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China‟S Two Economies

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China‟S Two Economies China‟s Two Economies Contributing Analysts Uwe Parpart David Goldman Steve Wang Victor Kwan +852 2843 1474 +852 5328 3360 +852 2843 1464 +852 2843 1480 [email protected] [email protected] [email protected] [email protected] CHINA‟S STORY 2 CHINA‟S STORY IS CREATIVE DESTRUCTION – THE DESTRUCTION OF ONE CHINA AND THE CONSTRUCTION OF ANOTHER • Mao leveled the old imperial culture and empowered the peasants • Deng destroyed the countryside through mass migration and the One Child Policy, in favor of an urban smokestack, export economy • Xi‟s new government is tearing down large parts of the old smokestack economy and building a tech-based, consumption-oriented economy • Any snapshot of the Chinese economy captures two different things: the destruction of the old and building of the new • Aggregate GDP data don‟t capture the transformations now in progress • We drill down into the details to assemble a portrait of the emerging China 3 CHINA‟S TRANSFORMATION CHINA‟S CURRENT ECONOMIC GROWTH REMAINS 4 ROBUST Import data are a good cross-check on China‟s GDP. Iron ore imports jumped in Q4 2013 and maintained this level during 2014. Crude oil imports in the 1Q totaled 74.72 Mt, +8.3% from 1Q 2013, in-line with the pace of economic expansion Mn Tonnes Mn Tonnes 100.00 30.00 23.52 90.00 73.96 25.00 80.00 70.00 20.00 60.00 50.00 15.00 40.00 10.00 30.00 20.00 5.00 10.00 0.00 0.00 Imports of Iron Ore Source: Customs Imports of Crude Oil Source: Customs BUT GROWTH IS SHIFTING AWAY FROM 5 PROCESSING EXPORTS BASED ON CHEAP LABOR Academics, analysts and noted short sellers have repeatedly forecast the coming collapse of the Chinese economy. What is collapsing is China‟s old economy of cheap-labor based exports General Trade Processing Trade 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 30.0% Trade as % of Foreign Trade Source: China Customs SHRINKING LABOR RESERVE FROM RURAL 6 SECTOR …but China‟s access to cheap labor overseas allows it to shift to higher-value-added production at home mn Total Population Rural Urban 1,600 1,400 1,200 1,000 800 600 400 200 0 China Total Population Source: NBS GDP GROWTH SHIFTS TO DOMESTIC 7 CONSUMPTION The transformational economic policies outlined in the 11th Five Year plan were specified further in the 12th Plan (2011-2015) with emphasis on “higher quality” and “inclusiveness” (narrowing of wealth gap) growth, a shift up the value-added chain in industry, and higher domestic consumption 25.0% 100.0% 20.0% 50.0% 15.0% 0.0% 10.0% -50.0% 5.0% -100.0% 0.0% -150.0% Net Exports Contribution -5.0% Investment Contribution -200.0% Consumption Contribution Consumption as % of GDP Contribution (RHS) -10.0% -250.0% Contributions to GDP Growth Source: NBS CHINA'S 12TH FIVE-YEAR PLAN TARGETS 47% 8 SERVICES GDP CONTRIBUTION Sectors such as energy, automotive, IT infrastructure and biotechnology are in focus. The service sector (43.3% of GDP in the 11th plan period) is to grow to 47% of GDP 55.0% 50.0% 47% 45.0% 43% 40.0% 35.0% 36% 33% 30.0% 25.0% Service Sector as % of GDP Growth China's Economic Planning Target 20.0% China Service Sector Contribution and Target Source: NBS ANTI-CORRUPTION CAMPAIGN 9 Wang Qishan, Politburo Standing Committee member and Secretary of the Central Commission for Discipline Inspection (CCDI), China‟s top anti-graft watchdog, has led the anti-corruption battle since taking charge in November 2012. Behind scenes political corrupted mastermind is rumored to be Zhou Yongkang, former Politburo Standing Committee member for 2007-2012 Zhou Yongkang Who‟s Next Source: Politics People Source: Politics People DEATH SENTENCES 10 Liu Han (Left) was the ex-chairman of the Chinese energy conglomerate, Sichuan Hanlong Group. He was sentenced to death for crimes including murder and leading an organized crime group. Liu Wei (Right), Liu Han‟s younger brother, received the same sentence. The Liu brothers and their associates have been charged with 15 crimes, including murder, assault, illegal detention, blackmail and operating casinos Liu Han Liu Wei Source: China Hubei Source: China Hubei WANG QISHAN CLEANS HOUSE 11 2012 was a year of political transition from the Hu/Wen to the Xi/Li leadership. On the political side, the fight against corruption was given top priority. On the economic policy side, Premier Li has emphasized market and private sector driven reforms and accelerated urbanization as key economic drivers 24 provincial officials 23 vice provincial officials 204 prefecture officials and above 3,003 county officials and above 49,579 government officials “TIGERS” UNDER INVESTIGATION WITHIN 12 THE COMMUNIST PARTY General Secretary Communist Party of Standing Zhou Yongkang* Central Committee Former member China (CPC) Committee *rumored Central Commission Central Military for Discipline Political Bureau Secretariat Commission Inspection Xu Caihou Former Secretary Power Central Association for State Owned Construction Compilation & Science and China Resources Corporation Translation Bureau Technology Huang Baodong Song Lin Yi Junqing Shen Weichen Manager /Secretary Chairman/Secretary Bureau Chief Group Leader CHINA MOVES UP THE VALUE ADDED 13 SPECTRUM China‟s transformation is unique: forget the BRIC story and look at China as a special case • Income growth by far the world‟s fastest • Urbanization • Agricultural productivity approaching US levels • Tech capacity (twice as many science/engineering PhD‟s per year as the US) (74.8% in China vs. 34.0% in US) • R&D spending as % of GDP at European levels • Major high tech accomplishments (world leader in supercomputing and DNA sequencing, and a challenger in chip production, robotics and aerospace) TWO STAGE ROCKET 14 STAGE 1: SHIFT WORKFORCE TO MANUFACTURING AND RAISE FARM PRODUCTIVITY • Low-wage, export model • State allocation of credit with enormous inefficiencies and corruption STAGE 2: SHIFT TO HIGH-VALUE-ADDED MANUFACTURING AND GROWTH • Consumption growth leads economy, not profits (reduces excess saving by corporate sector) • Freeing of interest rates • Two-way flow of investment leading to convertibility of yuan • Defense and military high tech shift to private sector • China creates its own new markets and sources of labor: Build-out of “New Silk Road” infrastructure (high-speed rail and high-speed broadband from Beijing to Istanbul in the west and to Bangkok, Singapore and Yangon in the south) GDP PER EMPLOYEE (CONSTANT 1990 DOLLARS 15 AT PPP) China‟s GDP per worker has just overtaken Brazil US$ 70,000 United States 60,000 OECD members 50,000 High income European Union 40,000 Turkey 30,000 China 20,000 Brazil 10,000 Middle income Low income 0 GDP Per Employee (Constant 1990 Dollars at Purchasing Power Parity) Source: World Bank HOUSEHOLD CONSUMPTION 16 1,600 1,500 China 1,400 Indonesia 1,300 1,200 Malaysia 1,100 Turkey 1,000 900 India 800 700 Middle income 1986=100 600 Low & middle income 500 400 Upper middle income 300 Mexico 200 100 Brazil 0 Household Final Consumption Spending (Current Dollars at Purchasing Power Parity) Source: World Bank GDP PER EMPLOYEE (CONSTANT PPP BASIS) 17 The growth rate of GDP per worker is much faster than any other country 600.0 China 550.0 India 500.0 Middle income 450.0 Turkey 400.0 Low income 350.0 United States 1991 = 100 1991= 300.0 High income 250.0 OECD members 200.0 European Union 150.0 Brazil 100.0 GDP/Employee (Constant PPP Basis) Source: World Bank AGRICULTURAL PRODUCTIVITY COMPARABLE 18 TO EU 8,000 United States 7,000 China 6,000 European Union 5,000 High income 4,000 Brazil 3,000 Middle income 2,000 Lower middle income 1,000 Low income 0 Kilograms of Cereal per Hectare Source: Food and Agriculture Organization CHINA MANUFACTURING GDP PER WORKER 19 Industrial productivity has risen 500% since 1995 (vs. 80% in the United States) RMB Manufacturing GDP per Worker Annual Growth % y-o-y 120,000 40% 35% 100,000 30% 25% 80,000 20% 15% 60,000 10% 5% 40,000 0% 20,000 -5% -10% 0 -15% Manufacturing GDP per worker and Annual Growth Source: NBS CHINA WAGES VS. PROFITS GROWTH 20 Fast wage growth suppresses profits % y-o-y Profit Growth Wage Growth (RHS) % y-o-y 100.0 20.0 18.0 80.0 16.0 14.0 60.0 12.0 40.0 10.0 8.0 20.0 6.0 4.0 0.0 2.0 -20.0 0.0 Profit Growth vs. Wage Growth Source: NBS US PROFITS VS. HOURLY EARNINGS 21 The US is the opposite: Slow wage growth supports profits % y-o-y Profit Growth Wage Growth % y-o-y 140% 6% 120% 5% 100% 80% 4% 60% 40% 3% 20% 2% Profits, GDP GDP Profits,Basis 0% -20% 1% Earnings Hourly SectorPrivate -40% -60% 0% US Profits vs. Hourly Earnings Source: BLS URBANIZATION APPROACHES 22 INDUSTRIALIZED NATION LEVELS 90.0% Brazil 80.0% High income 70.0% European Union 60.0% 50.0% Russian Federation 40.0% China 30.0% Middle income 20.0% India 10.0% Low income 0.0% Percent of Urban Population Source: World Bank GROWTH SHIFTS TO CONSUMPTION 23 Sharp m-o-m expansion in industrial production and retail sales in March pushed 1Q GDP to a 7.4% annual growth rate, above the consensus forecast. Capex decelerated, especially in real estate. That is consistent with our forecast of a shift towards consumption-driven growth, away from the cheap-credit fueled investment-led boom Investment Consumption % y-o-y % YTD y-o-y Total FAI Investment in Real Estate Net Exports Actual GDP 10.0 22.0 7.9% 7.9% 7.6% 7.4% 7.7% 7.5% 7.8% 7.7% 7.4% 21.0 8.0 2.6 19.8 20.0 2.3 4.0 2.2 6.0 4.0 4.7 19.3 4.9 3.9 5.7 19.6 19.0 4.0 4.3 18.0 17.9 6.1 4.6 17.6 3.6 4.5 2.0 3.7 3.7 3.0 2.7 17.0 16.8 0.0 16.0 0.6 -0.3 -0.2 0.4 1.1 -0.5 -0.8 -0.9 -0.8 -2.0 15.0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 GDP Expenditure Components Source: NBS, REORIENT FAI: Total vs.
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