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George Iliev: China Biz/Econ Presentation at the American University in Sofia
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China Business and Economy
George ILIEV
American University in BulgariaNov 28, 2010
1. China’s economy: GDP and growth
2. Exchange rate & forex reserves
3. Foreign trade
4. Investment flows & stock market
5. China’s relationship with the West
2
Contents
1) China Business Development Manager at VC network Merar
2) Three years of teaching Economy of China at Sofia University
3) Four years of editing Chinese and Japanese business news for publications on Dow Jones Factiva and Reuters Business Briefing
4) Author of a series of articles on the Chinese economy and business for Bulgaria's main business weekly Kapital
5) Six-month advertising internship in China
6) BA in Chinese Studies from Sofia University, 2002
7) MSc on China from the London School of Economics, 2008
8) One-year exchange at Anhui University in China, 2000-2001
9) One-semester at the Hong Kong University of Science and Technology (2009), part of an MBA at Emory University
3
My China Background
4
1. GDP and GDP growth
5Source: The Economist
GDP growth index of BRIC (1990=100), 1990-2005
0
50
100
150
200
250
300
350
400
45019
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Brazil
Russia
India
China
Source: World Bank
Nov 20, 2007Privatisation & Globalisation. WTO & China’s Trading Blocks
Flying Geese Model:International Division of Labour
8
Flying Geese Model within China
Source: The Economist
1980-2005: China was a cost-cutting destination
2008 Beijing Olympics showcased a high-tech China with growing R&D spending
Chinese tourists abroad buy more per head (since 2005) than any other nation
Large luxury goods market: Audi now sells more cars in China
(including Hong Kong) than in Germany Sales to Chinese (at home and travelling)
make up 18% of Louis Vuitton’s revenue
9
Moving up the value chain
Source: The Economist
Growth below 7-8% poses social problems Growth above 10% leads to overheating and
formation of bubbles (in stocks, real estate, industrial capacity, infrastructure)
10
China’s breakneck growth
Source: The Economist
11
12
China Stock MarketRoller Coaster
2. Forex Reserves & Exchange Rate
13
Accumulation of reserves in Asia &easy creditprecipitated 2007/8financial crisis
14
China Forex Reserves
Source: The Economist
Nominal (to theUS dollar): 24% up
Real (includinglabor costs): another 21% up
Labor shortagessince 2004
Japan in 1960/70s as comparison
15
China’s exchange rate since 2005
Source: The Economist
16
China wages
Migrant labor is driven by a four-stroke engine
The option of going to the countryside means there are no ghettos in China
Source: The Economist
17
China’s high savings rate
Source: IMF
18
China demography
20502000
Source: prb.org
19
3. China exports & imports
Transformation from public ownership (blue) to private ownership (purple)
late 1970s mid-1980s early 1990s 2009
% of foreign-invested companies in foreign trade, 1992-2008
0
10
20
30
40
50
60
70
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
total export import
Source: 中国统计年鉴
Discrepancy between Chinese and foreign trade surplus statistics results from:
1. Re-exports via Hong Kong not counted2. Exports at FOB, Imports at CIF3. Disguised capitalinflows
23
China’s trade surplus conundrum
Source: The Economist
GDP composition (expenditure method)
52.547.2
35.3
14.615.2
13.3
32.536.6
43.5
0.4 17.9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1981 1992 2008
net exports
capital formation
government spending
private consumption
Source: 中国统计年鉴
25
Domestic Value Added Exports
Source: McKinsey Quarterly
G20 excludingUSA is in tradebalance withChina Vast exports to
China (machines,raw materials)
26
China’s role as importer
Source: The Economist
27
4. Investment flows & stock market
Foreign direct investment in China, 1985-2008 (US$ 100 million)
050
100150200250300350400450500550600650700750800850900950
1000
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: 中國統計年鑑
Note: Figures from 2006 onward include investment in capital markets & financial institutions.
FDI in China (scale up to $100 B.)
In some years China is the biggest FDI destination in the world
IPOs of Chinese companies in Hong Kong, London, New York, Singapore
Foreign investments in China
29
Source: The Economist
H-share companies listed on stock exchanges in HK, US, UK, & Singapore, 1993-2008
615 18
25
42 43 4652
60
75
93
111122
143153 150
0
20
40
60
80
100
120
140
160
180
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: 中国证券期货统计年
Combined: second biggest in the world (A+H shares): USD 3.3 trillion market cap at end-2009
Mainland China only: ◦ third largest market cap◦ ninth highest free float◦ second highest daily trading volume (churn)
A shares & H shares: arbitrage opportunities
31
China and Hong Kong stock markets
Hong Kong Stock Exchange
32
156 H-share companies & 97 red chip companies listed in Hong Kong as of June 2010
China ranked the world's fifth largest outbound direct investor in 2009, up from 12th place in 2008
China’s FDI abroad was $56.5 billion in 2009
China Investment Corporation (sovereign wealth fund), created in 2007 with $200 billion of China’s forex reserves. (Now $300 billion)
Provincial sovereign wealth funds, like Guangdong Rising Asset Management, have also been launched
33
Chinese investments abroad
34
Source: The Economist,Nov 11, 2010
35
Source: The Economist,Nov 11, 2010
1. To reduce inflationary pressure and RMB revaluation (appreciation) pressure
2. To make use of the USD in its currency reserve while the dollar is still valuable
3. To buy up assets before other emerging powers like India and Brazil have started buying
36
Reasons for China’s shopping spree
Resources: oil, metals, agricultural products (Rio Tinto; assets in Australia, Canada, Kazakhstan, Africa)
Financial investments (Blackstone, Morgan Stanley, Fortis, Standard Bank, Barclays, Rothschild, AIA)
Technology & telecoms (Volvo, Hummer, Saab, Rover)
37
What China invests in
Chinese investments abroad are getting rebuffed:◦ CNOOC’s 2005 blocked offer for U.S. Unocal◦ Failed acquisitions in Australia, Canada
Foreign investments in China are getting rebuffed: ◦ Coca Cola’s $2.4 bn bid for juice company
Huiyuan◦ Carlyle’s bid for Xugong Construction Machinery• Yet, some (timely) Chinese investments have
been welcomed: CIC owns 10% in Morgan Stanley
39
Investment hurdles
China no longer takes its cues from the West (nor from Russia)
WTO member since 2001 (though lacking market economy status till 2016)
$2.6 trillion of forex reserves (mostly treasuries)
Huge government purchases in friendly countries
Own technological standards (3G, RFID); R&D in GMOs, nuclear fusion
Only a US/EU weapons embargo remains (since 1989)
40
5. China’s relationship with West
41
Yin & Yang
