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Copyright © 2004 Global Insight, Inc.
China: Macroeconomic Cycles and Impact on World Economies
Global Insight ForumAtlanta Breakfast Seminar
May 11, 2004
Todd C. Lee Managing Director
Asia Macroeconomics Group
Copyright © 2004 Global Insight, Inc. 2 4/2004
China 2003 Report Card
Macroeconomic PerformanceReal GDP rose 9.1% Industrial production up 12.6%Fixed investment up 26.7%Trade up 37.1%--exports 34.6%, imports 39.9%
Microeconomic ImpactSteel imports up 52% (world’s #1 steel importer); Consumed
33% of world finished steel Crude oil import up 31% (world’s #2 crude oil demand)Consumed 50% of world cement productionPassenger car production rose 85%
Copyright © 2004 Global Insight, Inc. 3 4/2004
Presentation Outline
Why China is having such impact? Size, policy, and growth matterSupply side impactDemand side impact
China’s impact is accentuated with each up-cycle
Driving force behind China’s macro cycles
Is this current cycle different?
How will it end?
Copyright © 2004 Global Insight, Inc. 4 4/2004
China’s Market Reform Marked by Openness to Trade Policy
0
10
20
30
40
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Exports Imports
(Percent, share of nominal GDP)
Copyright © 2004 Global Insight, Inc. 5 4/2004
Tariff Reduction Already Substantial
55.6
43.3 43.7 44.1 43.239.9
35.9
23.0
17.0 16.4 15.3
9.7
0
10
20
30
40
50
60
1982 1985 1988 1991 1992 1993 1994 1996 1997 2000 2001 2005
(Average tariffs, percent)
Copyright © 2004 Global Insight, Inc. 7 4/2004
0 2 4 6 8 10 12 14 16 18
China (National)China Hi (Shanghai)
BrazilMexicoTaiwanKorea
SingaporeEurope
United StatesJapan
(Manufacturing wages, $ per hour, 2001)
Sources: U.S. Bureau of Labor Statistics, China’s National Bureau of Statistics China data are 2002 wage rates
United States: $16.14
China: $0.66
Shanghai: $1.26
China’s Manufacturing Wage Competitiveness
Copyright © 2004 Global Insight, Inc. 8 4/2004
China U.S.
Literacy Rate 86% 97%
High School Graduates (aged 25+) 18% (232 mil.)*
84% (245 mil.)*
College Graduates (aged 25+) 5% (65 mil.)*
26% (76 mil.)*
University Students (per 1,000 people) 5.6 (7.2 mil.)*
54.1 (15.8 mil.)*
Source: Federal Reserve Bank of Dallas, Southwest Economy, Sept./Oct. 2003* Absolute level
China’s Human Capital Quality – Size Matters
Copyright © 2004 Global Insight, Inc. 9 4/2004
(Percent of Japanese multi-national corp. finding country as favorable FDI destination)
China Becomes FDI Magnet Due to WTO Entry
Rank 2000 Survey Ratio 2001 Survey Ratio
1 China 65 China 82
2 U.S. 41 U.S. 32
3 Thailand 24 Thailand 25
4 Indonesia 15 Indonesia 14
5 Malaysia 12 India 13
6 Taiwan 11 Vietnam 12
7 India 10 Taiwan 11
8 Vietnam 9 Korea 8
9 Korea 9 Malaysia 8
10 Philippines 8 Singapore 6Source: United Nations Conference on Trade and Development (2002)
Copyright © 2004 Global Insight, Inc. 10 4/2004
China Trade’s Sharp Rise after WTO Entry
0
10
20
30
40
50
1999 2000 2001 2002 2003
Imports Exports
(Billions of U.S. dollars)
WTOEntry
Copyright © 2004 Global Insight, Inc. 11 4/2004
China Becomes Asia’s Export Platform after WTO
-6
-4
-2
0
2
4
6
8
1999 2000 2001 2002 2003
Japan Asia Excl. Japan United States European Union
(Monthly trade balance, billions of U.S. dollars)
WTOEntry
Copyright © 2004 Global Insight, Inc. 13 4/2004
China Already a Major Import Market by 2002
295
173
0 200 400 600 800 1,000 1,200
1. USA2. Germany
3. UK4. Japan
5. France6. China
7. Italy8. Canada9. Belgium
10. Netherlands11. China (domestic)
(Billions of U.S. dollars)
Copyright © 2004 Global Insight, Inc. 14 4/2004
China Becoming A Dominant Import Market in 2003
413
250
0 200 400 600 800 1,000 1,200 1,400
1. USA 2. Germany
3. China 4. UK
5. France 6. Japan
7. Italy 7a. China (Domestic)
8. Canada 9. Belgium
10. Hong Kong
(Billions of U.S. dollars)
Copyright © 2004 Global Insight, Inc. 15 4/2004
China’s Macro Cycles since Reform Began
(Percent change from a year earlier)
?
?
?
?
?-5
0
5
10
15
20
25
1980 1985 1990 1995 2000 2005
Real GDP CPI
1984 Peak
1988 Peak
1994 Plateau 2004
Peak?
Copyright © 2004 Global Insight, Inc. 16 4/2004
China’s Advancement with Each Cycle
GDP
(Bil. current $)
Per Capita
GDP
(current $)
Imports
(Bil. current $)
Imports
(World rank)
1984 309 298 24 17
1988 401 364 55 11
1994 542 455 116 11
2003 1,564 1,203 413 3
Copyright © 2004 Global Insight, Inc. 18 4/2004
China’s Current Cycle Tame Compared with Past
(Percent change from a year earlier)
?
?
?
?
?
15.3
11.614.2
9.1
1.2
24.2
19.1
12.2
-5
0
5
10
15
20
25
1980 1985 1990 1995 2000 2005
Real GDP CPI
Copyright © 2004 Global Insight, Inc. 19 4/2004
Causes of China’s Macroeconomic Cycles
Gradualist reform creates mismatches between liberalized and non-liberalized parts of the economy
Once government partially relaxes control, such mismatches would generate:Excessive growth and growth bottleneck – high growth not
matched in efficiency advancementHigh inflationStrain on banking sector – mounting nonperforming loansCorruption
Government then is forced to tighten credit and retrench liberalization
Economic hard-landing ensues
Copyright © 2004 Global Insight, Inc. 20 4/2004
Post Reform Vigor-Chaos Macro Cycles
VIGOR
CHAOS
RETRENCHMENT STERILITY
LIBERALIZATION
Copyright © 2004 Global Insight, Inc. 21 4/2004
China’s Macro Cycles in Comparison
Cycle
Aggregate demand dominated by Possible cause Policy Response Landing
1982-86 retail sales fixed
investment
excessive investment, wage, and credit increases
credit policy tightened interest rates increased
soft, but short lived
1986-90 retail sales exports
relaxation of financial policies in, public panic buying in response to admin price increases
monetary and credit policy tightened
investment reduced sharply
price reform halted and partially reversed
hard
1991-99
fixed investment
retail sales exports
investment push by central and local authorities
monetary and credit policy tightened
investment growth gradually lowered
soft (IMF as of 1997). hard (by 1999)
2003-? fixed
investment exports
central government relaxation of credit expansion
monetary and credit policy tightened
admin crackdown on overheated sectors
???
Source: Oppers, Erik S. (1997), “Macroeconomic Cycles in China,” IMF Working Paper 97/135.
Copyright © 2004 Global Insight, Inc. 22 4/2004
What Drove The 2003 Cycle?
2000 2003
Jan. Dec. Sep. 02 Dec. 03
GDP 8.0 9.1
Exports 27.9 34.6
Retail Sales 9.7 9.4
State Investment 9.2 28.2
Real 1 Yr Lending Rate (%)5.50 4.60
6.05 4.35 6.01 2.11*
Money Supply (M2)16.1 19.2
16.3 15.4 16.6 19.6
Loans13.8 19.6
12.8 13.4 14.2 21.1
(Percent change from a year earlier)
* Hovered above 4% until October 2003.
Copyright © 2004 Global Insight, Inc. 23 4/2004
0
5
10
15
20
25
30
1998 1999 2000 2001 2002 2003 20040
2
4
6
8
10
12
Loan (Left Scale) Real Lending Rate (Right Scale)
Credit Growth Did Not Accelerate until Late 2002
(Monthly data, percent change a year earlier)
Political Leadership Political Leadership Transition BeganTransition Began
State Investment State Investment Stimulus BeganStimulus Began
Real lending rate equals one year lending rate less CPI inflation.
Copyright © 2004 Global Insight, Inc. 24 4/2004
But Why Is The Current Cycle So Tame?
(Percent change from a year earlier)
?
?
?
?
?
15.3
11.614.2
9.1
1.2
24.2
19.1
12.2
-5
0
5
10
15
20
25
1980 1985 1990 1995 2000 2005
Real GDP CPI
Copyright © 2004 Global Insight, Inc. 25 4/2004
But Why Is The Current Cycle So Tame?
Mismatches between liberalized and non-liberalized parts of the economy have narrowed
Domestic demand possesses structural weakness Inefficient SOEs’ need to restructure
– Massive layoffs (or the prospect of which) depresses demand
Structurally flawed financial intermediation– Non-state investment difficult to be funded through bank
lending—non-state under-investment
– Banks too scared to lend due to banking reforms
– Impact of financial system problem just as serious as SOE problem, but less publicized and well understood
Copyright © 2004 Global Insight, Inc. 26 4/2004
-5
0
5
10
15
20
25
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04
Industrial Production WPI
Coexistence of “Hot” and “Cold” in China
(Percent change a year earlier)
Copyright © 2004 Global Insight, Inc. 27 4/2004
-10
0
10
20
30
40
50
60
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04
Exports Retail Sales
Coexistence of “Hot” and “Cold” in China Part II
(Percent change a year earlier)
Copyright © 2004 Global Insight, Inc. 28 4/2004
2,000
4,000
6,000
8,000
10,000
12,000
1998 1999 2000 2001 2002 2003 20040
5
10
15
20
25
Level (Left Scale) Growth (Right Scale)
Saving Deposits’ Rapid Rise Reflects Weak Private Domestic Demand
(Percent change a year earlier)(Billion yuan)
Copyright © 2004 Global Insight, Inc. 29 4/2004
Short-term Macroeconomic Policy Dilemma
Investment-led overheatingOverheating in select sectors (e.g. steel, construction)Mounting bad loans (surging bank lending to SOEs)Corruption
Persistent deflationary forcesExcess-capacity, especially in labor (unemployment
continues to climb)Private sector under-investmentWeak consumer demand
Mounting revaluation pressure on currencyGrowing trade surplus with USSurging foreign exchange reservesHot money inflow
Copyright © 2004 Global Insight, Inc. 30 4/2004
Beijing’s Policy Response and Effectiveness
Government’s response so far Keep fixed exchange rate, while use other means to relieve
revaluation pressure (ongoing) Used $45 billion of forex reserves to recap state banks (Dec. 03) Raising reserve requirement ratio by 1%, to 7% (Sep. 03) Admin crackdown on overheating sectors (late 03) Allowing central bank lending rate to float 0.63% above target
(Mar. 04) Raising rrr by 0.5% on troubled banks (Mar. 04) Harsher admin crackdown on overheating sectors (late Apr. 04)
Policies ineffective thus far Investment surged 43% in 2004 Q1 Industrial production up 18% Money and loan growth remained around 20%
Copyright © 2004 Global Insight, Inc. 31 4/2004
How Will This Cycle End?
Moderate policies so far because stability is key to the government
No need for extreme measures yet because inflation is still tame
Main concern is wasteful lending’s impact on the banking sector’s bad loan problem
Likely additional measures: More admin crackdown Modest lending rate hike, but no deposit rate increase Plug holes from hot money inflow, keep fixed exchange rate policy
If investment expansion does not slowdown in the next quarter, Beijing will adopt much harsher measures
Soft-landing is still the baseline, due to tame inflation
Hard-landing is possible, but unlikely: will happen if harsh crackdown coincides with a global recovery retrenchment