare 14% 1%

Year US Exports US imports US trade balance1980 3.8 1.1 2.7

1985 3.9 3.9 0

1990 4.8 15.2 -10.4

1995 11.7 45.6 -33.8

2000 16.3 100.1 -83.8

2001 19.2 102.3 -83.1

2002 22.1 125.2 -103.1

2003 28.4 152.4 -124.0

2004 34.7 196.7 -162.0

2005 41.8 243.5 -201.6

2006 55.2 287.8 -232.5

2007 65.2 321.5 -256.3

2008 71.5 337.8 -266.3

2009 69.6 296.4 -226.8

2010 91.8 364.9 -273.0

Source: USITC

Country or Trading Group US Trading Balance

World -497.8

China -273.0

OPEC - 95.6

EU -79.7

Mexico -66.3

Japan -59.8

Canada -27.6

Others 104.2

2010 –source US Commerce Department

True US GDP GDP is defined as the gross value of the products and

services created by an economy. Value of products are measured at the retail value US GDP amounts to 14.5 Trillion, 70% of it in retail

consumption. How much of the 10.15 are manufactured in the US?

Rising US China Trade Tensionwsj16-09-09 P1, p18,p19

Rising US China trade tension threatening G20 meeting this week 35% tariff on Chinese tires for the next 3 years to preserve union jobs 17% of the tire market are imported by the Chinese Chinese tires manufacturers may loose 100,000 jobs Chinese wants to avoid wider conflict in trade More Chinese say in the IMF US sanction on Chinese steel pipe in December , 2009 The U.S. will impose duties on $2.8 billion in steel-pipe imports from China after saying

subsidies on the products may harm American steelmakers, a move that threatens to escalate trade tensions between the two countries. (BusinessWeek 12/31/2009)

China Central Banker Chides USASWJ August 4, 2011

Called the US to adopt responsible policy to manage its debts

China will continue to diversify investments other than US dollar

China’s state media continue to condemn Washington over its debt problems

Xinhua, official Chinese newspaper, urged the US to roll out measures to balance the budget

China’s huge foreign exchange reserve

New foreign currency inflows into China last year totaled $469 billion, triple the $156 billion in total global demand for gold.

China holds 1.954 metric tons of gold reserves as of June 2011

The U.S.’s Joe Biden and China’s Xi Jinping watch basketball Sunday at a high school rebuilt after the 2008 earthquake in Dujiangyan, Sichuan province 8-21-2011

Georgetown University and Bayi brawl, 8-18-2011

China Stock Market Index Chart

China yuan exchange rate

Protectionist measures ramp up-wsj150909p4 & p13 130 protectionist measures drafted and to be implemented Russian planned across-the-board tariff increases S. African change purchasing rules to favor domestic firms owned by

non whites Japan rewriting sanitation policies to restrict food import. 35% tariff on tires from China which constitutes 17% of the US tire

market 55 countries issued protective measures against China, 49 against

US, and 46 against Japan Move pleases labor but complicate policy Chicken trade retaliation could be dangerous Buy American in US stimulus program; Buy Chinese in Chinese

stimulus program

Global hunt for energy resources Acquisition of Australian mines Acquisition of Sub Sahara African oil field Cooperation between Russia natural gas Financing Venezuela Offshore drilling in Southern China Sea

International political conflict UN Security Council conflict over Iran nuclear

program North Korea nuclear issue Venezuela Chavez Obama’s potential meeting with Dalai Lama China’s expressed displeasure over arms sales to

Taipei Prosecution and execution of foreign expats

Rio Tinto executive detained UK citizen executed for possession of Cocaine

Environmental pollution & food safety

Environmental scare - Diesel spill in tributary contaminates China’s second longest waterway, Yellow River (wsj 010409)

Food safety scandal - December, 2009 shut down of Shanghai Panda Dairy of selling 2008 recalled milk product which contains Melamine.

2008 Melamine in dairy product, eggs, chicken feed, livestock feeds, pet foods. Melamine was blamed for killing six infants and sickening 300,000 babies

2008 Lead in toys resulted in the largest toy recall by Mattel. New Cadmium scare prompts Walmart to pull children's jewelry

Historical Chart of the RMB (Chinese Yuan)

49-76

76-89 90 95 00 01 02 03 04 05 06 07 08 09

Mao Zhedong

Deng Xiaoping

5 8.5 8.3 8.3 8.3 8.3 8.3 8.0 7.5 7.3 7.0 6.8

Issues China’s refusal to adopt a floating currency system Zhang Bin, a researcher at the Chinese Academy of Social Sciences

(CASS), has encouraged Chinese officials to consider a one-time 10% appreciation of the renminbi's value against the dollar, Bloomberg reported. The move, suggested as a means to reduce speculative inflows of capital, would be accompanied by a 3% annual limitation on the appreciation or depreciation of the currency relative to the dollar. While Zhang could not predict whether the government would accept his advice or allow the currency to appreciate from its current value of approximately RMB6.83 to the dollar, he stated that a 10% revaluation would not seriously impact export growth and that China should take an "active strategy" to reduce the threat from short-term capital inflows.

Changing workforce Wsj6-1-10, Honda strike spurs Honda to raise pay by 24% even though the

strikers demanded 57% increase Honda shut down all four of the Chinese joint-venture final-assembly plants

because of lack of components from its parts manufacturing plants Foxcomm announced a salary increase of 20% in May, 2010

Honhai bends amid scrutiny – wages to rise 30% WSJ 6-3-10 p

Charles Mo is a Certified Public Accountant in the US. He is the General Manager and founder of Charles Mo & Company, a wholly owned American consulting firm specializing in recruiting, opening new factories and business, outsourcing accounting, and providing HR related assessment tools for corporations.

Charles moved to China in 1995 as the Controller/General Manager for Polaroid China, and later served as the Chief Financial Officer for Nike China, and finally as the Chief Operating Officer for Coca-Cola in Shanghai until 2005. Prior to that Charles worked for Wang Laboratories, Inc. in Massachusetts in various financial management capacities.

In 2003 Charles joined American Chamber of Commerce in Shanghai, and was appointed CSR Committee Vice Chair in 2004, Board Treasurer in 2005, and elected Board Vice Chairman in 2006, 2007, and 2008. Charles was also the Chairman of the Audit Committee in 2005 and member of the Audit Committee in 2006 and 2007.

Charles has an MBA from California State University Fullerton and a BA in Business Administration from Hong Kong Baptist College.

Successes GM China auto sales up 67% in 2009 Coca-Coca, Nike, surpassed 1 billion in revenues

in 2006 Other successes by American companies

Intel, Microsoft, Big 4 CPA’s, Law firms, Small companies success stories

Element Fresh (9 locations in Shanghai, 2 in BJ) Blue Frog Bar & Restaurant(7 in SH, 2 in BJ, 1 in Macau) DE Global founded by Ed Gwinn(offices in Vietnam, Taiwan and HK) B&L Group founded by Phil Branham (project management firm for the US

Pavilion in the coming World Expo

Failures Best Buy began to close all its branded stores in China on February 22nd. Home Depot started to close all of its China stores two years ago. Just closed its

last one in BJ last month. Whirlpool to close washing machine plant in Shanghai(4-10-2009) Yahoo dismal results in China eBay admits FAILURE in China, eBay Eachnet to close (12-19-2006) Polaroid China bankrupted and closed in 2002 Hertz entered China in the 90’s and did not re-enter until the 2000’s Walmart slow start in China, union problem, has a total of 84 stores in China

after acquiring Trustmart. Carrefour has 148 stores in China. Law firms cannot operate in China except through rep office Numerous small American businesses failed over the years or continue to incur

losses