China :Economic Development and FDI

China :Economic Development and FDI

Angang HuTsinghua University

Jan.19 2003

What is the model for China’s economic development: catch-up model

Why dose China take off and catch up with development?

Why dose China become No.2 FDI country in the world?

How to evaluate China’s investment climate

What’s challenges for China’s leaders

The forerunner, the late comer; the pursuer and the staying behind in modernization.

The innovator, the follower, the leader and the follower of technical progress

Modernization: a progress of continuous catch-up and competition

China’s Long-run Economic Development China is the late comer of

catch-up in modernization From an international

perspective,China is the fourth model of catch-up in world’s history of economic development

International Examples 1870-1913: USA catch-upped U.K. 1950-1992: Japan catch-upped USA

1965-1997: “the four dragons of the Asian” catch-upped the developed countries

1978-2020:China’s taking-off

GDP(PPP, current international $)

GDP, PPP (current i nternat i onal $)

0

2E+12

4E+12

6E+12

8E+12

1E+13

Chi naUni ted StatesJ apan

Ratio of China’s GDP to US’sRati o of Chi na' s GDP to US' s

0. 00

10. 00

20. 00

30. 00

40. 00

50. 00

60. 00

1970 1975 1980 1985 1990 1995 2000

PPPPPP, Gen ui n e

GDP (PPP), % of WorldGDP percentage , PPP ( current i nternat i onal $)

0. 00E+00

5. 00E+00

1. 00E+01

1. 50E+01

2. 00E+01

2. 50E+01YR

1975

YR19

76

YR19

77

YR19

78

YR19

79

YR19

80

YR19

81

YR19

82

YR19

83

YR19

84

YR19

85

YR19

86

YR19

87

YR19

88

YR19

89

YR19

90

YR19

91

YR19

92

YR19

93

YR19

94

YR19

95

YR19

96

YR19

97

YR19

98

Chi naJ apanUni ted StatesI ndi a

GDP per capita, (PPP, current international $)

GDP per capi ta, ppp (current i nternat i onal $)

2

2. 5

3

3. 5

4

4. 5

5

Chi naUni ted StatesJ apanWorl d

Effects of Catch-Up Speed effect: higher economic

growth rate Structural effect: faster change

of structure Technical effect: more prompt

diffusion of technologyOpenness effect: more open polities of trade and investment

Trandency of Five Economies for Long Run（ 1965－ 1999年）

Growthrate ofGDP

Growthrate of

GDP percapita

1965-1999 1965-1999 GDP 人均GDPChina 8.1 6.4 2.45 4India 4.6 2.4 1.4 1.5Japan 4.1 3.4 1.24 2.13Russia NA NA NA NAUSA 3 2 0.91 1.25

World 3.3 1.6 1 1

Country

Growth potencial Index

Source：World Bank, 2001, World Development Indicator, 2001, Table 1.4, Oxford University Press 。

Growth Index of GDP (1990=1.0)

GDP (1990=1. 0)增长指数

0

1

1

2

2

3

1990 1991 1992 1993 1994 1995 1996 1997 1998

Bul gar i a

Chi na

Hungary

Pol and

Russi an Federat i on

Ukrai ne

% of China and Russian’s GNP per capita(PPP) to US’s

% of GNP per capi ta (PPP) to US' s

05

101520253035404550

Chi naRussi an Federati on

Gross Domestic Investment, % of World

Gross Domest i c I nvest ment , ( % of t he Wor l d)

( 2. 00)

3. 00

8. 00

13. 00

18. 00

23. 00

1975 1980 1985 1990 1995 2000

Chi na I ndi aJ apan Russi an Federat i onUni ted States

Institutional innovation effect: to encourage the innovation and transfer of technology and the protection of intellectual property rights, to encourage the adjustment and upgrading of the industrial structure

Ratio of Planning and Market

Price（％） 1978 1995 2000

General Purchasing of Farm products

Ratio of Planning Price

94 17 6.7

Ratio of Planning guide price

4.4 2.9

Ratio of Market Price

6 78.6 90.4

Means of Production


15.6 9.6


100 6.5 4.6


0 77.9 85.6

General retail goods


97 8.8 3.7


2.4 1.5


3 88.8 94.8

Market-oriented Development Index (1978-1999)

0. 0

10. 0

20. 0

30. 0

40. 0

50. 0

60. 0

1975 1980 1985 1990 1995 2000年份

市场化指数

From Planning Economy to Market Economy:Major Rapid Changes Market structure:increasing

income,consumption structure changing;

Free market: overcapacity,price decreasing,intensive competition, consumer products

Restricted market: regulations remain,telecom services,bank,insurance

Towards liberalization,de-regulation,lesser bureaucracy

Demographic transition effect:

From high growth of population to low growth of population

Ages 15-64: 888million, account for 70.15% of total population

Urban population: 458 million=2 times of US, growth rate is 4.3%, 650-700 million by 2010.

Demographic transition(1982-2000)

1982 1990 2000

Birth rate 2.22 2.11 1.40

Death rate 0.66 0.67 0.65

Growth rate 1.57 1.44 0.76

% of total population

Age 0-14 33.6 27.7 22.9

Age 15-64 61.6 66.7 70.2

Age >64 4.9 5.6 7.0

Ratio of urban population

21.13 26.41 36.22

Human capital: average school year of population is 7 years; high educated population is 45.57 million

Economic Revolution China has the fast growing

economic in the world, 9% real GDP growth over past 23 years

China will become the largest economy in the world by 2015-2020

China will become one of the largest trade country in the world by 2020(World Bank,1997)

Potential domestic market: No.1 in 10 emerging markets

Relative high real purchasing power

World products bases

China Will Be One of the Largest IT Countries in the World

Total number of telephones will be up over 500 million in 2005 from 324 million in 2001;penetration rate up from 24% in 2001 to 40% in 2005;the penetration rate of internet users will reach over 8% in 2005 from 4% in 2001; users of cable-television will be over 150 million .

Comparison of National Powers(% of World Total)

Country 1980 1985 1990 1995 1998

Changefor1980-1998

AnnualChange

China 4.736 5.306 5.646 7.163 7.782 3.046 0.1692

India 3.376 3.615 3.735 4.008 4.365 0.989 0.0549

Japan 6.037 6.337 7.317 8.535 7.749 1.712 0.0951

Russia 0.569 0.53 1.607 3.271 2.808

USA 22.485 22.022 22.138 21.903 22.785 0.3 0.0167

China’s Diversity and Unevenness One China, two systems: urban

population(36.2%), rural population(63.8%) Two different institutional governances ID Education Employment and social security system Public service Public expenditure and financial transfers Political election

One China,four worlds: First world:high income

regions(2.2% of total population), Second world:upper-middle income

regions(21.8%), Third world:lower middle income

regions(26.0%), Fourth world:low income

regions(50%)

One China, four societies:

Agricultural society:50% of total employment population;

Industrial society:22.5%; Service society:22.5%; Knowledge society:5% As for rural areas, agricultural labor

accounts for 65.8%,industry is 13.6%, service is 16.8%,knowledge is less than 2%

Impacts of WTO on Chinese Economy Entry to WTO: reduce tariffs,lower

trade barrier for imports, open domestic market

Increase FDI,Increase competition,more diversified economy, integration into world economy

Economic growth: potential GDP growth rate increase 0.5-3% per year

Factors of investment climate in China Macro-economic stability international integration, infrastructure, governance, Market entry and exit, human resources and skills, access to finance.

China’s Present Economic Situation Macro-economic stabilization: No

fluctuation,no inflation Economic efficiency High revenue growth Low stock of GDP Low energy consumption, coal

demand decline

The Fluctuation of GDP Growth Rate(%)

Period average Standard balance fluctuation Maximum Minimum

1953—2000

8.0 7.9 99 21.3 -27.3

1953—1978

6.7 10.3 154 21.3 -27.3

1979—2000

9.6 3.1 33 15.2 3.8

1991—1995

12.0 2.1 17.5 14.2 9.2

1996—2000

8.3 0.96 12 9.6 7.0

Table II. Comparison of China’s Main Economic Index Average Growth Rate (%)

GDP Average Growth Rate 12.0 8.3Fluctuation 17 0.9Growth Rate of employment 1.2 0.9Investment Growth Rate Fixed assets 36.9 11.2Growth Rate of national financial revenue 16.3 (13.4) 16.5 (14.7)Growth Rate of national financial expenditure 17.2 (4.3) 18.4 (16.6)

Growth Rate of the index of citizens’ consumption 12.9 1.8

Growth Rate of the index of commodity retailing prices 11.4 -0.1

Growth Rate of energy total production 4.4 -3.3Growth Rate to energy total consumption 5.9 -0.5

Growth Rate of the retailing total of social consumer goods 23.2 (11.8) 10.6 (10.7)

Growth Rate of export 19.1 10.9

IndexThe 8th Five Year

PeriodThe 9th Five Year

Period

Growth Rate of import 19.9 11.3

China’s Economic Growth in Short-term Keeping relative high economic

growth rate Relative low inflation Relative high foreign currency

reserves Stable currency exchange rate Relative low nominal ratio of

government balance(<3% of GDP) But some political and economic risks

In general, China compares favorably in areas such as macro and political stability, integration into the world market, and infrastructure. Abundance of cheap labor associated with rural-urban migration has been and continues to be a comparative advantage of China.(World Bank,2002)

China has done spectacularly well, and is the unchallenged leader of the pack. The country has doubled its ratio of trade to GDP over the past two decades (to 41 per cent of GDP in 1999), and has had per capita GDP growth of nearly 8 per cent during 1990-99.

Figure 2.1Growth remained strong through the East Asian Crisis

-15

-10

-5

0

5

10

15

1994 1995 1996 1997 1998 1999 2000 2001

Per

cent

GD

P g

row

th

China

Korea, Rep.

Malaysia

Indonesia

Thailand

Philippines

While China and India had comparable levels of GDP per capita (measured at purchasing power parity) in 1990 (approximately $1400), over the following decade India’s per capita income nearly doubled, while China’s nearly tripled. Thus, today, China’s per capita income is about 50% higher than that of India. Together with its faster growth, China has also had significantly faster poverty reduction

Figure 1.2. Poverty reduction in India and China is closely related to the growth rate

* India poverty reduction figure is for 1993-99

Percent per annum (1992-98)

8.4

China

9.9

India

4.4

5.4*

0

2

4

6

8

GDP per capita

growth ratePoverty

reduction

10

International Integration

China has reduced tariff rates to about one-third of what they were two decades ago: from 49.5 percent in 1982 to 16.8 percent in 1998, 15%in 2002. Partly as a result, trade increased from 15 percent of GDP in 1980 to nearly 50 percent of (a much larger) GDP by 2002. Imports increased from about $US 36 billion in 1980 to $US 285 billion in 2002. Likewise, exports increased from $US 27 billion in 1980 to $US 300 billion in 2002.

China is Second Country of Net FDI in the World

Ratio of Net FDI to GDPFDI GDP净占比重（％）

0. 00E+001. 00E+002. 00E+003. 00E+004. 00E+005. 00E+006. 00E+007. 00E+008. 00E+00

Chi naUni ted States

Figure 2.4FDI as a share of GDP in China is high, but declining

0

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Ratio of FDI to Capital Investment(%)

FDI净占资本投资总额比重（％）

0. 00E+00

5. 00E+00

1. 00E+01

1. 50E+01

2. 00E+01

1982

1984

1986

1988

1990

1992

1994

1996

1998

Chi naUni ted States

Ratio of Country’s FDI to World Total

FDI中国和美国净占世界总数比重（％）

0. 00E+001. 00E+012. 00E+013. 00E+014. 00E+015. 00E+016. 00E+01

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Chi naUSA

-4

-3

-2

-1

0

1

2

3

4

5

6

China

India

S. KoreaMalaysia

Indonesia

ThailandPhilippines

Brazil

Argentina

Figure 2.3FDI as a share of GDP, 2000

Human Development Indicator（ 1950-1999）

1950 1975 1980 1985 1990 1995 1999

China 0.159 0.522 0.553 0.590 0.624 0.679 0.718

India 0.160 0.406 0.433 0.472 0.510 0.544 0.571

Japan 0.607 0.851 0.876 0.891 0.907 0.920 0.928

Russia 0.809 0.826 0.823 0.778 0.775

USA 0.866 0.861 0.882 0.896 0.912 0.923 0.934

Total Human Capital （ 1975－ 2000 ）

1975 1980 1985 1990 1995 2000

human（ year）

China 4.38 4.61 4.94 5.51 6.08 7.11

India 2.70 3.27 3.64 4.10 4.52 5.06

Japan 7.78 8.51 8.74 8.96 9.23 9.47

Russia 9.27 9.23 9.77 10.5 9.77 10.0

US 9.69 11.9 11.6 11.7 11.9 12.1

% of total human capital in world’s

China 17.5 17.6 18.7 20.2 21.9 24.0

India 7.27 8.40 9.06 9.98 11.1 12.3

Japan 4.60 4.36 4.01 3.73 3.55 3.27

Russia 6.57 5.69 5.30 5.05 4.26 4.06

US 10.5 11.6 10.2 9.3 9.0 8.6

Figure 2.5Share of firms reporting that infrastructure was "no obstacle" to doing business

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Thailand India

Brazil

East AsiaChina

South AsiaMalaysia

OECD

Source: World Business Environment Survey

Figure 2.7. Shipping cost advantages

-10%

0%

10%

20%

30%

40%

50%

Thailand Indonesia China S. Korea Brazil

Cost advantage compared to IndiaE. CoastW. CoastUSA

Textiles

6.7

21.0

9.210.6

0

10

20

India Shanghai

Last timeLongest

0

4

8

1210.6

7.0 7.0

India Korea Thailand

7.8

China

Figure 2.8. Days to clear imported inputs through customs

Figure 2.9Telephones per hundred people

0

5

10

15

20

25

30

35

40

45

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Korea

Malaysia

Brazil

China

Thailand

India

Source: International Telecommunications Union

Figure 2.10Mobile telephone users per hundred people, 2001

0

10

20

30

40

50

60

70

China

IndiaIndonesia

S. Korea

Malaysia

Philippines

Source: International Telecommunications Union

Figure 2.11Electric Generation Capacity (MW/thousand people)

0

0.2

0.4

0.6

0.8

1

1.2

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Korea

Malaysia

Orissa (India)

Brazil

Thailand

China

Philippines

Punjab (India)

Source: US Energy Information Agency

IndiaPolitical stability

Government effectiveness

RegulationsRule of law

Corruption

ChinaPolitical stability

RegulationsRule of law

Corruption

BrazilPolitical stability

RegulationsRule of Law

Corruption

ThailandPolitical stability


Corruption IndonesiaPolitical stability


Corruption





Figure 2.12 Governance ‘pentagons’

Source: Kaufman, Kraay and Zoido-Laboton, 1999

China scores very high on political stability, near the median for government effectiveness, regulations, and rule of law, but below the median for corruption.

Figure 2.13Management time spent dealing with public officials on

regulations, administrationPercent of management time

0

5

10

15

20

IndiaChina Transitional Europe

LAC OECD

Source: World Business Environment Survey (WBES) ©2000 The World Bank Group

Ranking out of 75 countries surveyed in the Global Competitiveness Report 2001

China

0 15 30 45 60 75

Hiring and firing of workers

Administrative burden for startups

Median number of days to start a firm

Number of permits to start a firm (6 permits)

(10 permits)

(30 days)

(90 days)

Figure 2.16Entry and exit

Strongest Weakest

India

Figure 2.18Illiteracy and School Enrollment, 1999-2000

*Philippines data is for 1998-1999** No data for India & Indonesia

Source: UNESCO, through SIMA

0

10

20

30

40

50

60

70

80

90

100

illiteracy rate secondary enrollment tertiary enrollment**

ChinaIndiaIndonesiaKorea, Rep.MalaysiaPhilippines*Thailand

Figure 2.22R&D Expenditures in China

0

5000

10000

15000

20000

25000

30000

35000

40000

1991 1992 1993 1994 1995 1996 1997 1998 19990

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Total R&D expenditure (PPP $)Left Axis

As % of GDPRight Axis

Figure 2.23R&D as Share of GDP, latest year available

0

0.5

1

1.5

2

2.5

3

China India Brazil Korea Malaysia Thailand

19971994

1996

1996

19961996

Fig.2.26 Sources of finance

India

Retained earnings

Parent Bank loan

Equity Other(largely

other loans)

<20 20-100 100 plus

China

Retained earnings

Parent Bank loan

Equity Other (largely other loans)

0

20

40

60Percent

0

20

40

60Percent

Overall Evaluation International integration increased significantly

in the past decade, culminating, of course, with China’s entry into the WTO. On this measure China compares well to other Asian countries. Infrastructure, too, compares well to other countries and seems to be improving rapidly. Most elements of governance compare favorably to other countries. Human resources and skills are, despite high illiteracy rates and low tertiary school enrollment, largely comparable to several other Asian countries and appear to be improving(World Bank,2002).

China is Facing the Economic Challenges High unemployment in urban The gaps between the rural and

urban areas Poverty in both rural and urban

areas Regional disparities Environmental challenge

美国兰德公司对中国不确定因素影响经济增长率的估计（ 2005-2015 年）

类型 Negative influence on GDP growth

1.Unemployment,poverty, social destability 0.3-0.6%

2.Economic cost of corruption 0.5%

3. IV/AIDS, epidemic 1.8-2.2%

4.Water shortage, pollution 1.0-2.0%

5.Consumption of energy and price rising 1.0%

6.Financial system and SOE 0.9-1.3%

7.FDI decline 0.8-1.6%

8.Taiwan conflict and other regions conflicts

1.0-1.3%

High Unemployment in Urban

laid-off workers:54million（ 1995—2001 ）

Register Unemployment Rate was 3.6% in 2001

Real Unemployment Rate was around 8-9%

Price Index of Agricultural Products in Domestic Market(1985-2000) 1978 100农产品收购价格指数（年＝）

0

100

200

300

400

500

600

Wheat Price ComparisonWheat Pr i ce Compari son(1995- 2000)

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000

US$/

ton

Chi na US

Corn Price ComparisonCorn Pr i ce Compar i son(1995- 2000)

020406080

100120140160180200

1995 1996 1997 1998 1999 2000

US$/

ton

Chi na US

Volume of Business of Agricultural Products and its Loss because of Price reduction

Year Volume of Business of Agricultural Products (100 Million RMB) a

Growth Rate of the Index of the Purchasing Price of

Agricultural Products (%) b

Loss for Price Reduction 100 Million RMB) c

1996 7600

1997 9136 -4.5 411

1998 10123 -8.0 810

1999 11018 -12.2 1344

2000 12443 -3.6 448

1997-2000 33620 -22.6 3013

Per capita Income in Rural and Urban(1978-2001)

Per Capi ta I ncome i n Rural and Urban

010002000300040005000600070008000

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

RuralUrban

The Urban-Rural Relative Gaps(1978-2001)

Urban/ Rural

00. 5

11. 5

22. 5

33. 5

Urban Poverty Population by Region,1998

Urban Poverty Popul at i on by Regi on, 1998

020406080

100120140160

Ratio of Urban Poverty by Region(1998)

Rati o of Urban Poverty by Regi on, 1998

0. 00

2. 00

4. 00

6. 00

8. 00

10. 00

12. 00

14. 00

16. 00

Annual Growth Rate of Income in Urban(1996-2000)

Annual Growth Rate for Urban Househol d(1996-2000)

02468

1012

Averag

e

Lowst

Income

(10%) Low

stIno

me(5%) Low

Income

(10%) Lower

middle

(10%)

Middle

(10%)

Uper M

iddle

Income

(10% High

Income

(10%)

Highes

tInc

ome(10

%)

Rural Inequality

Gini Coefficients of Rural Income

YEAR

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

Gin

i C

oe

ffic

ien

ts

.36

.34

.32

.30

.28

.26

.24

.22

.20

.18

Overall Inequality in China

Inequality in China

YEAR

.

1994

1992

1990

1988

1986

1984

1982

1980

1978

1970

1953

Gin

i In

de

x

.60

.55

.50

.45

.40

.35

.30

.25

.20

.15

.10

.05

Gini Index

Rural Gini

Urban Gini

Regional Gini

Overall Gini

Regional Divergence of China （ Standard Error of the

Log of Real GDP Per capita）

0. 51

0. 52

0. 53

0. 54

0. 55

0. 56

0. 57

0. 58

0. 59

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Year

StantardError

Inequality Between-Regions

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

19

52

19

56

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

China’s Regional Inequality in international Comparison

Country Year Max/Min CV

China(a) 1994 13.96 0.87 China(b) 1994 4.13 0.39 Yugoslavia 1988 7.80 0.54 Greece 1988 1.69 0.10 Spain 1988 2.23 0.17 Germany 1988 1.93 0.13 France 1988 2.15 0.26 Canada 1988 2.30 0.28 Japan 1981 1.47 0.12 Italy 1988 2.34 0.26 Portugal 1988 1.66 0.23 Belgium 1988 1.61 0.15 Britain 1988 1.63 0.15 Netherlands 1988 2.69 0.19 USA 1983 1.43 0.11 Australia 1978 1.13 0.05 South Korea 1985 1.53 0.15 India 1980 3.26 0.36 Indonesia(a) 1983 5.30 0.46 Indonesia(b) 1983 4.00 0.34

China’s Overall Regional Inequality in international Comparison

Region/Country 1980s 1990s East Europe 0.250 0.289 High-Income 0.332 0.338 South Asia 0.350 0.319 East Asia and Pacific 0.387 0.381 Middle-East/North Africa 0.405 0.380 Sub-Saharan African 0.437 0.470 Latin America/ Caribbean 0.498 0.493 China 0.299 0.388 China (Zhao Renwei) 0.382 (1988) 0.445 (1995) China (Qiu Xiaohua) 0.450 (1997) China (Li Qiang) 0.458 (1997) China (Chen Zongsheng) 0.403 (formal economy, 1997) China (Cheng Zongsheng) 0.515 (including informal

economy1997)

Energy Depletion(% of GDP)

0

5

10

15

20

25

30

China India Japan United States

Genuine savings: energy depletion (% of GDP)

Genuine Domestic Savings(% of GDP)

-5

0

5

10

15

20

25

30

35

China India Japan United States

Genuine domestic savings (% of GDP)

Economic Costs of GDP(%) Unemployment rate:8-9% of GDP（ 1999－ 2001 ）

Natural disaster： 3－ 5％（ 1990s ） Natural assets： 4－ 5％（ 1998 年） Pollution： 3－ 8％（ in mid

1990s，World Bank,1997 ） Corruption： 14－ 15％（ 1999-2001 ） Consumers： 2－ 3％（ 2000 ） The loss from unemployment was around

6-9% of GDP

China :Economic Development and FDI

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Transcript of China :Economic Development and FDI