The Impact of the U.S. Economic Slowdown on China and the...
Transcript of The Impact of the U.S. Economic Slowdown on China and the...
The Impact ofthe U.S. Economic Slowdown
on China and the WorldLawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic DevelopmentDepartment of Economics
Stanford UniversityStanford, CA 94305-6072, U.S.A.
June 2001
Phone: 1-650-723-3708; Fax: 1-650-723-7145Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Lawrence J. Lau, Stanford University 2
The Slowdown in the U.S. Economyu The bursting of the internet “bubble”u A decline in corporate profitsu A reduction in fixed investment by corporationsu A rise in the unemployment rateu A decline in consumer confidence
Lawrence J. Lau, Stanford University 3
Measures Undertaken to Arrest the Decline in the Rate of Growthu Reductions in the short-term rate of interestu A tax cut with immediate cash refundsu Will these reductions work?
u It depends on the confidence of businesses and consumersu A new source of investment growth is needed to replace the internet-driven
investments in the high-technology sector
Lawrence J. Lau, Stanford University 4
How Has the "New" Economy Been Manifested in the United States?u An increase in the rate of technical progress, or growth of total factor
productivity—that is, the ability of producing output from a given quantity of inputs—over the decade of the 1990s
u A decline in the average level of changes in inventory (stocks) relative to GDP as well as in its volatility. Changes in inventory used to be a major source of business cycle fluctuations in the United States. The improvement may be attributed in part to better inventory management due to more, faster, better and cheaper information available.
u New housing starts, which also used to be a major source of business cycle fluctuations in the United States, have also been reduced in volatility in recent years, reflecting better information and faster adjustments, and institutional changes such as the introduction of adjustable-rate mortgages and securitization of mortgages.
Lawrence J. Lau, Stanford University 5
Rates of Growth of Total Factor Productivity in the United States--Quarterly Data
Rates of Growth of Total Factor Productivity of the United States
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1959Q1 1962Q4 1966Q3 1970Q2 1974Q1 1977Q4 1981Q3 1985Q2 1989Q1 1992Q4 1996Q3 2000Q2
Year
Per
cen
t p
er a
nn
um
Lawrence J. Lau, Stanford University 6
The Change in Inventory/GDP Ratio in the United States--Quarterly Data
Change in Inventory/GDP Ratio
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
19
47
Q3
19
49
Q2
19
51
Q1
19
52
Q4
19
54
Q3
19
56
Q2
19
58
Q1
19
59
Q4
19
61
Q3
19
63
Q2
19
65
Q1
19
66
Q4
19
68
Q3
19
70
Q2
19
72
Q1
19
73
Q4
19
75
Q3
19
77
Q2
19
79
Q1
19
80
Q4
19
82
Q3
19
84
Q2
19
86
Q1
19
87
Q4
19
89
Q3
19
91
Q2
19
93
Q1
19
94
Q4
19
96
Q3
19
98
Q2
20
00
Q1
Quarter
Per
cen
t
Change in Inventory/GDP Ratio
Lawrence J. Lau, Stanford University 7
New Housing Starts in the United StatesNew Housing Starts (thousand units)
0
500
1,000
1,500
2,000
2,500
1959
19
61
1963
19
65
1967
19
69
1971
19
73
1975
19
77
1979
19
81
1983
19
85
1987
19
89
1991
19
93
1995
19
97
1999
Year
Th
ou
san
ds
New Housing Starts
Lawrence J. Lau, Stanford University 8
The Effects of the "New" Economy
Average Average AverageRate of Inventory AbsoluteGrowth of Change-GDP InventoryTFP Ratio Change-GDP
Ratio1951-60 0.75% 1.09%1961-70 1.05% 0.95% 1.00%1971-80 0.82% 0.68% 0.84%1981-90 0.76% 0.43% 0.63%1991-2000 0.85% 0.48% 0.51%
Lawrence J. Lau, Stanford University 9
How Has the “New” Economy Been Manifested in the United States?
u The rate of inflation in the United States has remained low during the past decade while the rate of unemployment has declined to levels unseen since the late 1960s, even below the so-called “natural” rate of unemployment
u This has been made possible, in part, through the productivity gains due to the information and communication revolution
u This has also been made possible, in part, because of better management of the monetary policy (by Dr. Alan Greenspan of the Federal Reserve Board) based on better and more timely information and better and faster analysis and response
u Low unemployment has been achieved without kindling high inflationu The U.S. has been the beneficiary of the East Asian currency crisis
u The price of imports remained low, helping to keep inflation downu Its status as a safe haven for capital allowed the rate of interest to remain
lowu The foreign central banks have to re-build their foreign exchange reserves
by purchasing and holding U.S. dollars
Lawrence J. Lau, Stanford University 10
The Rates of Inflation of the United StatesRates of Inflation in the United States
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1957
Q2
1959
Q1
1960
Q4
1962
Q3
1964
Q2
1966
Q1
1967
Q4
1969
Q3
1971
Q2
1973
Q1
1974
Q4
1976
Q3
1978
Q2
1980
Q1
1981
Q4
1983
Q3
1985
Q2
1987
Q1
1988
Q4
1990
Q3
1992
Q2
1994
Q1
1995
Q4
1997
Q3
1999
Q2
Quarter
Per
cen
t p
er a
nn
um
Rate of Change of the Consumer Price Index
Rate of Change of the GDP Deflator
Lawrence J. Lau, Stanford University 11
The Unemployment Rate of the United StatesUnemployment Rate of the United States (percent)
0%
2%
4%
6%
8%
10%
12%
1948
Q1
1950
Q1
1952
Q1
1954
Q1
1956
Q1
1958
Q1
1960
Q1
1962
Q1
1964
Q1
1966
Q1
1968
Q1
1970
Q1
1972
Q1
1974
Q1
1976
Q1
1978
Q1
1980
Q1
1982
Q1
1984
Q1
1986
Q1
1988
Q1
1990
Q1
1992
Q1
1994
Q1
1996
Q1
1998
Q1
2000
Q1
Percent
Qu
art
er
Unemployment Rate (percent)
Lawrence J. Lau, Stanford University 12
The Relationship between the Unemployment Rate and the Rate of Change of PGDP
The Relationship between Unemployment and Inflation
0%
2%
4%
6%
8%
10%
12%
0% 2% 4% 6% 8% 10% 12% 14%
Rate of Inflation (percent per annum)
Rate
of
Un
emp
loym
ent
(per
cen
t)
1957-1973
1974-1993
1994-2000
Lawrence J. Lau, Stanford University 13
The Relationship between the Unemployment Rate and the Rate of Change of the CPI
The Relationship between Unemployment and Inflation
0%
2%
4%
6%
8%
10%
12%
-2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Rate of Inflation (percent per annum)
Rate
of
Un
emp
loym
ent
(per
cen
t)
1957-1973
1974-1993
1994-2000
Lawrence J. Lau, Stanford University 14
Was the U.S. Market in High-Technology Stocks a Bubble?u There is genuine added value in some firmsu However, there is also a bubbly quality to the stocks of the internet
start-ups, many of which have no established track recordu There is also significant duplication of investmentu In a sense, many of the IPOs (initial public offerings) of the past two
years represent the securitization of venture capital. These firms would not have been able to go public five years ago and would have to settle for venture capital. However, their success rate should be approximately the same as venture capital.
Lawrence J. Lau, Stanford University 15
The Evolution of Measured Technical Progress over Timeu Some problems of the recent measures of total factor productivity
u The measurement of labor inputs is based on a standard number of hours, or hours paid, rather than hours worked--the discrepancy between hours paid and hours work for employees in the high-technology sector is believed to have risen during the high-technology boom of the past five years
u The change in the accounting practice on expenditure on software not bundled with hardware from full expensing to capitalizing will in the first few years result in a higher measured real GDP even though nothing has changed
u The hedonic price index adjustment may over-state the pecuniary benefits of purely technological innovations
u The price indexes may not have taken fully into account the shift in the composition of consumption and investment away from goods to services. The prices of services, however, have risen faster than the prices of goods
u Moreover, the deterioration in service sector quality has not been taken into account
u The pricing of upgrades of subscription type services--how to distinguish between quality improvement and pure price increase
Lawrence J. Lau, Stanford University 16
How Important is the Wealth Effect?u Is there a wealth effect?
u The wealth effect is not as strong as some analysts believe—both the rise and fall in wealth are caused by the change in the stock market valuation of approximately 50 firms and their effects are concentrated on a very small group of people
Lawrence J. Lau, Stanford University 17
Exports as a Percent of GDP:Selected East Asian Economies
Exports as a Percentage of GDP
0
20
40
60
80
100
120
140
160
180
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Year
%HONG KONG INDIA INDONESIA KOREA MALAYSIA PHILIPPINES
SINGAPORE THAILAND CHINA Japan Taiwan
Lawrence J. Lau, Stanford University 18
Exports to U.S. as a Percent of Total ExportsExports to U.S. as a Percent of Total Exports
0
10
20
30
40
50
60
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
%
China Hong Kong India Indonesia Korea Maylaysia
Philippines Singapore Taiwan Thailand
Lawrence J. Lau, Stanford University 19
Indexes of East Asian Exchange Rates:Local Currency per US$ (January 2, 1997=100)
Indices of East Asian Exchange Rates(Local Currency per U.S. Dollar, 1/2/97=100)
50
100
150
200
250
300
350
400
450
500
550
600
650
700
1/2/97 8/12/97 3/20/98 10/28/98 6/7/99 1/13/00 8/23/00 4/2/01
1/2
/97=100
C. Yuan HK$
I. Rupiah K. Won
RM P. Peso
S$ NT$
T. Baht Japan Yen
Indian Rupee Brazilian Real
Lawrence J. Lau, Stanford University 20
Ratio of Short-Term Foreign-Currency Liabilities to Foreign Exchange Reservesu The potential short-term foreign exchange liabilities, that is, the
foreign exchange that can be withdrawn with little or no prior notice, consists of the stock of foreign portfolio investment and short-term foreign loans
u The stock of foreign portfolio investment can be estimated by cumulating past foreign portfolio investments; however, the existing stock may be under- or over-estimated by this procedure because of the possibilities of gains and losses from these investments
u To these may be added the current account deficit of the currentperiod
u If foreign exchange reserves are low relative to these potentialdemands on foreign exchange, the currency may be vulnerable to arun
Lawrence J. Lau, Stanford University 21
Ratio of Short-Term Foreign-Currency Liabilities to Foreign Exchange Reserves
Ratio of Short-Term Foreign Currency Liabilities toForeign Exchange Reserves
0
500
1000
1500
2000
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
Year
%
CHINA HONG KONG
INDIA INDONESIA
KOREA MALAYSIA
MEXICO PHILIPPINES
SINGAPORE THAILAND
TAIWAN
Lawrence J. Lau, Stanford University 22
Ratio of Short-Term Liabilities, Including Current Account Balance, to Reserves
Ratio of Short-Term Foreign Currency Liabilities, Including Current Account Balance, to Foreign Exchange Reserves
0
500
1000
1500
2000
2500
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
Year
%
CHINA HONG KONG
INDIA INDONESIA
KOREA MALAYSIA
MEXICO PHILIPPINES
SINGAPORE THAILAND
TAIWAN
Lawrence J. Lau, Stanford University 23
Ratio of Short-Term Liabilities, Including Current Account Balance, to Reserves
Ratio of Short-Term Foreign Currency Liabilities, Including Current Account Balance, to Foreign Exchange Reserves
-100
0
100
200
300
400
500
600
700
800
19
95
19
96
19
97
19
98
19
99
Year
%
CHINA
HONG KONG
INDONESIA
KOREA
MALAYSIA
PHILIPPINES
SINGAPORE
THAILAND
TAIWAN
Lawrence J. Lau, Stanford University 24
Ratio of Short-Term Foreign-Currency Liabilities to Foreign Exchange Reserves
Ratio of Short-Term Foreign Currency Liabilities toForeign Exchange Reserves
0
100
200
300
400
500
600
700
800
1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 Quarter
%
CHINA HONG KONG
INDIA INDONESIA
KOREA MALAYSIA
PHILIPPINES SINGAPORE
THAILAND TAIWAN
Lawrence J. Lau, Stanford University 25
Ratio of Short-Term Liabilities, Including Current Account Balance, to Reserves
Ratio of Short-Term Foreign Currency Liabilities, Including Current Account Balance, to Foreign Exchange Reserves
0
100
200
300
400
500
600
700
800
1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 Year
%
CHINA HONG KONG
INDIA INDONESIA
KOREA MALAYSIA
PHILIPPINES SINGAPORE
THAILAND TAIWAN
Lawrence J. Lau, Stanford University 26
Indexes of East Asian Stock Market Indexes:Local Currency (January 2, 1997=100)
Indexes of East Asian Stock Exchange Indexes(Local Currency, 1/2/97=100)
20
70
120
170
220
270
1/1/97 8/11/97 3/19/98 10/27/98 6/4/99 1/12/00 8/22/00 3/30/01
1/2
/97
=1
00
China Hong Kong Indonesia
Korea Malaysia Philippines
Singapore Taiwan Thailand
Japan India
Lawrence J. Lau, Stanford University 27
Short-Term Rates of InterestShort-Term Rates of Interest, Selected East Asian Countries
(percent p.a.)
0
10
20
30
40
50
60
70
1/1/97 8/11/97 3/19/98 10/27/98 6/4/99 01/12/00 08/22/00 03/30/01
Perc
en
t p
er
an
nu
m
CHINA HONG KONG
INDONESIA KOREA
MALAYSIA PHILIPPINES
SINGAPORE TAIWAN
THAILAND JAPAN
INDIA
Lawrence J. Lau, Stanford University 28
The Rates of Growth of Real GDP Have Begun to Turn Downwards Again
Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
19
96
Q1
19
96
Q3
19
97
Q1
19
97
Q3
19
98
Q1
19
98
Q3
19
99
Q1
19
99
Q3
20
00
Q1
20
00
Q3
Quarter
An
nu
alized
Rate
s in
Percen
t
China Hong Kong Indonesia
Korea Malaysia Philippines
Singapore Taiwan Thailand
Japan India
Lawrence J. Lau, Stanford University 29
Quarterly Rates of Growth of ExportsYear-over-Year Quarterly Rates of Growth of Exports in U.S. Dollars
(Percent)
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
Q1 97 Q2 97 Q3 97 Q4 97 Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00
Perc
en
t p
.a.
China Hong Kong
Indonesia South Korea
Malaysia Philippines
Singapore Taiwan
Thailand Japan
India
Lawrence J. Lau, Stanford University 30
Quarterly Rates of Growth of ImportsYear-over-Year Quarterly Rates of Growth of Imports in U.S. Dollars
(Percent)
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
Q1 97 Q2 97 Q3 97 Q4 97 Q1 98 Q2 98 Q3 98 Q4 98 Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00Perc
en
t p
.a.
China Hong Kong
Indonesia South Korea
Malaysia Philippines
Singapore Taiwan
Thailand Japan
India
Lawrence J. Lau, Stanford University 31
The Current Account BalanceThe Current Account Balance, Billion US$
-40
-30
-20
-10
0
10
20
30
40
50
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Bil
lio
n U
S$
China Hong Kong Indonesia
Korea, Rep. of Malaysia Philippines
Singapore Taiwan Thailand
Mexico India
Lawrence J. Lau, Stanford University 32
The Current Account Balance as a Percent of GDP
The Current Account Surplus (Deficit) as a Percent of GDP
-12
-6
0
6
12
18
24
30
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Pe
rce
nt
China Hong Kong
Indonesia Korea, Rep. of
Malaysia Philippines
Singapore Taiwan
Thailand Mexico
India
Lawrence J. Lau, Stanford University 33
Is Another Crisis Likely?u Based on the early warning economic indicators, the East Asian
economies are unlikely to have another crisis in the foreseeablefuture
u The savings rates have remained high while the savings-investment gaps--also reflected as the current account gaps--have largely disappeared
u The dependence on short-term foreign capital (portfolio investment--both equity and debt instruments--and loans) has been significantly reduced
u Foreign investment now consists mostly of direct rather than portfolio investment
u Both total and short-term external debts have declinedu The ratio of short-term to total external debts has also declined
u Foreign exchange reserves have risen both absolutely and as a percentage of annual imports
u Real exchange rates have depreciated significantly from their peaks in most of the affected economies
Lawrence J. Lau, Stanford University 34
The Impact on China:The External Environment Has Deterioratedu The U.S. economy, and its high-technology sector in particular, has slowed down
rather precipitously--the rate of growth of real GDP is expected to be no higher than 1% in 2001
u The slowdown in the U.S. will have an impact on East Asia, both directly and indirectly, and in particularly in economies where the high-technology sector is important, such as South Korea, Malaysia and Taiwan
u The continuing stagnation of the Japanese economy does not help but is not expected to have a negative impact because has gone on for an entire decade
u The European economies are expected to grow somewhat faster and thus to provide a partial offset to the U.S. economic slowdown
u Chinese exports to the U.S. constitutes only 5% of Chinese GDP--the U.S. slowdown will have only an impact on Chinese economic growth of less than 0.5%, after taking into account both the direct effects of a slowdown in Chinese exports to the U.S. and the indirect effects of a slowdown in Chinese exports to other East Asian economies, due to a slowdown in these economies caused by the slowdown in the U.S.
Lawrence J. Lau, Stanford University 35
Chinese Exports to the United States as a Percent of Chinese GDP
Chinese Exports to U.S. as a Percent of Chinese GDP
0
1
2
3
4
5
6
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Per
cen
t
Ratio of Exports to U.S. to GDP
Lawrence J. Lau, Stanford University 36
The Effects of the Slowdown in the United States Economy on Chinau While exports is a very high percentage of GDP in Hong Kong, Malaysia,
Singapore and Taiwan, it is a relatively low percentage of the Chinese economy, amounting to approximately 20 percent
u The proportion of total exports destined for the U.S. has generally declined in the East Asian economies over the years, to less than 30 percent
u The one exception is the Chinese economy, where the proportion of Chinese exports destined for the U.S. has been rising to its current level of approximately 20 percent
u The slowdown in the U.S. economy will have a significant, but not overwhelming, negative impact on the rate of growth of real GDP in the East Asian economies--on the order of 1 percentage point decline in Hong Kong, Malaysia, Singapore and Taiwan and a less than 0.5 percentage point decline in the other East Asian economies, including China
Lawrence J. Lau, Stanford University 37
Direct and Total Effects of Non-Competitive-Imports (NCI) Model (Value-Added)
Direct Totalu Processing Exports 0.153 0.176
u Textiles 0.147 0.165u Wearing Apparel 0.158 0.170
u Non-Processing Exports 0.329 0.925u Textiles 0.195 0.934u Wearing Apparel 0.229 0.944
u All Exports (Weighted Average of Processing and Non-Processing Exports) 0.240 0.545u Textiles 0.178 0.657u Wearing Apparel 0.183 0.441
Lawrence J. Lau, Stanford University 38
Direct and Total Effects of Non-Competitive-Imports (NCI) Model (Employment)
Direct Totalu Processing Exports 0.048 0.057
u Textiles 0.044 0.050u Wearing Apparel 0.048 0.052
u Non-Processing Exports 0.214 0.703u Textiles 0.107 0.845u Wearing Apparel 0.108 0.745
u All Exports (Weighted Average of Processing and Non-Processing Exports) 0.130 0.375u Textiles 0.084 0.558u Wearing Apparel 0.069 0.294
Lawrence J. Lau, Stanford University 39
Is There Sufficient Aggregate Demand?Consumption and Investmentu In 2001Q1, fixed investment grew 12.4% and retail sales grew
10.3%u Real personal consumption has revived as shown by the retail sales
datau Public infrastructural investment has continued
Lawrence J. Lau, Stanford University 40
Sources of Growth of Aggregate DemandInfrastructural Investmentu Infrastructural investment (US$750 billion-1.2 trillion within the
period 1998-2001)u Infrastructural investment projects include roads and highways,
railways, telecommunications networks, irrigation and water conservancy facilities, ecological projects such as reforestation, urban infrastructure such as mass transit systems, environmentalprotection, urban and rural electricity networks, urban mass transit
u Development of the Central and Western Regionsu Promotion of affordable owner-occupied residential housing
investment for and by the domestic population is one of the few alternative new and durable sources of growth of aggregate demand
u Promotion of urban mass transit systems
Lawrence J. Lau, Stanford University 41
Sources of Growth of Aggregate DemandPromotion of Science and Education in Chinau Investments in information technology
u Leap-frogging traditional development in telecommunication (the experience of the wireless phone)
u E-commerce among enterprisesu New models of marketing, distribution and salesu A PC in every classroom (in every urban home) u Set-top boxes on television sets with point and click device and numeric pad
can link 400 million households to the internetu New modes of education and information disseminationu The Chinese language is uniquely suited to communication based on a graphic
interface (the experience of the fax machine)u Extension of compulsory education to 12 yearsu Investments in tertiary education and in R&D
Lawrence J. Lau, Stanford University 42
The Development of the Great West:Three Paradigms of Economic Growthu Growth through domestic demand--the domestic market paradigm a
la the United States in the 19th centuryu Industrial migration over time--the "wild-geese-flying pattern"
metaphor applied to Chinese provinces and regionsu Privatization is not always necessary--shrinking the state sector
without privatization--the experience of Taiwanu What does it take?
u Availability of infrastructure (transportation and communication, including the internet)
u Continued marketization of the economyu Maintenance of a domestically open economy (the equivalent of the “interstate
commerce” clause of the U.S. constitution)u Affirmation of property rights and the rule of lawu The role of the "open door”--WTO
Lawrence J. Lau, Stanford University 43
The Development of the Great West:Reducing Regional Inequalitiesu Even though all regions benefited from the economic reform since
1979, the coastal regions benefited much more than the inland regions
u Interregional income inequality has risen, resulting in:u Dissatisfaction and restivenessu Deterioration of social services, especially education and health careu Massive illegal migration from the inland regions to the coastal regions,
creating huge pressure on social and physical infrastructureu Moving jobs to where people are, not people to where jobs areu Urbanization through the creation of new towns and cities, not the
growth of existing towns and citiesu Developing a truly integrated national marketu Maintaining long-term competitiveness without devaluation
Lawrence J. Lau, Stanford University 44
Foreign Direct Investment (FDI)u Foreign Direct Investment
u FDI arrivals totaled US$40.39 billion in 1999, an 11% decline from 1998--however, the sources of the FDI were different--real FDI probably rose if “round-tripped” capital were excluded
u FDI commitments amounted to US$41.24 billion in 1999, a decline of 20.9%u FDI arrivals totaled US$40.7 billion in 2000, a 1% increase over 1999; for 2001Q1,
FDI arrivals rose 11.7%u FDI commitments amounted to US$62.4 billion in 2000, an 51.3% increase over 1999,
partly in response to expected Chinese accession to WTO; for 2001Q1, FDI commitments rose 44.3% Y-o-Y
u The nature of FDI has also changed--from export-oriented to domestically oriented; from light industry to heavy and high-technology industries, and from small projects to large projects
u Collateralized loan program as a natural hedge for foreign direct investorsu Initial public offerings (IPOs) and listings on Chinese stock exchanges as a
potential exit strategy for foreign direct investors
Lawrence J. Lau, Stanford University 45
The Tenth Five-Year Plan (2001-2005)u An indicative (or predictive) plan rather than a mandatory planu Doubling of real GDP between 2001 and 2010, with an implied rate
of growth of 7.2% p.a.u An inflation target of less than 3% p.a.u An increase in the share of central government revenue in GDP (the
introduction of a comprehensive individual income tax)—tax revenue rose 22.8% to 1.266 trillion Yuan, or 14.2% of GDP, in 2000
u The National People’s Congress has stressed the importance of fighting corruption, organized crime and cults such as the FalunGong
Lawrence J. Lau, Stanford University 46
The Pace of Economic Growth Has Picked Up:YoY Quarterly Rates of Growth of Real GDP
YoY Quarterly Rates of Growth of Real GDP
-5%
0%
5%
10%
15%
20%
25%
1983
q1
1984
q1
1985
q1
1986
q1
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
Quarter
Per
cent
per
ann
um
GDPQ1 GDPQ2
GDPQ3 GDPQ4
Lawrence J. Lau, Stanford University 47
The Consumer and Retail Price IndicesMonthly Rates of Change of Price Indices Since 1995 (Y-o-Y)
-10
-5
0
5
10
15
20
25
95-03 95-08 96-01 96-06 96-11 97-04 97-09 98-02 98-07 98-12 99-05 99-10 00-03 00-08 01-01
Month
%
RPI
CPI
CPI for 36 Big Cities
Price Index for Agricultural Production Material
Lawrence J. Lau, Stanford University 48
Monthly Exports, Imports and Trade BalanceOfficial Chinese Data
Monthly Exports, Imports, and Trade Balance
-10
-5
0
5
10
15
20
25
30
Jan-92 Nov-92 Sep-93 Jul-94 May-95 Mar-96 Jan-97 Nov-97 Sep-98 Jul-99 May-00 Mar-01
Month
US
$ B
illi
on
Exports Imports Trade Balance
Lawrence J. Lau, Stanford University 49
Composition of Chinese ExportsChinese Exports by Commodities: Primary versus Manufactured Goods
Primary Goods
Manufactured Goods
0
50
100
150
200
250
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
US
$ B
illi
ons
Manufactured Goods
Primary Goods
Lawrence J. Lau, Stanford University 50
Manufactured Exports as a Percent of Total Chinese Exports
Distribution of Chinese Manufactured Exports as Percent of Total Exports1985-1999
-
10
20
30
40
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
Per
cen
t
Clothing, Footware and Toys
Machines and Transport Equipments
Lawrence J. Lau, Stanford University 51
China and the World Trade Organization (WTO) (1)u “Permanent Normal Trade Relations” has passed the U.S. Congressu The government is committed to an “open-door” policy and national
treatment for foreign direct investors--a “level playing field” for all, including domestic non-state-owned enterprises
u Remaining obstacle in the trade of agricultural commodities and allowable domestic subsidies has been removed
Lawrence J. Lau, Stanford University 52
The Impact of the Accession to the World Trade Organization (WTO) on China (2)u Signaling effect
u Reform and open-door policies are on track and will be continuedu Long-term benefits include:
u A permanent commitment to an openness and a lock-in to the global economyu Replacement of the current discretion-based system by a more transparent and
rule-based system in economic regulationu National treatment for all enterprises--foreign as well as domestic non-state-
owned enterprisesu Insurance for domestic economic efficiency through open global competition--
inefficient domestic monopolies will no longer be protected
Lawrence J. Lau, Stanford University 53
The Impact of the Accession to the World Trade Organization (WTO) on China (1)u Immediate impact small but change in long-term expectations
u FDI should rise, especially in the services sector--distribution, finance, and telecommunication
u Exports and imports should rise moderately in the short and intermediate termu Massive imports of agricultural commodities unlikely because of limitations of
world market supplyu Closure and consolidation of inefficient enterprises likely even without WTO
accessionu More trade in intermediate goodsu Tariff reductions from 22% to 17% on averageu A deadline for reform of the state-owned enterprises and the banking sectoru WTO accession provides additional incentive and pressure for development of
an integrated national market not only for goods but also for factors
Lawrence J. Lau, Stanford University 54
Internet Users in the Asia/Pacific Region
1999 2000 2001 2002 2003 2004 2005 AnnualRate ofGrowth
China 16.5 27.2 40.4 59.4 84.5 111.6 141.3 43.0Hong Kong 1.9 2.5 3.0 3.2 3.8 4.6 5.4 19.0India 3.2 6.2 11.0 18.9 30.3 42.3 62.5 64.1Indonesia 1.0 1.4 1.9 2.5 3.6 5.2 7.3 39.3South Korea 5.3 8.1 10.7 14.1 17.7 22.1 26.8 31.0Malaysia 1.2 1.7 2.4 3.5 4.7 6.2 8.1 37.5Philippines 0.6 1.1 1.6 2.7 4.1 6.3 8.6 55.9Singapore 0.8 1.0 1.3 1.5 1.7 1.9 2.4 20.1Taiwan 4.4 5.5 6.9 8.6 10.8 12.4 15.8 23.7Thailand 1.0 1.5 2.3 3.5 4.6 6.5 8.7 43.4Asia/Pacific Region 66.2 94.5 128.0 173.3 231.5 295.7 374.4 33.5
Note: 1999 figures estimated and 2000-2005 figures projected by the Yankee Group.
Internet Users in the Asia/Pacific Region (millions)
Lawrence J. Lau, Stanford University 55
Penetration Rates in the Asia/Pacific Region
1999 2000 2001 2002 2003 2004 2005China 1.3 2.0 2.9 4.2 5.8 7.4 9.2Hong Kong 26.9 35.6 40.6 42.5 49.6 57.7 65.3India 0.3 0.6 1.0 1.7 2.7 3.6 5.2Indonesia 0.5 0.6 0.9 1.1 1.5 2.1 2.9South Korea 11.2 17.0 22.3 29.3 36.2 44.8 53.9Malaysia 5.3 7.4 10.0 13.9 18.1 23.3 29.8Philippines 0.8 1.4 2.1 3.3 4.8 7.2 9.5Singapore 24.2 29.0 37.7 42.5 47.9 54.0 66.1Taiwan 19.9 24.7 30.5 37.8 46.8 53.3 67.4Thailand 1.6 2.4 3.5 5.1 6.6 9.1 11.7Asia/Pacific Region 2.4 3.3 4.5 6.0 7.8 9.6 11.9
Note: 1999 figures estimated and 2000-2005 figures projected by the Yankee Group.
Penetration Rates in the Asia/Pacific Region (percent)
Lawrence J. Lau, Stanford University 56
Opportunities and Challenges of the New Economyu The “New Economy” brings about a one-time permanent increase in potential
output, hence, productivityu The “New Economy” depends on both tangible and intangible capital--the
importance of complementarity of different forms of capital (tangible, infrastructural, human, R&D, knowledge)
u The “New Economy” is here to stayu The “New Economy” facilitates and encourages the process of “de-verticalization”
or “fragmentation”, which began in 1984 as a result of the economic reformu The need to identify, improve and sharpen “core competence” in order to survive;
productivity can actually be enhanced by taking advantage of the opportunities for “de-verticalization” and “out-sourcing”
u e.g., the choice amongst being a designer, manufacturer or a marketer
Lawrence J. Lau, Stanford University 57
Opportunities and ChallengesImplications for the Chinese Economyu The “New Economy” facilitates and encourages global division of
labor--i.e., globalization of sources of supply; it also shortens the “Product Cycle”--hence new opportunities but also competitive challenges
Lawrence J. Lau, Stanford University 58
The Possibility of Leap-Froggingu China has the ability to leap-frog--there are no vested interests to
protect; no existing businesses to be cannibalized; there can be“creation without destruction”
u e.g., facsimile machines instead of telexes; video compact discs instead of VCRs; a new keyboard layout;
u Computer/word processor/printer combination instead of typewriters;u mobile and wireless telephones instead of fixed lines;u debit and credit cards instead of checks;u internet trading of stocks and bonds;u E-commerce rather than traditional commerce (B2B and B2C, e.g., books and
magazines)
Lawrence J. Lau, Stanford University 59
The Possibility of Influencing/Setting Standardsu The markets are potentially large enough in China for the benefits of
economies of scale to be realized and for it to have a significant influence on future standards
u e.g., Linuxu wireless telephone standards (CDMA)u Promotion of experiments with other, non-PC-based access devices to the
internet--television sets, web TV type devices, digital set-top boxes, screen phones and wireless
Lawrence J. Lau, Stanford University 60
The Possibility of Local Adaptationu The possibility of local adaptation--taking advantage of local
conditionsu e.g., the Legend story
u languageu local supply and demand conditions, e.g., stability of the voltage of the
electric power supplyu The Chinese language is uniquely suited to communication based on a graphic
interface (the experience of the fax machine)u Set-top boxes on television sets with point and click device and numeric
pad can link 400 million households to the internetu Transformation of the “Old Economy” through the information and
communication technology, especially in light of the accession to the World Trade Organization (WTO)
Lawrence J. Lau, Stanford University 61
The New Economy Levels the Playing Field between Large and Small Firmsu Small firms can have access to services and supplies heretofore only available to
large firmsu E.g., Charles Schwab and E-trade benefit small investors by bringing down the cost of
securities trading proportionally much more than large investorsu Rapid delivery services and warehousing facilities, e.g., FedEx, are available to both
large and small firmsu Small firms can also become more accessible to their customers and potential
customers through the Internet with only marginal expenditures on advertising and public relations
u Small firms have access to large firms as potential suppliers in a global supply chain
u The Chinese economy with its high and potentially even higher concentration of smaller firms and more primitive information infrastructure (and thus the potential for leap-frogging) may benefit much more from the new economy than other economies
u E.g., B2B dot.coms seem to have relatively greater success in East Asia than in the United States