Chinese Economics Thread

[Martian]

China's Nominal GDP Officially Passes Japan's

I hope no one minds if I interrupt the terrific discussion on China's economy with two brief posts.

China has officially passed Japan in nominal terms as the world's 2nd largest economy. Note the calculation discrepancy between 2008's GDP numbers and the revised 2009 numbers which increased from $4.909 trillion to $5.296 trillion. This was due to a revision to the 2009 GDP growth from 8.7% to 9.1% as well as a baseline change to the starting 2009 GDP number along with the recent Renminbi exchange rate increase.

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"China's GDP rises 9.1% in 2009, surpassing Japan
16:31, July 02, 2010

Beijing has revved up its 2009 GDP volume at more than US$5.29 trillion, exceeding Japan's US$5.08 trillion.

China's National Bureau of Statistics revised up the country's GDP (gross domestic product) growth rate for 2009 from 8.7 percent to 9.1 percent.

After a detailed check-up, the bureau modified the volume of GDP, a major gauge of a country or a region's economic production, to 34.0507 trillion yuan (US$5.296 trillion) last year, according to a Xinhua report.

With the upward revisions, China has surpassed Japan as the world's second-largest economy. Japan posted nominal GDP of US$ 5.085 trillion last year.

Most economists forecast China's economy will grow more than 10 percent in 2010, powered by strong domestic consumption and government-inspired investments in high-speed trains and new energies."

 

[Martian]

1) Technically, I think China did not pass Japan in nominal GDP last year because the standard practice is to use the average currency conversion rate for the year or 2009 (e.g. 6.83 Yuan to 1 U.S. dollar). See

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2) It will be interesting to see the new GDP projections for China by both the IMF and Goldman Sachs. The IMF-projected GDP for China is lacking by about $1/2 trillion dollars. The Goldman Sachs' projections are about $1 trillion dollars short for 2010 China. See

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3) China will catch up faster to U.S. GDP than most people expected. China's economic growth rate is roughly 8 to 10% per year. In contrast, U.S. growth rate is approximately 2 to 3%. In addition, China's currency appreciation gives China's nominal GDP an additional boost. America had better keep an eye on the rear-view mirror. China is closing in fast.

 

[Hendrik_2000]

The per capita GDP of the booming coastal cities is many times more than that in the inland cities. However, despite having such a large population with a high per capita GDP, consumption currently accounts for ~10% of China's economy, whilst exports account for many times more.

Why is that the case?

Even if the per capita GDP in the coastal region doubles, consumption won't double (which means it will still be less than 20% of the economy) because part of it will become savings in banks.

I don't know where you got your number from maybe from the figment of your imagination . but chinese consumption is 37% of the GDP Still lower than westen country but this is due to different statistical method. Export component of GDP is around 20%. The bulk of GDP is made of Capital investment Contrary to the myth The major driver of Chinese economy is not export but Urbanization . Only 40% of chinese population live in the city compare to 90% in the west. So there will be more growth in the next 2 decades

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IF YOU are the sort to worry at night about man-induced climate change, then book a stay at any of the new high-rise hotels going up on the edge of China’s big cities—start looking for them around the third ring road. When you stagger red-eyed out of bed to peer into the murky dawn, you will see rank upon serried rank of raw “superblock” developments, a mile apart, marching into the distance. You think of the emissions involved in their carbon-hungry construction, the traffic jams on the arteries tying them into the expanding city, and the new coal-fired power stations being built to light them up. And you wonder how Asia can change its habits—energy consumption grew by 70% in the ten years to 2008—before it is too late for all of us.

Yet the world’s hopes of putting carbon emissions on a manageable path depend upon on how developing Asia urbanises in the coming decades. The scale is staggering. According to the Asian Development Bank, 44m people join city populations each year. Every day sees the construction of 20,000 new dwellings and 250km (160 miles) of new roads



Chinese consumption grow by 17% for the last 3 years and China is now the largest Automobile market in the world. Consumption will grow even more once the goverment implement the health care reform in 2014 when universal health care will be implemented

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The 22 institutions have respectively produced forecast data on the first-quarter GDP growth rate, with a weighted average growth rate of 11.4 percent. Of them, Blue Oak Capital estimated the highest growth rate of 13.5 percent, while the Unirule Institute of Economics estimating the lowest growth rate of 9.5 percent.

Furthermore, according to the forecast data from the 22 institutions, the first-quarter CPI is expected to increase by 2.4 percent, industrial added value by 19.7 percent, total investments in fixed assets by 28 percent, and gross retail sales of consumer goods by 18.2 percent. Both imports and exports will surge in the first quarter, with exports expected to be up by 25.2 percent and imports expected to be up as high as 47.5 percent.

Well, tell that to Premier Wen and the innumerable China netizens, who has expressed concerns on their holdings of US treasury bills. So much so that many are calling for China to sell the holdings rather than suffer billions in "paper loss".

As an interesting comparison, the current official defence budget for China is in the region of US$60 billion. Thus, China's holdings in US treasury bills is sufficient to fund such a military budget for ~ a decade. Thus, a 10% paper loss translates into a year's worth of defence budget.

IMO, the real danger here is that with a large enough paper loss, there may be a plit in the CCP, as happened during the Tiananmen incident that resulted in Zhao Ziyang being under house arrest until he died

.

You seem to have clue of the in and out of world finance . You cannor repatriate that trade surplus because doing so will mean buying dollar and selling yuan resulting in valuation of dollar . Export will be hit and at the same time increasing the circulation of Yuan will result in inflation .

The trade surplus won't affect daily live of average people so what is the fuzz?
You cannot raise defense spending too fast It will only alarmed neighboring country and raise tension. China priority is still to raise living standard of her people . Defense is there to ensure that there is stability.

Any comparison to TAM is irrelevant 87% of Chinese people approve the goverment handling of the economy according to Phew survey

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Fair point. But it isn't going to change over-night. And even than, EU and US will still remain 1 of China's largest trade partner.

Thus, whilst I'm sure China would like to spend money elsewhere rather than buying US$, if they stopped doing so, it will wreck havoc with their exports. Which incidentally, is still the largest driver of China's economic growth.

Thus, the real question under what conditions will China want their exports (currently the largest driver of their economic growth) to suffer

As I say export make up less than 25% of GDP and they are not going to stop overnight In fact export to EU is growing . Urbanization is the main driver of Chinese Economy AND NOT EXPORT!
Western press peddle this idea that China is dependent on the west is nothing but dream world to stroke the ego of the west and covering their reduced influence on world economy. China turn out to be better economy manager read this

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In fact export to EU is growing show the competitiveness of Chinese export engine.So any talk of Export collapse is BS

China Exports Jump 48.5% as Europe Crisis Yet to Bite (Update2)
June 09, 2010, 11:22 PM EDT
More From Businessweek


June 10 (Bloomberg) -- China’s exports jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years, indicating that Europe’s sovereign-debt crisis has yet to pose a restraint on the world’s fastest-growing major economy.

Today’s data may prove only a temporary boon after the International Monetary Fund warned yesterday that global economic risks have “risen significantly” and Europe’s woes could disrupt global trade. China has so far retained a crisis policy of pegging the yuan to the dollar, resulting in a 20 percent gain against the euro this year that will make exports to that region less competitive with rivals such as South Korea.

Since they have so much dollar holdings, they might as well put it to good use to secure the resources they need. Especially when few others can afford it at the moment. Fewer competition should result in better prices for the buyer.

That is exactly what their doing guarateeing their resources and at the same time reducing their holding of US denominated asset

The existence of a growing ant tribe in China is a "straw man" argument? This ant tribe issue is potentially explosive.

You are making a hill out of ant mole. the problem you mention is small isolated social problem . Trying to use it as proof of goverment failure is ridiculous.In fact I say the glut of graduate is due to goverment succes in quadrupling the number of graduate from just 1 million ten years ago to 6 million now. If supplied exceed demand wage will fall and result in hardship. Welcome to market economy!. Join the rest of us . The day that university degree will automatically guarantee job is over!

As for exports, take iPhone as an example. It is made in China. How many people in China can afford a genuine (as opposed to counterfeit) iPhone in China? The workers who make them certainly can't since their monthly pay is less than the cost of 1 genuine iPhone. The same applies for MacBooks, consumer electronics, etc.

The Chinese doesn't buy Iphone they buy clone the same feature for lower price and support Chinese enterpreneur

As for Japan, they aren't growing very much. Hardly a fore-front candidate to take up export slack from EU and US.

Japan is still the wealthiest country in the world with GDP per capita of $40,000. they have high saving rate and sharing the same culture as China they are the bigest market for Chinese agriculture product

As for ASEAN, whilst there is growth, large parts of ASEAN is poorer than China itself. Population-wise, ASEAN is marginally smaller than EU, but the per capita GDP is considerably lower. Furthermore, ASEAN depends on China to buy their commodities. If China imports less commodities from ASEAN due to slowing export demand from EU and US, ASEAN suffers too, as evidenced in 2008-09.
If ASEAN suffers economic slowdown, I hardly think they are the proper candidate to make up the export demand that EU and US provides.

Again you are wrongly using GDP per capita to equate with purchasing power ASEAN is not affected by the financial meltdown and their economy is still growing. They have growing middle class that can afford Chinese product. Plus the existence of Large and wealthy overseas Chinese community in these countries facilitate trade. Their economy is robut because they suffer the meltdown first way back in 97. Since then bank supervision is tighter and recapitalize . Bank is still lending. Dont forget that they have young demographic. Now that free trade is implemented I see good prospect for doubling of trade within 5 years. All over Asia China is investing in infrastructure and mineral exploitation to promote growth in this region

The strikes are small in scale and not coordinated. And yes, it is a minor disruption so far. But, I'd hardly call iPhones, MacBooks, Honda cars, LCD TVs, etc as "low value added export".

If there is a proper labour union that coordinates a nation-wide strike, I'd think the PLA will move in to restore order instead of the central leadership providing moral support.

Again you have no clue of World outsourcing. Though Iphone is made in China the component inside China is outsourced elsewhere in Asia. the actual Chinese input is around 8%. After deducting worker salary and other cost you end up with profit margin of 2 or 3% so nothing to brag about and good riddance if they left!

The PLA will stay out of this strike because the worker demand is in synch with goverment goal of raising living standard. Plus their demand is bread and butter issue NOT POLITIC. So no solidarity no gdansk

Did that toy company happen to also be making toys from other more established foreign companies? Law suits are being filed against a toymaker that counterfeits toys and releases it under their own brand name:

Proving patent infringement on Toy will be difficult!

last comment anyone who use social dislocation and the resulting problem to predict the Chinese demise must be living in dream world . China is a country experiencing transformation in warp speed Any social problem is the natural byproduct of this transformation.

 

[Hendrik_2000]

For those of you who wishes China to fail I am sorry to say you will be disappointed

Managing bubbles
Vigilance by China's policymakers has kept the nation's economy on track while others stumble
Fan Gang
Jul 05, 2010

The growth of China's gross domestic product this year may approach 10 per cent. While some countries are still dealing with the economic crisis or its aftermath, China's challenge is - once again - how to manage a boom. Thanks to decisive policy moves to pre-empt a housing bubble, the real estate market has stabilised, and further corrections are expected soon. This is good news for China's economy, but disappointing, perhaps, to those who assumed that the government would allow the bubble to grow bigger and bigger, eventually precipitating a crash.
Whether the housing correction will hit overall growth depends on how one defines "hit". Lower asset prices may slow total investment growth and GDP, but if the slowdown is (supposedly) from 11 per cent to 9 per cent, China will avoid economic overheating yet still enjoy sustainable, high growth. Indeed, the current annualised growth rate of 37 per cent in housing investment is very negative. Ideally, it would slow to, say, 27 per cent this year!

China has sustained rapid economic growth for 30 years without significant fluctuations or interruption. Excluding the 1989-90 slowdown that followed the Tiananmen crisis, average annual growth over this period was 9.45 per cent, with a peak of 14.2 per cent in 1994 and 2007, and a nadir of 7.6 per cent in 1999

While most major economies have suffered crises in their early stages of growth, China's story seems abnormal (or accidental), and has elicited periodic predictions of an "upcoming crash". All such predictions have proved wrong, but the longer the story lasts the more people forecast a bad end.

For me, there is nothing more abnormal about China's unbroken pattern of growth than effective macroeconomic intervention in boom times. To be sure, both economic development and institutional reforms may cause instability. The type of central government inherited from the old, planned economy - with its overstretched growth plans - causes fluctuations, and was a significant cause of instability in the early 1980s..

But the central government must be responsible for inflation in times of overheating, lest a bursting bubble fuel unemployment. Local governments and state-owned enterprises do not necessarily have those concerns. They want high GDP growth, without worrying much about the macroeconomic consequences. They want to borrow as much as possible to finance ambitious investment projects, without worrying much about repayment or inflation.

Indeed, the main cause of overheating in the early 1990s was over-borrowing by local governments. Inflation soared to 21 per cent in 1994 - its highest level over the past 30 years - and a great deal of local debt ended up as non-performing loans, which amounted to 40 per cent of total credits in the state banking sector in the mid-1990s. This source of vulnerability has become less important, owing to tight restrictions imposed since the 1990s on local governments' borrowing capacity.

Now, however, the so-called "animal spirits" of China's first generation of entrepreneurs have created a new risk of overheating. The economy has been booming, income has been rising and markets have been expanding: all this creates high potential for enterprises to grow; all want to seize new opportunities, and every investor wants to get rich fast. They have been successful and, so far, have not experienced bad times. So they invest and speculate fiercely without much consideration of risk.

The relatively high inflation of the early 1990s was a warning to central government policymakers about the macroeconomic risks posed by fast growth. The bubble burst in Japan's economy in the early 1990s, and in Southeast Asian economies later in the decade, providing a neighbourly lesson to stop believing that bubbles never burst.

Since then, the central government's policy stance has been to put the brakes on the economy whenever there is a tendency towards overheating. Stringent measures were implemented in the early 1990s to reduce the money supply and stop overinvestment, thereby heading off hyperinflation.

In the recent cycle, the authorities began cooling the economy as early as 2004, when China had just emerged from the downturn caused by the outbreak of severe acute respiratory syndrome in 2003. In late 2007, when GDP growth hit 13 per cent, the government adopted more restrictive anti-bubble policies in industries (steel, for example) and asset markets (real estate), which set the stage for an early correction.

Economic theory holds that all crises are caused by bubbles or overheating, so if you can manage to prevent bubbles, you can prevent crises. The most important thing for "ironing out cycles" is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages.

I am not quite sure whether all Chinese policymakers are good students of modern economics. But it seems that what they have been doing in practice happened to be better than what their counterparts in some other countries were doing - a lot on "deregulation", but too little on cooling things when the economy was booming and bubbles were forming.

The problem for the world economy is that everybody remembered John Maynard Keynes' lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone - with no symmetric policy intervention - during the preceding boom. But managing the boom is more important, because it addresses what causes crises in the first place.

In a sense, what China has been doing seems to me to be the creation of a true "Keynesian world": more private business and freer price competition at the micro level, and active, countercyclical policy intervention at the macro level.

There may be other factors that could slow or interrupt China's growth. I only hope that policymakers' vigilance will prevail and be improved upon, enabling China's high-growth story to continue for another 10, 20 or 30 years.

Fan Gang is professor of economics at Beijing University and the Chinese Academy of Social Sciences, and a member of the Monetary Policy Committee of the People's Bank of China. Copyright: Project Syndicate

 

[SampanViking]

1) Technically, I think China did not pass Japan in nominal GDP last year because the standard practice is to use the average currency conversion rate for the year or 2009 (e.g. 6.83 Yuan to 1 U.S. dollar). See

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2) It will be interesting to see the new GDP projections for China by both the IMF and Goldman Sachs. The IMF-projected GDP for China is lacking by about $1/2 trillion dollars. The Goldman Sachs' projections are about $1 trillion dollars short for 2010 China. See

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3) China will catch up faster to U.S. GDP than most people expected. China's economic growth rate is roughly 8 to 10% per year. In contrast, U.S. growth rate is approximately 2 to 3%. In addition, China's currency appreciation gives China's nominal GDP an additional boost. America had better keep an eye on the rear-view mirror. China is closing in fast.

Well here are the basic maths for the next ten years.

By the beginning of 2010, China had an economy equivalent to $5 Trillion, while the US was worth $14 Trillion.

Assuming that China can keep its historic levels of growth going and achieve an annual average of %10, (excluding currency appreciation) then by the beginning of 2020, China will have achieved an annual GDP equivalent to $14 Trillion as well. Trying to guess the performance of the US economy is less straight forward, but it seems most likely that China will have overtaken the US to become the worlds largest economy by about 2025 and certainly achieve this no later than 2030.

 

[Spartan95]

@Hendrik
I stand corrected on the proportion of domestic consumption and exports as part of China's economy. Thanks for the info.

You are making a hill out of ant mole. the problem you mention is small isolated social problem . Trying to use it as proof of goverment failure is ridiculous.In fact I say the glut of graduate is due to goverment succes in quadrupling the number of graduate from just 1 million ten years ago to 6 million now. If supplied exceed demand wage will fall and result in hardship. Welcome to market economy!. Join the rest of us . The day that university degree will automatically guarantee job is over!

IMO, this "ant tribe" phenomenon is under reported and the extent is under-estimated by observers.

China's factories employ millions of workers who are paid ~US$200 per month. These workers range from lowly educated rural migrants to degree holders. And none of these people can afford to buy their own property in the big cities in China. Heck, they can't even put aside any savings. How long are they going to tolerate such a situation?

Fortunately, there is now a widespread move to increase their wages. But even at ~US$300 per month, that isn't enough to buy a property these days. Thus, this group of people numbering in the millions will have problem owing their own properties, or even to get married (since the customary weddings in China is getting more and more ostentatious. Larger dowries are expected as well).

Japan is still the wealthiest country in the world with GDP per capita of $40,000. they have high saving rate and sharing the same culture as China they are the bigest market for Chinese agriculture product

Again you are wrongly using GDP per capita to equate with purchasing power

I thought you said using per capita GDP is not an indication of purchasing power?

Nonetheless, based on estimates, the Japanese population has peaked and is expected to decline in the coming years. There will also be more workers supporting each retiree in Japan than ever before. I'd hardly think China will rely on Japan for any meaningful export growth.

Again you are wrongly using GDP per capita to equate with purchasing power ASEAN is not affected by the financial meltdown and their economy is still growing. They have growing middle class that can afford Chinese product. Plus the existence of Large and wealthy overseas Chinese community in these countries facilitate trade. Their economy is robut because they suffer the meltdown first way back in 97. Since then bank supervision is tighter and recapitalize . Bank is still lending. Dont forget that they have young demographic. Now that free trade is implemented I see good prospect for doubling of trade within 5 years. All over Asia China is investing in infrastructure and mineral exploitation to promote growth in this region

Huh?

Thailand had -1.6% growth in 2009:

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Singapore had -11% growth in 2009:

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Malaysia had -7.8% in 2009:

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The rest of ASEAN had anaemic growth, such as Indonesia's 1.68%, which is a drop from previous years of 2+% growth. The Phillipines went from 4+% to less than 1% in 2009.

Admittedly, Vietnam is an exception as it had good economic growth (but with high inflation) in 2009 as it is neighbours with China and China is also its largest trading partner.

Again you have no clue of World outsourcing. Though Iphone is made in China the component inside China is outsourced elsewhere in Asia. the actual Chinese input is around 8%. After deducting worker salary and other cost you end up with profit margin of 2 or 3% so nothing to brag about and good riddance if they left!

Good riddance eh?

Well, incidentally, this news article came up today:

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Rising yuan forces rethink of China ops

THE recent rise of the yuan is prompting a rethink among Asian companies with manufacturing operations in China.
Analysts say a more robust yuan would further erode China's labour-cost advantage over other links in the global supply chain, even as foreign-owned factories in China are seeing more workers strike over poor working conditions

Now, if some of the large factories shift out of China (foxconn alone employs 800,000), there will be millions left jobless. Not exactly a good way to keep the masses happy.

Proving patent infringement on Toy will be difficult!

Will have to wait and see what comes out of the lawsuit.

If patent infringement is proven, then it will actually encourage foreign companies to invest in China. Alternatively, if patent infringement is not proven, than foreign companies will think twice about investing in China.

last comment anyone who use social dislocation and the resulting problem to predict the Chinese demise must be living in dream world . China is a country experiencing transformation in warp speed Any social problem is the natural byproduct of this transformation.

Chinese demise? Since when did I say that China will fail?

I have no doubt that China will be a super-power in the years ahead, probably earlier than most western forecasts. However, that does not mean that it is all smooth sailing in the next few decades for China. Whilst China's leadership has done well to get this far, there are many more challenges ahead. Whilst I have no doubt that China's leadership is realistic, a lot of others seem to be overly optimistic and think that China's rise is inevitable.

 

[SampanViking]

The result of upward pressure on Salaries on the Chinese East Coast, has not been to chase companies out of China, as China still has significant advantages over its regional competitors, especially in high end manufacturing.

The result is to persuade domestic and foreign companies alike, to relocate further inland. New High tech hubs are already springing up in various key locations, where the salaries are still only 60% - 70% of those paid on the coast and which are the home provinces for large numbers of the migrant population.

Foxconn for example is planning its next mega factory in Zhengzhou – the Provincial Capital of Henan.

 

[Spartan95]

The result of upward pressure on Salaries on the Chinese East Coast, has not been to chase companies out of China, as China still has significant advantages over its regional competitors, especially in high end manufacturing.

The result is to persuade domestic and foreign companies alike, to relocate further inland. New High tech hubs are already springing up in various key locations, where the salaries are still only 60% - 70% of those paid on the coast and which are the home provinces for large numbers of the migrant population.

Foxconn for example is planning its next mega factory in Zhengzhou – the Provincial Capital of Henan.

Moving inland is 1 option.

The other option is to relocate to another country that has even lower wages. India also has a tremendous labour pool that also happens to be largely english speaking. But due to infrastructure issues, manufacturing in India has not quite taken off. Bangladesh has a minimum monthly wage os US$25, which is ~10% of wages in China. But, due to lack of infrastructure and other issues, few companies have set up shop there.

Vietnam is also emerging as a manufacturing hub due to its lower wages as compared to China. Vietnam's advantage is that China is just next door. With China-ASEAN FTA in force now, having a factory in Vietnam is comparable to having a factory in Yunnan.

 

[montyp165]

Moving inland is 1 option.

The other option is to relocate to another country that has even lower wages. India also has a tremendous labour pool that also happens to be largely english speaking. But due to infrastructure issues, manufacturing in India has not quite taken off. Bangladesh has a minimum monthly wage os US$25, which is ~10% of wages in China. But, due to lack of infrastructure and other issues, few companies have set up shop there.

Vietnam is also emerging as a manufacturing hub due to its lower wages as compared to China. Vietnam's advantage is that China is just next door. With China-ASEAN FTA in force now, having a factory in Vietnam is comparable to having a factory in Yunnan.

Wages are only a small part of the cost equation for manufacturers, expenses based on infrastructure and organization eat far more into a company's assets. For that reason even with increasing wages Chinese economic advantages leverage themselves to improved productivity.

 

[Red Moon]

One of the big advantages China has is a peasant, or ex-peasant labor force that can read and write. It will take decades for India or Bangladesh to catch up in this regard. A second advantage is a state apparatus that is VERY active in developing all the necessary infrastructure. This is also impossible for countries built on the British or Western model, since much more is left to private initiative, and infrastructure is something private capital tends to shy away from. As well, China provides tons of engineers, and other qualified personnel.

There are always factories "thinking of relocating" to a lower wage country, but this primarily involves the lowest of the low end manufacturing, precisely because they do not require the advantages China offers. (Chinese companies themselves are starting to export some of these factories, for example, to Bangladesh.) And remember, relocating also has its costs.

Probably the largest group of companies that may consider relocation would be those involved in the so-called processing trade: those whose inputs, aside from labor, electricity and secondary services such as canteens, are all imported, and whose output is all exported. These plants usually utilize unskilled labor, and by their nature, do not depend on local supplies or market. So yes, they can relocate if and when the Yuan goes up significantly. On the other hand, the only benefit these companies bring to China is employment of some unskilled labor and foreign reserves. And apparently there are shortages of unskilled labor already in some coastal areas, while China is now accumulating foreign reserves from profits earned abroad.

I DO AGREE that it will not all be smooth sailing for China, but journalists always exaggerate any tiny trend they may discover (or invent). It is interesting that it takes but a few days of Yuan exchange rate "flexibility" for news items to appear talking about this big "problem" of a rising Yuan! Pretty soon we will be reading about Yuan-caused inflation around the world.