Chinese Economics Thread

Discussion in 'Members' Club Room' started by Norfolk, Jan 10, 2008.

  1. Spike
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    Spike Banned Idiot

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    Article from Bloomberg that comments about the connections between the US and Chinese economies and potential problems for China if the US had a serious downturn.

     
  2. SampanViking
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    SampanViking The Capitalist
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    Hi Norfolk

    Your words are like daggers aimed at my heart:(

    Sorry but too tired and intoxicated to give a proper answer to your points this PM, watch this space :D
     
  3. Norfolk
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    Norfolk Junior Member
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    Sorry SampanViking, I didn't mean to make you unhappy!:eek: And I will indeed be watching. Have a good sleep and a gentle recovery!:D
     
  4. Schumacher
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    Schumacher Senior Member

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    Here's a piece that looks a little deeper into this issue of Chinese dependence on exports. A 'best case scenario' for China of a US slowdown may be that it'll help achieve a 'soft-landing' & alleviate some of the inflation problems discussed here.

    http://economist.com/finance/displaystory.cfm?story_id=10429271

    An old Chinese myth
    Jan 3rd 2008
    From The Economist print edition


    Contrary to popular wisdom, China's rapid growth is not hugely dependent on exports

    MOST people suppose that China's economic success depends on exporting cheap goods to the rich world. If so, its growth would be seriously dented by a stuttering American economy. Headline figures show that China's exports surged from 20% of GDP in 2001 to almost 40% in 2007, which seems to suggest not only that exports are the main driver of growth, but also that China's economy would be hit much harder by an American downturn than it was during the previous recession in 2001. If exports are measured correctly, however, they account for a surprisingly modest share of China's economic growth.

    The headline ratio of exports to GDP is very misleading. It compares apples and oranges: exports are measured as gross revenue while GDP is measured in value-added terms. Jonathan Anderson, an economist at UBS, a bank, has tried to estimate exports in value-added terms by stripping out imported components, and then converting the remaining domestic content into value-added terms by subtracting inputs purchased from other domestic sectors. At first glance, that second step seems odd: surely the materials which exporters buy from the rest of the economy should be included in any assessment of the importance of exports? But if purchases of domestic inputs were left in for exporters, the same thing would need to be done for all other sectors. That would make the denominator for the export ratio much bigger than GDP.

    Once these adjustments are made, Mr Anderson reckons that the "true" export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore (which on January 2nd reported an unexpected contraction in GDP in the fourth quarter of 2007, thanks in part to weakness in export markets). Indeed, China's economic performance during the global IT slump in 2001 showed that a collapse in exports is not the end of the world. The annual rate of growth in its exports fell by a massive 35 percentage points from peak to trough during 2000-01, yet China's overall GDP growth slowed by less than one percentage point. Employment figures also confirm that exports' share of the economy is relatively small. Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.

    Even if the true export share of GDP is smaller than generally believed, surely the dramatic increase in China's exports implies that they are contributing a rising share of GDP growth? Mr Anderson's work again counsels caution. Although the headline exports-to-GDP ratio has almost doubled since 2000, the value-added share of exports in GDP has been surprisingly stable over the same period (see left-hand chart). This is explained by China's shift from exports with a high domestic content, such as toys, to new export sectors that use more imported components. Electronic products accounted for 42% of total manufactured exports in 2006, for example, up from 18% in 1995. But the domestic content of electronics is only a third to a half that of traditional light-manufacturing sectors. So in value-added terms exports have risen by far less than gross export revenues have.


    Many of China's foreign critics remain sceptical. They argue that China's massive current-account surplus (estimated at 11% of GDP in 2007) proves that it produces far more than it consumes and relies on foreign demand to buy the excess. In the six years to 2004, net exports (ie, exports minus imports) accounted for only 5% of China's GDP growth; 95% came from domestic demand. But since 2005, net exports have contributed more than 20% of growth (see right-hand chart).

    This is due not to faster export growth, however, but to a sharp slowdown in imports. And even if the contribution from net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand. The boost from net exports is in any case unlikely to vanish, even if America does sink into recession, because exports to other emerging economies, where demand is more robust, are bigger than those to America. According to Standard Chartered Bank, Asia and the Middle East accounted for more than 40% of China's export growth in the first ten months of 2007, North America for less than 10%.

    Multiplier effects

    China's economy is driven not by exports but by investment, which accounts for over 40% of GDP. This raises an additional concern: that weaker exports could lead to a sharp drop in investment because exporters would need to add less capacity. But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production. Adding in the capital spending of local firms that produce inputs sold to exporters, he reckons that a still-modest 14% of investment is dependent on exports. Total investment is unlikely to collapse while investment in infrastructure and residential construction remains firm.

    An American downturn will cause China's economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China's growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing's worries about the economy overheating, it would be welcome.

    The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America's total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China's growth than it is of America's.


    Copyright © 2008 The Economist Newspaper and The Economist Group. All rights reserved.
     
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  5. yongke
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    yongke New Member

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    I agree with the last poster. The current inflation is Supply side, not Demand side. For example, the increase in fuel cost count as Supply, since it will cost company more money to buy fuel, which lead to increase in price. This have nothing to do with demand, which have no relation with fuel cost (they are not buying fuel after all).

    There for, this "inflation" is more of an adjustment. If the price of pork rises by 50% and general inflation is less than 10%, then the farmer are making far more money than before.

    In time, the price will settle to an equalibrium point and inflation will lower naturally.
     
  6. ger_mark
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    Germany-China rail freight plan

    A new rail freight service between Germany and China, that would be twice as quick as sea travel, has been backed by six countries, Chinese media says.

    The China Daily state newspaper says China, Mongolia, Russia, Belarus, Poland and Germany are to work together on the Hamburg to Beijing train route.

    The states are to ease customs and border checks to minimise travel time.

    China Railway Container Transport said the 20-day-long freight journeys should start in early 2009.

    "Barring any complications, a scheduled container train should be shuttling between China and Germany in a year's time," said the firm's chairman Zheng Mingli.

    A trial run is under way, with a container train taking a sample of Chinese products to the north German city.

    After it arrives the six countries will analyse ways to improve the rail route, including easing customs barriers, and integrating different railway types.

    Moving goods by sea between the two cities usually takes 40 days and means passing through the Indian Ocean, which adds an additional 10,000km to the journey.


    http://news.bbc.co.uk/2/hi/business/7180906.stm
     
  7. SampanViking
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    SampanViking The Capitalist
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    After all that I come and see that most of what I had to add has been said already by Shumacker and yongke;)

    Interesting to hear about the rail route though germark, I am aware that there are a number of others also planned through Central Asia, Iran and Turkey.

    The attraction of the Southern routes is that all the countries use the same rail gauge, whilst Russia uses a wider one (to prevent rail based Invasion) This means the trains will need to switch bogeys coming in and leaving Russia.
     
  8. Norfolk
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    Norfolk Junior Member
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    Excerpts from "China's Looming Financial Reform Challenges" by Pieter Bottelier, China Brief, Jamestown Foundation, Volume 7, Issue 23,13 December, 2007:

    It is not clear in this article as to the reasons for the apparent constraints on supply. Is it simply that land is being taken out of cultivation by a combination of more farmers moving to seek work in the cities and former farmland being redeveloped for other purposes? Or is it that the Government, in order to alleviate some of the poverty in the rural areas, has permitted food prices to rise in order to better benefit the farmers?

    There are others on this board much better placed to comment on the capacity of the Chinese economy to provide returns on savings and investments.

    This is in general line with what Fu was saying about needing to raise interest rates overall. SampanViking weighed in pointing out the difficulties that this may raise for farmers, amongst others. Both seem to be right, and this seems to reflect the nature of China's present economic issues:

    While the bulk of China's economic prosperity is certainly acquired through the domestic market, the margins that allow for such an accumulation of capital and foreign reserves, and especially US dollars, are of course earned in foreign markets. With so much surplus capital (at present) with (almost) nowhere else to go, Chinese investors are caught between a rock and a hard place; continue holding onto and even buying more of, US debt, which continues to depreciate in value due to both lower interest rates and the simultaneous devaluation of the US Dollar; or try to wean themselves off of US debt in such a way as to try to limit additional losses occasioned when such debt likely has to be sold at a loss, without precipitating potentially serious consequences in world securities markets in general and the US in particular.

    Additionally, there is the factor that deteriorating economic conditions in general and in the US in particular may reduce demand for Chinese manufactures, etc., threatening in turn the exports earnings that provide the margins which afford such large foreign reserves, and subsequently capital for additional investment. Even with China not being fully integrated into the US-based world economic system, Chinese prosperity is nevertheless still tied to an economy with an historical predilection for "boom and bust" economic cycles. While Chinese economic planning may be considerably more prudent in some ways than the dynamics in the US allow, having your margin of prosperity so (almost unavoidably) dependent upon a comparatively volatile economy does not allow for a lot of flexibility in options should economic conditions noticeably deteriorate.

    If China were to find itself caught between rising inflation at home and falling exports and investments earnings abroad, the political stresses within China might become considerable. Tensions between China and the U.S .under such circumstances may be exacerbated by such undercurrents as a result.
     
  9. Quickie
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    I am not going to commend on those complicated economic issues of interest rates, liquidity, money supply etc but something more relevant to the price controlled measures that was taken.

    Things would be much simpler if inflation can be entirely attributed to cost alone, whether it be cost of raw material, transportation or energy. Ever experience having to pay an extra 10 cents for a cup of coffee just because the price of a kg or so of sugar has increased by 20 cents? (Sugar is a price controlled item here) It may seem ridiculous but I have experienced many similar instances (mostly involving food items) at one time or another. You are left somewhat bewildered how the new price come about, based solely on the calculation of costs alone.

    In my opinion, the motivation to maximise profit is one of the more important factors in the complicated process of price inflation. The success of any price control measure would largely depend on correctly identifying instances of artificial inflation (e.g. caused by profiteering, personal greed) from those of genuine inflation (e.g. related to imbalance in supply and demand for which different measures would have to be taken.)
     
  10. SampanViking
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    SampanViking The Capitalist
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    Norfolk asks
    HI Norfolk

    No, their is no real shortage of Agricultural land in China, the real problem is highly inefficient subsistence farming methods, which cannot produce anything like the yields of Intensive Farming.

    Chinese Farmers do not use Pesticides, Herbicides or have veterinary cover for their livestock, so when attempts are made to increase production, crop blight and livestock disease are the usual consequences.

    China is however wary of land clearances in order to create modern farms on a substantial level, due to the numbers of people involved and it wants to avoid recreating the conditions of the UK during the Enclosures Act of the early 19th Century or indeed the US's own Share Croppers in the 1930's.
     
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