CBE_C_Chinese Chimera

8/7/2019 CBE_C_Chinese Chimera

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By,

DeepaliKalyanpur

Sherman SerraoVrindaMohan

YaminiDhawan

SreeMurugan



³CHIMERA´

A word which means«

µA fanciful mental illusion or fabrication¶



The People's Republic of China is theworld's second largest economy after theUnited States

Governed by the Communist Party of China (CPC) under a single-party system

Permanent member of the United NationsSecurity Council

Recognized nuclear weapons state



World's fourth largest country

Population:1,338,612,968 (July µ10)

Population Growth Rate Rank -148

Age Structure: 0-14 years: 19.8%

15-64 years: 72.1%

65 years and over: 8.1%



Urban population: 43% of totalpopulation

Per Capita Income: $3,735

GDP: $4.9 trillion growth rate of 9.1%

GDP - composition by sector: Agriculture: 10.6%

Industry: 46.8%

Services: 42.6%



Literacy level: 91.6%

Unemployment rate: 4.3% (Sep µ09)

Exports: $1.204 trillion (World No. 1)

Imports: $954.3 billion (World No. 2)

Reserves of foreign exchange and gold:$2.422 trillion (World No. 1)



Exchange Rate (Renminbi yuan (RMB) per US dollar ):

y 6.65 CNY (Yesterday)

y 6.82 CNY (2009)

y 6.94 CNY (2008)

y 7.61 CNY (2007)y 7.97 CNY (2006)

y 8.19 CNY (2005)



China·s Economic Growth 1978-2025:

What We Know Today about China·s Economic Growth

Tomorrow

Views of the future China vary widely. While some believethat the collapse of China is inevitable, others see theemergence of a new superpower that increasingly poses a

threat to the U.S



China before 1978

The economy was heavily disrupted by the war againstJapan and the Chinese Civil War from 1937 to 1949

the victorious Communists installed a planned economy. the economy largely stagnated and was disrupted by the

Great Leap Forward famine which killed between 30 and40 million people, and the purges of the CulturalRevolution further disrupted the economy.

Urban Chinese citizens experienced virtually no increasein living standards from 1957 onwards, and rural Chinesehad no better living standards in the 1970s than the1930s.

Socialist equality had destroyed the incentive to improve The economy was riddled with huge inefficiencies and

malinvestments, and with Mao's death, even the CPC leadership turned to market-oriented reforms as the onlyway to salvage the failing economy



1978 Chinese economic reforms

1. Encouraged the formation of ruralenterprises and private businesses

2. Liberalized foreign trade and investment

3. Relaxed state control over some prices4. Invested in industrial production and the

education of its workforce

While pre-1978 China had seen annual

growth of 6 percent a year, post-1978China saw average real growth of morethan 9 percent a year



Why is china growing so fast?

A study by IMF shows that the following reasons are

responsible for growth of china till now

Capital accumulation--the growth in the country's stock of capital assets, such as new factories, manufacturingmachinery, and communications systems

Large number of Chinese workers at low cost

Sustained increase in productivity was the driving forcebehind the economic boom.

During 1979-94 productivity gains accounted for more than42 percent of China's growth and by the early 1990s had

overtaken capital as the most significant source of thatgrowth

It turns out that it is higher productivity that has performedthis newest economic miracle in Asia. Chinese productivityincreased at an annual rate of 3.9 percent during 1979-94,

compared with 1.1 percent during 1953-78



China is likely to be the world's largest economic power

by almost any measure. The extrapolations are supported

by two types of considerations

China¶s growth patterns of the past 25 years sincethe beginning of economic reforms

Information available today about the quantity andquality of Chinese labourers through 2015

Demographics alone suggests China¶s continued

economic rise. If talent is randomly distributed inthe world population and if agglomeration of talentis important, then the odds are strongly in China¶sfavour.



Collapse of China is inevitable

China's economy will mature, and itsfast rates of growth will calm

Economic growth is driven by threethings:

more capital

more labour

more productivity.



Capital

China¶s capital accumulation was mainlybecause of the high saving rate of thepeople and industries

However, China's savings rate is declining Saving rate is falling from 21% of GDP in

1995-96 to around 18% today

as bank and capital market reforms make

credit more widely available, As a result there is decrease in capital

accumulation in China



Labour

China's labour force is still gettingbigger, but at a slower rate

The working population of the country isdecreasing

More of dependent population

Labour productivity will decrease



Productivity

Productivity will itself decline as labour and capital will decline

Less of capital for development

Less of labour for training





Chinese Chimera : A Wild Illusion

The multiple issues and characteristicsof Chinese Economy:

a. Growth

b. Currency Issue

c. Labor Market



The Growth

9% growth in 2009

10% forecasted by IMF for 2010 and2011

Biggest lender to US post recession

G2:Proposed formation- "Chimerica³

G2: China-the biggest Creditor

USA-the biggest Debtor



The Two Major Threats

1.Overheating economy

2.Worrying labor market and demographictrends



Overheating Economy

Rapid loan growth : property sector

Consumer Price inflation

Strong Consumption : sales rising to18%

ACTION

Banks increasing reserves ,controlledlending



Currency Issue

Proposed : RMB to be Reserve Currency Reasons:

I. Currency Swaps by RMB trade with Hong

Kong , Indonesia, South Korea etcII. Bilateral Trade Deal with brazil in their own

currencies

Fears:

I. Requires RMB to be freely convertible : lossof control by China

II. US Dollar : International Currency of Choice



Labor Market

Labor Force 813 million 40% in agriculture

Demographic Distribution:

20% < 15 yr

72% between 15 to 65

8% >65

Comparisons:

I. Youngsters(20%)-higher than those inJapan(13%) but lesser than Malaysia(31%)

II. Population Growth rate(0.655%)-lesser thanMalaysia(1.723) and Vietnam(1.137)



Problems

Limited internal migration from Rural toUrban China

Youngsters not replacing old age people

Threats: Low wage labor-Vietnam

Skilled labor-Malaysia andJapan



Solutions / Government Options

Size and Volume

Government Expenditure

Skill Pool Employee Relations

Infrastructure



Conclusion- 3 Important Factors

Reliance on Exports

Employment Sustainability

Threats in labor issues



China ² The Rising Dragon

US the world¶s largestimporter/consumer.

China the world¶s largest exporter.

Current trade between both thecountries pegged at $409 billion

Bilateral relations strained due tovarious reasons.

As of May, 2010; China hold $868 billionof U.S. Treasury securities.



Miracles..

Relative stability of the Rate of Growthof Real GDP

Globalization and InvestmentDiversification.

Investment in China by ForeignInvestors: A consideration



Tasks Ahead

Maintaining and increasing employment.

Establishing a credible and sustainablesocial safety net.

Socialization of basic social services suchas education and healthcare.

Reforms of SOE¶s

Reform of banking and financial systems.

Integrating and unifying the domesticmarket.

Controlling corruption.



Mirages..

Domestic Stability

Acceleration of urbanization andindustrialization.

Centralization versus Decentralization

Reliability of information.

Integration of National markets.

Exchange rate mechanism.



Will the proximity of the Asian Giants

result in an embrace or a donnybrook

Traded goods silk, spices and precious stones through the silk route

Buddhism and invaluable information Aryabhatta works on trigonometry were translated

into Mandarin

Panchsheel or 5 principles of peaceful coexistence was signed in 1954

Through the 1960s the relations deteriorated with the Sino-India War (1962), China sided

with Pakistan, and India backing the Soviet UnionFrom 1980 to 1990 a mix of diplomatic talks and a war like situation ensued

In 1992 border trade resumed after a hiatus of more than thirty years and consulates

reopened in Mumbai and Shanghai in December 1992, and in June 1993

In 1993 and 1996, the Sino-Indian Bilateral Peace and Tranquillity Accords, an agreement to

maintain peace and tranquillity along the Line of Actual Control (LoAC) was signed

Through bilateral negotiations, several agreements on economic, scientific, cultural,technological, media and military cooperation, signed throughout the 1990s

China is currently Indias largest trading partner. India-China bilateral trade reached US$32

bn in the first half of 2010 and expected to exceed US$ 60 bn in 2010

India and China: Rivals or Partners?



Implications for India: Its Advantage India

China is becoming a consumer market to sell to rather than a globalmanufacturing hub: Selling to China is still wrapped in many problems - protectionist

measures, ,the Government itself a major shareholder in many state-owned enterprises,

entrenched cultural sensitivities.

Indias infrastructure woes have become its opportunity:As airports, bridges, city

subways are getting constructed for contractors, architects and engineers who madegood in China, India is the new opportunity. A staggering US$500 billion is being spent in

the next three years in India, and foreign businesses involved in any aspect of

infrastructure development are scrambling to get into the market

India the future tiger of global procurement: Lower wages and skilled workforce are

working in our favour despite challenges pertaining to quality and infrastructure. China

meanwhile, continues to become more expensive, as the Communist China Price re-establishes a policy of charging foreign investors more



Implications for India: Its Advantage IndiaRelocation Costs from China to India: Primarily Wage Structures

Comparison of the basic expenses (salary, welfare and factory rental) of a typical Chinese

factory in Dongguan in southern China with similar factories in Chennai in southeast India

Particulars Dongguan Chennai

AverageWages 156573 23400

MandatoryWelfare Costs 51512 5640

Factory Rental (5000 sq.m) 7352 5416

Total 215437 28816

Annualized 2585244 345782

Termination Costs 626294 -

7 times more expensive.

Monetary savings for the business would be US$2 million p.a.

In Dongguan, the salary level has been increasing at a rate of about 15 percent p.a. for the

last three years whereas in Chennai, the rate has been increasing by about 5 percent



Implications for India: Its Advantage India

India easier to live in than China: India is more accepting of cultural differences,

languages

Demographic Dividend

Indias entrepreneurial spirit and much derided democracy: Chinas growth has

been largely state-directed. Indias, by contrast, is driven by 45m entrepreneurs. They are

less dependent on state patronage than Chinese firms, and often more innovative. Ideas

flow easily around India, since it lacks Chinas culture of secrecy, censorship and piracy



'Inclusive growth' to find place in China's economic &

social blueprint : Kouhao and Pushi Piazhi

Premier Wen Jiabao acknowledges the maladies of an economy suffering and describes the growth as "unbalanced, uncoordinated,

and unsustainable´

President H u Jintao first used the term "incl usive growth" ( or

kouhao), at a Asia-Pacific Economic Cooperation (APEC) meeting

China's roadmap for 2011 to 2015 (12th Five Year Plan) provides a blue print for

economic and social targets

Prime focus would be on boosting wages and improving its domestic consumption

Equitable sharing of economic growth and allowing every citizen to benefit fromthe economic transformation

Rebalancing process to target lowering the large trade surpluses and foreign-

exchange reserves , and shifting the driver of economic growth from investment

and exports to domestic consumption

Move from being currency manipulator to currency appreciator



'Inclusive growth' to find place in China's economic &

social blueprint : Kouhao and Pushi Piazhi

Chinese dissident Lui Xiabao was awarded the Nobel Peace Prize(2010 ). On December 10, 2008, on the sixtieth anniversary of the

United Nations¶ Universal Declaration of Human Rights, 303

courageous Chinese citizens signed a petition known as ³Charter 08,´

a manifesto for democracy

Charter 08 essentially calls for ending one-party rule

Laid out nineteen recommendations that included overhauling the constitution

Separation of legislative, judicial, and executive powers

Implementing general elections of public officials



³Fifteen years ago when China was at a crossroads, a powerf ul fig ure led China on the road to a market economy.

He left an important political will: µAdhere to the Party¶s

basic line unswervingly for 100 years¶«Fifteen years later,

China has reached a point where the original mode of

develo pment seems to have reached its limit. The tide of

history, like the eastern-flowing Yangtze River , seems to

flow in circles. However, it is believed that all the rivers will

eventually flow into the sea.´

Conclusion

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