Copyright © 2004 Global Insight, Inc. China: Macroeconomic Cycles and Impact on World Economies...

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%


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?


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)


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)


Supply Side Impact


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


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


(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)


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


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


Demand Side Impact


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)



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



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?


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


China’s Vigor/Chaos Cycles


China’s Current Cycle Tame Compared with Past


?

?

?

?

?

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


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


Post Reform Vigor-Chaos Macro Cycles

VIGOR

CHAOS

RETRENCHMENT STERILITY

LIBERALIZATION


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


investment growth gradually lowered

soft (IMF as of 1997). hard (by 1999)

2003-? fixed

investment exports

central government relaxation of credit expansion


admin crackdown on overheated sectors

???

Source: Oppers, Erik S. (1997), “Macroeconomic Cycles in China,” IMF Working Paper 97/135.


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


* Hovered above 4% until October 2003.


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.


But Why Is The Current Cycle So Tame?


?

?

?

?

?

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


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


-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)


-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)


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)


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


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%


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

Copyright © 2004 Global Insight, Inc. China: Macroeconomic Cycles and Impact on World Economies...

Documents

Transcript of Copyright © 2004 Global Insight, Inc. China: Macroeconomic Cycles and Impact on World Economies...