ikt366readings in economics

giant CHINA: risks for the restprepared by

golden ratio: 1.61803399

yusuf ağıl & orhan burak özkan

briefly PRC

people’s republic of china

beijing, the capital

shanghai, the financial center

yuan ¥, the chinese currency

UN security council member

2001 WTO

economic analysis of PRC

population

1.347.350.000 (2011census)

19.21% of the world

2011 population growth rate: 0.49%

labor force

high population labor abundance⇒abor abundance low wages⇒low wages poverty⇒

population below poverty line: 2.8%

GINI of PRC: 0.415

unemployment

compared to large scale economies, relatively low

higher inflation in inputs

opt out of orders

fiscal crisis of EU

these 3 trigger job cuts

inflation

on global financial crisis, deflation seen

then global financial crisis, inflation seen

during 2010, US QE2 leakages into PRC,

inflation in PRC ↑

external trade

export > import

exports to where

EU, US, hong kong, japan, south korea

by the recession in EU and US, exports of PRC ↓

current account

financial attractiveness of shanghai

trade surplus

ease of investment

ease of inflow

these 4 trigger current account surplus

stock of direct foreign investment at home

- low cost of inputs, especially labor force

- here repeated again, attractiveness of shanghai

- ¥ vs € and $

- relatively higher returns of ¥

FX

¥ appreciation around 21,06% against to €

since 2007

FX

¥ appreciation around 18,26% against to $

since 2007

FX

sweep PRC economy away from reliance of $

russia & PRC consent of use руб & ¥

Reserves of FX

to strengthen ¥, people’s bank of china ↑

reserves of FX

for PRC’s economic favor, to keep the ¥ at

optimum against to $ and €

annual economic growth and output

2011 real GDP growth: 9.1%

2011 nominal GDP: 7298 (in billions)

forecast of paul krugman, in 2050, china will

be the biggest economy of the world

enviromental issue

as years pass by PRC’s emission of CO2,

has been raising.

coal is vital for PRC.

coal contamination is so high.

industrial growth

PRC exports mainly consist of industrial

goods.

exports dominate PRC economy.

PRC economy is a risk for the global economy?

contract agreement repudiation

risk for foreign companies located in PRC

contract with regional authority is challenged

by central government.

expropriation

the act of taking of privately owned property

by a government to be used for the benefit

of the public.

contract agreement is challenged by central

government if the content of agreement is

not fit with the dictates of PRC.

strikes, riots and civil commotion

• urban-rural income disparity

• unemployment

• low wages

• corruption

• land seizure by local party officials

risk for foreign investors

sovereign credit risk

the risk that people’s bank of china

alters its foreign-exchange regulations

thereby significantly reducing or completely

nulling the value of foreign-exchange

contracts.

¥ struggles with $ - €.

economic risk

overheating growing economy might lead to

bubble-burst in property and stock markets.

in the short-term, inflationary process

in the long-term, ageing population via one

child policy

Currency inconvertibility and transfer risk

tight controls on currency remittance inward

and outward of PRC

terrorism

east turkistan

small explosions using homemadeincendiary devices do occur but these areisolated incidents that do not impact onwestern investors.

the risk of islamic terrorism is minimal.

risk of war

the risk of war is low across most of china

and is slightly higher in tibet and xinjiang.

taiwan case

capital outflow risk

the biggest regional risk is arising from the

rapid growth of capital outflow from china,

some of which reflects the proceeds from

corruption.

Although the outflow amounts are hidden behind

even bigger capital inflow amounts, they are large

and growing.

risk of some chinese products

embodied with unhealthy materials

poor quality