Economy, Business, and Trade in China, Hong Kong, and Japan Sri Tella Madhura Belani

1. Economy, Business, and Trade in China, Hong Kong, and Japan Sri Tella Madhura Belani Daniel Moisan

2. Agenda • Economy : Sri • Business: Madhura • Trade: Dan

3. EconomyChina – Hong Kong - Japan • Key economic data • GDP Growth Comparison • Country-specific details

4. Economic Data

5. GDP Growth Comparison

6. China’s Economy • Second largest economy globally next to the U.S. • Slowly moving to a market economy • Still a significant amount of state-owned enterprise • Traditionally managed by controlling credit growth • Raised interest rates for first time in 9 years in 2004 • Accuracy of economic figures often questioned • GDP Breakdown • Agriculture 14.8% • Industry 52.9% • Services 32.3%

7. China’s Financial Markets • Central bank – People’s Bank of China • Link between interest rates and economic activity uncertain since economy not truly a market system • Managed exchange rate policy • Foreign reserves rising each year • Desire to slow investment to reduce excess capacity • Two major stock markets • Shanghai • Shenzhen

8. Hong Kong’s Economy • Economy is mainly a services center • Agriculture 0.1% • Industry 12.0% • Services 87.9% • Manufacturing contributes only about 4% of GDP • Virtually no mineral resources • Capital flows freely into and out of Hong Kong • High level of foreign investment and liquidity in economy

9. Hong Kong’s Financial Markets • No central bank – Hong Kong Monetary Authority • Serves some central bank functions • Interest rates largely determined by actions of U.S. Federal Reserve • HKD tied to USD since 1983 through a currency board • Strongly links Hong Kong’s economy to that of the U.S. • Foreign exchange reserves 5th largest in the world • Hong Kong Exchange • Hang Seng Index

10. Japan’s Economy • Manufacturing comprises over 20% of GDP • Agriculture 1.3% • Industry 25.4% • Services 73.3% • Asset bubble of the 1980’s led to tightened policy • Slow recovery possibly due to protective trade measures • Two-way trade 20% of GDP, compared to 70% for China • Largely due to restrictions on imports • Japan’s gross debt is 150% of GDP • Highest in the developed world

11. Japan’s Financial Markets • Bank of Japan • Responsible for monetary policy and foreign exchange • Ministry of Finance • Responsible for government fiscal policy • Floating exchange rate • Current policy attempting to prevent significant Yen appreciation • Japan holds world’s largest foreign exchange reserves in absolute terms • Tokyo Stock Exchange • Nikkei Index

12. Business • Government policies • Foreign Direct Investment (FDI) • Bureaucracy and corruption • Legal aspects • Labor market

13. China • Government Control • China’s state-owned enterprises ( SOEs); ~46,800 • Severe losses, inefficiencies and poor management • FDI • Positive attitude: decentralization; simplified process • 20% are invested towards buying SOEs • Various Form • Wholly-foreign-owned venture (WFO): 70 % of total FDI • Equity Joint Ventures: foreign investor hold > 25% • Cooperative/contractual businesses • Bureaucracy and Corruption • Businessmen are most likely to resort to bribery

14. China • Legal • Lack of confidence in judicial system; spread of corruption; better in big cities • No antitrust legislation • Anti-monopoly law drafted in 2004 • Labor • Although a large pool of labor, scarcity of managerial skills • Strikes have disrupted operations at many plants • Others • Infrastructure • Language and culture

15. Hong Kong • Governmentpolicy • Ranked first in places in Asia to do business • Intervention in currency and real estate market • State owns/runs infrastructure: Railways, bridges and tunnels • FDI • Second-largest recipient of FDI in Asia • Simple procedures • Advantages • No restrictions, strong legal system, free-port status, • Disadvantages • Expensive labor, high rents, poor environmental quality

16. Hong Kong • Legal • Price fixing and cartels are legal • Monopolies exist state-owned, transportation and utilities • IP protection laws not strong • Labor • Expensive

17. Japan • Government Policy • Slow privatization. E.g. Postal services • FDI • Used to have restrictions; beginning to open • Low relative to the size of the economy. • Bureaucracy and Corruption • Centralized power • Close ties between government, politicians and Japanese industry

18. Japan • Legal • Anti-competitive practices: keiretsu • Infringement laws are weak • Labour • Shrinking labor force. • Highly skilled and educated work force • Harmonious labor relations: Long-term employment

19. Regional Trade Overview • China and Japan both maintain trade a surplus • Although Hong Kong has a trade deficit, excluding the balance from China it has a significant surplus • Japan has a significant surplus due to tighter import restrictions • China and Japan both claim to have a trade deficit with the other. Most likely a position to provide negotiating leverage 2003 Trade in Goods Trillions of US $ Trade balance in 2003 Trade balance with . . . Region

20. Overview of trade in China • China’s international trade has grown considerably over the last five year (CAGR of 24%) • Two way trade is becoming a greater proportion of the country’s GDP (59% in 2003) • Machinery and transportation equipment is the largest category of exports followed by light industrial products International Trade BN US $ Exports by type Total = $438 BN

21. Trade restrictions in China • 1950 – China withdrew from the GATT (General Agreement of Tariffs and Trade) which was the predecessor to the WTO • After being admitted to the WTO, China revised 2,300 trade laws to conform to WTO regulations by September of 2003 • Although there has been considerable negotiations between the US, China filed its first complaint in April 2003 over the imposition of US steel tariffs • Tariffs have declined from 15.3% in 2002 to 10.4% in 2004 • Trade restrictions are expected to continue to decline in the near future

22. Overview of trade in Japan • Japan’s international trade has fluctuated over the last five years • Growth of two way trade is relatively low (4% CAGR) • International trade is a significantly lower portion of the overall economy in Japan • Machinery and transportation equipment account for 67% of Japan’s exports International Trade BN US $ Exports by type Total = $565.5 BN

23. Trade restrictions in Japan • Tariffs are imposed ad valorem on 90% of products • Tariffs on US goods are charged at WTO rates • Special tariffs apply to vegetable oils, foodstuffs, alcoholic beverages, and petroleum products • No customs duties on imported cars • Import quotas are in effect for various products to protect the local economy; significant trade negotiations have taken place to try and ease these restrictions and increase access to the Japanese consumer

24. Overview of trade in Hong Kong • Hong Kong’s international trade continues to increase at a moderate rate (7% CAGR) • Re-exports continues to be the bulk of its trade – this yields two way trade at significantly above GDP because of pass-through merchandise • The bulk of exports are in consumer goods and semi-manufacturing International Trade BN US $ Exports by type Total = $565.5 BN

25. Trade restrictions in Hong Kong • Based on the agreement for the transition of Hong Kong back to China, it participates independently in all international trade agreements • Because 90% of exports are re-exports, there are no tariffs on most goods • Excise duties are charged on four groups of commodities. This is purely to generate money for the government and applies equally to domestic and internationally manufactured goods • Under the Closer Economic Partnership Arrangement (CEPA) with mainland China, 374 product categories enter mainland China with no tariffs • Foreign companies located in Hong Kong fall under the guidelines of CEPA -> this is intended to spur growth in the region

26. References • Economic Intelligence Unit ( The economist) • CIA World fact book • Global Insight

27. Q & A