China :Economic Development and FDI

1. China :Economic Development and FDI Angang Hu Tsinghua University Jan.19 2003

2. 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

3. 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

4. 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

5. 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

6. GDP(PPP, current international $)

7. Ratio of China’s GDP to US’s

8. GDP (PPP), % of World

9. GDP per capita, (PPP, current international $)

10. Effects of Catch-Up • Speed effect: higher economic growth rate • Structural effect: faster change of structure • Technical effect: more prompt diffusion of technology • Openness effect: more open polities of trade and investment

11. Trandency of Five Economies for Long Run（1965－1999年） Source：World Bank, 2001, World Development Indicator, 2001, Table 1.4, Oxford University Press。

12. Growth Index of GDP (1990=1.0)

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

14. Gross Domestic Investment, % of World

15. 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

16. 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 Ratio of Planning Price 15.6 9.6 Ratio of Planning guide price 100 6.5 4.6 Ratio of Market Price 0 77.9 85.6 General retail goods Ratio of Planning Price 97 8.8 3.7 Ratio of Planning guide price 2.4 1.5 Ratio of Market Price 3 88.8 94.8 Ratio of Planning and Market Price（％）

17. Market-oriented Development Index (1978-1999)

18. 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

19. 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.

20. 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 Demographic transition(1982-2000)

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

22. 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)

23. Potential domestic market: No.1 in 10 emerging markets • Relative high real purchasing power • World products bases

24. 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 .

25. Comparison of National Powers(% of World Total)

26. 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

27. 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%)

28. 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%

29. 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

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

31. 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

32. 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 The Fluctuation of GDP Growth Rate(%)

33. Index The 8th Five Year Period The 9th Five Year Period GDP Average Growth Rate 12.0 8.3 Fluctuation 17 0.9 Growth Rate of employment 1.2 0.9 Investment Growth Rate Fixed assets 36.9 11.2 Growth 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 -3.3 Growth 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 Growth Rate of import 19.9 11.3 Table II. Comparison of China’s Main Economic Index Average Growth Rate (%)

34. 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

35. 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)

36. 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.

38. 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

40. 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.

41. China is Second Country of Net FDI in the World

42. Ratio of Net FDI to GDP

44. Ratio of FDI to Capital Investment(%)

45. Ratio of Country’s FDI to World Total

47. 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 Human Development Indicator（1950-1999）

48. 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 Total Human Capital （1975－2000）