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What Fuels China's Growth?

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  • 1. What Fuels Chinas Growth? Ben Vickery Manufacturing Futures Group MEP

2. Why is Chinas Manufacturing Capacity Growing at Historic Levels?

  • Factors include
  • Foreign Direct Investment
  • International Trade Policy
  • Labor Supply
  • Currency Policy
  • Market Promise and Exports
  • Education and Recruitment
  • Formal and Informal IP Policy
  • Transition From Low to High Tech Production

3. A Quick Look At Chinaespecially Beijing, Shanghai and Guangzhou 4. Three clusters for Chinese transformation: Beijing, Shanghai and Guangzhou

  • The Guangdong Region: A key manufacturing base for China, whose investors include Intel, Honda, IBM and Wal-Mart, among others(also the originator of SARS).
  • The Shanghai Region: 250 of the Fortune 500 invest here, and the city has become world-class in the last decade.
  • The Beijing Region: Motorola (with more FDI than any other MNC) focuses efforts here, top universities are located here, and the area is gearing up for 2008 Summer Olympics.
  • These three areas represent 7.5% of Chinas land and 1.25% of its population, but also garner 73% of Chinas foreign direct investment and creates 30% of the nations GDP!
  • Dr. Wehan Tang, Economist of theDelaware River Port Authority

5. Economic Westernization Leads to Massive FDI

  • As a result of the Chinese governments economic reform efforts, particularly in Eastern China, the nation has experienced an explosion of Foreign Direct Investment (FDI).

6. China surpassed the U.S. in FDI for the first time in 2002 Sources:United Nations Conference on Trade and Development (UNCTAD), U.S. Bureau of Economic Analysis, Bank of China 7. FDI Trends

  • As recently as 2000, the U.S. received roughly seven times as much FDI as China, yet 2002 marked the first point at which China ($52.7 billion) surpassed the U.S. ($23.6 billion) to become the leading global FDI recipient.
  • FDI in China by U.S. firms has increased from only $200 million in 1989 to more than $7.8 billion in 2000.U.S.-China Security Review Commission (6/30/01)
  • FDI in China is expected to reach $100 billion in every year of the 11th Five-Year Plan period (2006-10).ChinaDevelopment Research Center
  • A major reason behind the big increase in China's foreign direct investment is that more transnational corporations are moving their manufacturing operations to China.Peoples Daily (1/2/03)

8. International Trade Policy

  • Chinas economic Westernization is being accelerated by international trade policy, particularly entry into the World Trade Organization (WTO).
  • A five year process begun in November 2001.
  • Average tariffs on products will gradually drop below 10% (versus 44% in 1991).
  • Nontariff barriers (quotas, licensing) will ease.
  • Increases in jointly-owned enterprises (9% in 1990, 40% now, perhaps 60% by 2006).
  • Reforms of state-run monopolies expected to accelerate in the next three years, with new antimonopoly laws driving restructuring of Chinas service industries (such as telecommunications).

9. WTO Impacts Continued

  • Chinese deregulation should streamline regulations and simplify administrative procedures. 789 of the 4000 types of business permits and authorizations are slated for elimination by the end of 2003.
  • Chinas government will be required to redirect its efforts to focus on current and growing social issues, including pensions, unemployment and health benefits, safety and health measures. This is also being driven by the extreme economic stratification between Chinas East and West (Go West initiative).
  • Reform of state-controlled bankingthe removal of Chinas safety net practice of covering firm by state-owned banks (which will hopefully create opportunities for U.S. and other Western financial institutions).

10. What WTO Entry Means to China

  • Galvanized by its WTO admission, China's macroeconomic situation has improved remarkably. Its gross domestic product (GDP) grew by 7.9 per cent year on year in the first three quarters of this year.
  • Last year many people were worried over China's trade situation in the wake of its WTO entry. Some famous institutions and scholars predicted a less than 6 per cent growth rate for China's trade sector.
  • The fact is China's exports increased by 19.4 per cent in the first three quarters of this year [2002]. Its total trade volume during that period was US$445.1 billion, an 18.3 per cent increase year on year
  • A WTO report released on October 10 this year said that China has become the fourth largest trade body in the world following the United States, European Union and Japan.
  • The rapid growth in China's trade volume is directly attributable to the improved trade environment following its WTO entry.
  • China Daily (11/18/02)

11. Ready Access to Cheap Labor

  • These low labor costs are also driven by Chinas almost inexhaustible native labor supply, with nearly 1.3 billion inhabitants.
  • This contrasts with the economic challenge posed by Japan in the 1980s, as Japans total population has remained relatively steady since 1985, and is currently about 1/10 ththat of China.
  • Nearly 700 million Chinese live in the West, and these rural peasants flock to the East for improved pay and living conditions.
  • The standard Chinese labor rate is roughly 40 cents per hour, or about 1/40 ththat of the U.S.Think about that the next time youre at Wal-Mart and wonder how they can sell Chinese-manufactured goods so cheaply!

12. Currency Policy

  • Chinas continued under valuation of its currency has kept the cost of Chinese labor and good extremely low.
  • It maintains an extremely tight trading band on the yuan, or Renmenbi (RMB), between 8.276 and 8.280 to the dollar, varying by only 0.02% since April 2000.
  • This policy has helped the nation to accumulate $280 billion of currency reserves, including $75 billion alone in 2002.
  • China, which ran an estimated $100 billion trade surplus with the U.S. for 2002, maintains heavy controls over the convertibility of the yuanWhile Beijing told top Bush administration officials in 2001 that it will eventually allow the yuan to move more freely, the central banks new governor, Zhou Xiaochuan, and other Chinese leaders have given no indication they are inclined to do so soon.
  • Wall Street Journal (1/24/03)

13. Market Promise & Exports

  • Chinas economic development is also being driven by the promise of a growing market for goods and services.
  • As multinational corporations that have located manufacturing facilities in China wait for the internal markets to mature, they focus largely on goods for export to the U.S. and other established markets, thereby impacting international trade balances.
  • Chinas export of goods has effectively reduced prices of many manufactured goods to those of commodities.

14. The Impact of Chinese Production Source: Nikkei BP Network, National Automotive Glass Consultants 32.5% $18.5/sqm $27.41/sqm Glass Windshields 36.8% $12 $19 Telephone 55.4% $70 $157 VHS Recorder 56.7% $136 $314 Fax Machine 66.4% $165 $491 DVD Player Decrease Price, 2001 Price, 1997 Commodity 15. Knowledge Recruitment & Retention

  • The Chinese state is committed to building a strong educational system, and China has undertaken a strategy to bring back expatriate Chinese scientists and engineers that have been educated in the U.S.
  • Since 1979, more than 400,000 mainland Chinese students have traveled abroad for graduate study, with only 10-25% estimated returning to China.
  • However, in 2002, over 18,000 overseas students returned to China, double the number from 2000.
  • More than 30,000 returnees are in Shanghai alone, with 90% holding graduate degrees from overseas.
  • These Shanghai returnees are expected to exceed 120,000 by 2010.Wall Street Journal (3/6/03)

16. Knowledge Recruitment & RetentionContinued

  • Potential China returnees include green card holders, H1B visa holders (for skilled high-tech workers), and naturalized American citizens (including many granted blanket asylum after the 1989 Tiananmen Square incident).
  • Chinese firms now offer salary and benefits to scientists and engineers roughly equivalent in purchasing power to those here.
  • The Chinese Government sponsors all-expenses-paid visits to China for potential engineering recruits and holds recruiting fairs in Silicon Valley.
  • With the ascension of Hu Jintao as Chinas General Secretary earlier this month, the recruiting push is expected to accelerate. Jintao is himself a graduate of the Qinghua University engineering school. Los Angeles Times (11/25/02)

17. Intellectual Property Acquisition

  • China has also undertaken a strategy to greatly enhance its intellectual property, both by requiring that foreign manufacturers train their local partners in the technologies associated with their products and by illegally acquiring intellectual property.
  • By applying lesson
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