China – a new economic power
BUSI_3001_Spring_2011
February 28, 2011
Charles Mo & Company
Topics




Overview of the China Economy
What does it represent to be number 2?
Largest companies in China
Issues in China











Impact of the 585 billion Chinese stimulus program,
Difference of the stimulus programs between the US and China
Trade tension between the US and China
US trade restrictions imposed on Chinese products
A potential stock market bubble in China
Overseas hunt for energy resources
Conflict with international politics
Environmental pollution
Undervaluation of the RMB
Changing workforce
Success and failure stories of American firms
Economic Statistics of China
Currency
Yuan (CNY); also referred to as the
Renminbi (RMB)
Exchange rate(av) (2/16/2011)
Rmb:$ USD
= 6.49
Rmb:¥ JPY100 = 7.86
Rmb:€ EUR = 8.89
Rmb:£ GBP = 10.56
Fiscal year
Calendar year
(01 Jan to 31 Dec)
Trade organizations
WTO, APEC ,G-20
What does it mean to be the second largest economy?











China topped Japan as the second largest economy in the world. 2-14.2011
China has passed the US to become the world’ biggest energy consumer. Wsj 7-202010
In 2009, China overtook the US as the number one auto market with 45% increase to
13.1 million cars.
In December, 2009, China overtook Germany's US$917 billion export to become the
top exporter with export valued at US$957 billion (Wall Street Journal)
Largest mobile phone network with 679 million phones (Apr. 2009)
Boeing predicts China will be the largest market for commercial air travel outside the
US for the next 20 years
In 2008, China replaced the US as the world’s largest internet user
Largest global steel producer and consumer
ICBC – largest bank in the world in terms of market cap, China Construction Bank(3),
Bank of China(5)
Petro China – largest market cap oil company
The US is poised to lose its 110-year run as the world's biggest manufacturing nation
by output in 2011 to China - though it still claimed the top spot last year - according to
IHS Global Insight figures released on Monday, Financial Times reported. The US
created 19.9% of world manufacturing output last year, compared with 18.6% in
China, despite the global downturn.
GDP (Nominal)
(2007)
(2008)
(2009)
(2010)
$3.42 trillion
$4.42 trillion
$4.7 trillion
$5.7 trillion
(ranked 3rd)
(official data)
GDP (PPP)
(2010)
$10.7 trillion
GDP per capita (Nominal)
(2010)
Source: IMF
$4,283
(ranked 95th)
GDP per capita (PPP)
(2010)
$7,518
(ranked 91th
(ranked 2nd)
GDP growth rate
(2009)
(2010)
11.5%
10.3%
(official data)
GDP by sector
(2008)
agriculture
(primary)
industry
(secondary)
services
(tertiary)
note: industry includes construction
(11.3%)
(48.6%)
(40.1%)
(5.5%)
GDP by components, %
(2006)
Private consumption
Government consumption
Gross fixed investment
Exports of goods/services
Imports of goods/services
(36.4)
(13.7)
(40.9)
(39.7)
(-31.9)
Interest rates
(2009-9-20)
One-year benchmark deposit rate: 5.13%
One-year lending rate: 7.47 %
Inflation rate
(CPI)
-1.2% (Jan-Aug 2009 average)
4.9%[1]
(CPI: 8.7%,[2]
4.5%
1.7%
Feb 07 - Feb 08)
(2007 average)
(2006 average)
Being No 2 brought more changes to China







Higher wages – in 2010 alone, wages for factory workers in 20 major
exporting provinces raised 20-30%. Wages will continue to increase in
double digits in the years to come.
Higher commodities price – cotton price increased 40% in 2010 and
expected to increase another 50% next year.
Overall increase in prices – gasoline, water, utility, and real estate
Increased R&D spend – from 0.5% of GDP a decade ago to 1.5% of
GDP. China now outspends Japan in R&D.
Industries and businesses are moving inland.
Higher export costs
China’s trading partner USCBC Table 7

China's Top Trade Partners 2009 ($ billion) Source: PRC General
Administration of Customs, China's Customs Statistics











Rank Country/region
Volume
% change over 2008
1
2
3
4
5
6
7
8
9
10
298.3
228.9
174.9
156.2
106.2
105.7
60.1
52.0
47.9
43.4
-10.6
-14.2
-14.1
-16.0
-17.8
- 8.1
0.7
- 3.0
- 8.8
-16.3
United States
Japan
Hong Kong
South Korea
Taiwan
Germany
Australia
Malaysia
Singapore
India
Continued





2.7 trillion in foreign exchange reserves, Feb, 2011
801 billion of US treasury, Dec, 2009
750 billion of US treasury, Jan 2010
895 billion of US treasury, March, 2010
900.2 billion of US Treasury, April, 2010(Japan
795.5)
Country
China, Mainland
Japan
United Kingdom
Oil Exporters
Brazil
Carib Bnkng Ctrs
Hong Kong
Canada
Taiwan
Russia
Switzerland
Luxembourg
Singapore
Thailand
Germany
India
Ireland
Korea, South
Mexico
Egypt
Dec Nov Oct Sep Aug Jul
Jun May Apr Mar Feb Jan Dec
2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2009
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----891.6 895.6 906.8 883.5 868.4 846.7 843.7 867.7 900.2 895.2 877.5 889.0 894.
883.6 877.2 875.0 862.1 833.8 818.6 801.2 784.8 793.8 783.3 768.2 765.2 765.7
541.3 511.8 478.5 459.8 450.3 376.5 363.7 350.9 321.1 279.0 233.5 208.3 180.3
218.0 210.4 213.9 221.5 217.8 215.4 216.3 228.6 232.9 223.4 211.9 211.9 201.1
180.8 184.4 177.6 175.6 165.1 162.3 158.5 161.5 164.4 164.5 170.9 169.0 169.2
155.6 146.3 133.8 144.7 159.7 151.2 165.9 166.3 153.2 148.2 144.4 143.6 128.2
138.2 138.9 139.2 135.9 137.8 135.2 141.0 145.7 151.8 150.9 152.4 146.6 148.7
134.6 134.7 124.0 114.3 102.7 100.8 93.7 84.8 81.9 77.1 67.1 54.7 52.8
131.9 131.1 131.2 130.0 130.2 130.5 128.6 126.2 126.9 124.8 121.4 119.6 116.5
106.2 122.5 131.6 128.5 129.0 130.9 123.4 126.8 113.1 120.1 120.2 124.2 141.8
100.6 100.6 101.3 103.6 106.6 105.4 100.1 84.4 80.0 78.8 81.8 84.4 89.7
85.4 81.0 77.5 85.2 78.0 97.9 96.6 75.6 76.9 83.9 77.8 79.1 88.4
70.1 59.4 63.6 53.9 52.7 52.6 50.5 40.6 42.4 45.5 42.6 41.3 39.2
65.5 65.7 66.2 64.0 60.9 54.4 49.3 46.3 46.9 43.5 42.1 33.3 33.3
62.3 60.4 60.1 59.7 58.7 57.1 54.0 55.8 54.8 53.7 50.0 49.0 47.8
41.6 40.7 41.1 41.0 39.0 39.4 36.4 29.3 31.0 32.0 31.6 32.7 32.5
38.4 42.6 41.4 44.0 42.0 43.6 48.3 48.0 45.7 43.3 38.7 39.2 43.6
37.9 41.5 41.1 40.4 41.6 39.3 38.7 37.8 38.7 40.1 39.8 39.7 40.3
33.6 32.7 34.9 37.0 36.2 33.6 33.2 34.2 33.1 36.1 33.9 34.4 36.8
30.4 34.2 34.9 35.0 33.6 30.3 29.4 28.0 21.1 21.4 21.7 19.4 18.9
Conference Board: China’s GDP To Surpass U.S.?

GDP (constant) in millions
US$, ppp-adj
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 *
2010
2011
2012
2013
2014
2015
2016
United States
12,219,604
12,351,532
12,575,547
12,888,712
13,349,260
13,757,016
14,124,714
14,399,780
14,399,670
14,020,652
14,385,189
14,557,812
14,848,532
15,145,057
15,447,505
15,755,992
16,151,298
China
4,337,325
4,800,704
5,396,402
6,213,749
6,841,338
7,552,836
8,511,474
9,719,364
10,651,923
11,621,248
12,783,373
14,009,231
15,286,673
16,680,600
18,201,634
19,861,363
21,434,069
Nominal_GDP_IMF_2008_millions_of_USD.jpg
k
Fort Name
500
Headq Revenue
uarters (Millions. $)
Profit
(Millions. $)
Employees
Industry
1
17
Sinopec
Beijing
131,636.0
3,703.1
681,900
Oil
2. 24.
Petroleum China
National
Beijing
110,520.2
13,265.3
1,086,966
Oil
3. 29.
State Grid
Corporation
Beijing
107,185.5
2,237.7
1,504,000
Utilities
4. 170. Industrial and
Commercial Bank of
China
Beijing
36,832.9
6,179.2
351,448
Banking
5. 180
China Mobile Limited
Beijing
35,913.7
6,259.7
130,637
Telecom
6. 192
China Life Insurance
Beijing
33,711.5
173.9
77,660
Insurance
7
215
Bank of China
Beijing
30,750.8
5,372.3
232,632
Banking
8
230
China Construction
Bank
Beijing
28,532.3
5,810.3
297,506
Banking
9
237. China Southern
Power Grid
Guangz 27,966.1
hou
1,074.1
178,053
Utilities
1
0
275
Beijing
2,279.7
400,299
Telecom
China Telecom
24,791.3
Four Trillion RMB Stimulus Program




Announced in November, 2008, largest stimulus program at the time
Resulted in a budget deficit of 3% of GDP in 2009

1998
1.1% deficit of GDP

1999
1.9%

2000
2.5%
Central government contributed 1.18 trillion

2009 & 2010
600 billion each

Rest of the fund from private sectors and local governments
Budget deficit

3% China 2009

12.3% US 2009
China’s 4 Trillion RMB (US$585 Billion)Stimulus Program







China objective - it will keep its own economy in good shape
China’s stimulus program totals 18% of its 2008 GDP
Paulson’s 700 billion TARP bailout and Obama’s 785 billion stimulus
program together amounts to 10.7% of 2008 GDP
After the initial 585 b stimulus program was announced, BJ requested
local governments to submit proposal and the returned request totaled 1
trillion, over twice the stimulus amount
Central government encouraged banks to lend to identified 10 industries
Total yearly government expenditure in China for 2009 is below 20% of
GDP
US government expenditure in 2009 now amounts to 20% of GDP
Boosting the economy
Breakdown of China’s stimulus package
Total spending:4 trillion yuan ($585.76 billion)
45%
25%
9.25%
Railways.
Highways
airports,
power
grids
Post disaster Rural
reconstruction Development
And
infrastructure
Projects
8.75%
7%
4%
Ecology
And
Environment
Housing Independent
Security Innovation
1%
Health
Culture
And
education
The US and the China Stimulus Program
US
700 B & 785 B
China
585 B
% of GDP
10.7%
20%
Government
Spend per year
20% of GDP
20% of GDP
Tax
Credit/reduction
1/3 or 295 B
VAT on imports
Infrastructure
33%
45%
Healthcare
14%
1%
Year
US Exports
US imports
US trade balance
1980
3.8
1.1
2.7
1985
3.9
3.9
0
1990
4.8
15.2
-10.4
1995
11.7
45.6
-33.8
2000
16.3
100.1
-83.8
2001
19.2
102.3
-83.1
2002
22.1
125.2
-103.1
2003
28.4
152.4
-124.0
2004
34.7
196.7
-162.0
2005
41.8
243.5
-201.6
2006
55.2
287.8
-232.5
2007
65.2
321.5
-256.3
2008
71.5
337.8
-266.3
2009
69.6
296.4
-226.8
2010
91.8
364.9
-273.0
Source: USITC
2010 –source US Commerce Department
Country or Trading Group
US Trading Balance
World
-497.8
China
-273.0
OPEC
- 95.6
EU
-79.7
Mexico
-66.3
Japan
-59.8
Canada
-27.6
Others
104.2
True US GDP




GDP is defined as the gross value of the products and
services created by an economy.
Value of products are measured at the retail value
US GDP amounts to 14.5 Trillion, 70% of it in retail
consumption.
How much of the 11.31 are manufactured in the US?
Rising US China Trade Tension
wsj16-09-09 P1, p18,p19








Rising US China trade tension threatening G20 meeting this week
35% tariff on Chinese tires for the next 3 years to preserve union jobs
17% of the tire market are imported by the Chinese
Chinese tires manufacturers may loose 100,000 jobs
Chinese wants to avoid wider conflict in trade
More Chinese say in the IMF
US sanction on Chinese steel pipe in December , 2009
The U.S. will impose duties on $2.8 billion in steel-pipe imports from China after saying
subsidies on the products may harm American steelmakers, a move that threatens to
escalate trade tensions between the two countries. (BusinessWeek 12/31/2009)
RMB exchange to the US $
Protectionist measures ramp up-wsj150909p4 & p13









130 protectionist measures drafted and to be implemented
Russian planned across-the-board tariff increases
S. African change purchasing rules to favor domestic firms
owned by non whites
Japan rewriting sanitation policies to restrict food import.
35% tariff on tires from China which constitutes 17% of the US
tire market
55 countries issued protective measures against China, 49
against US, and 46 against Japan
Move pleases labor but complicate policy
Chicken trade retaliation could be dangerous
Buy American in US stimulus program; Buy Chinese in Chinese
stimulus program
Global hunt for energy resources
 Acquisition of Australian mines
 Acquisition of Sub Sahara African oil field
 Cooperation between Russia natural gas
 Financing Venezuela
 Offshore drilling in Southern China Sea
International political conflict






UN Security Council conflict over Iran nuclear
program
North Korea nuclear issue
Venezuela Chavez
Obama’s potential meeting with Dalai Lama
China’s expressed displeasure over arms sales to
Taipei
Prosecution and execution of foreign expats


Rio Tinto executive detained
UK citizen executed for possession of Cocaine
China pushes Australian tie wsj6-22-10p3
China’s new role
Environmental pollution & food safety




Environmental scare - Diesel spill in tributary contaminates
China’s second longest waterway, Yellow River (wsj 010409)
Food safety scandal - December, 2009 shut down of Shanghai
Panda Dairy of selling 2008 recalled milk product which
contains Melamine.
2008 Melamine in dairy product, eggs, chicken feed, livestock
feeds, pet foods. Melamine was blamed for killing six infants
and sickening 300,000 babies
2008 Lead in toys resulted in the largest toy recall by Mattel.
New Cadmium scare prompts Walmart to pull children's jewelry
Historical Chart of the RMB (Chinese Yuan)
4976
7689
90
Mao Deng 5
Zhed Xiao
ong ping
95
00
01
02
03
04
05
06
07
08
09
8.5
8.3
8.3
8.3
8.3
8.3
8.0
7.5
7.3
7.0
6.8
Issues


China’s refusal to adopt a floating currency system
Zhang Bin, a researcher at the Chinese Academy of Social Sciences
(CASS), has encouraged Chinese officials to consider a one-time
10% appreciation of the renminbi's value against the dollar,
Bloomberg reported. The move, suggested as a means to reduce
speculative inflows of capital, would be accompanied by a 3% annual
limitation on the appreciation or depreciation of the currency relative
to the dollar. While Zhang could not predict whether the government
would accept his advice or allow the currency to appreciate from its
current value of approximately RMB6.83 to the dollar, he stated that
a 10% revaluation would not seriously impact export growth and that
China should take an "active strategy" to reduce the threat from
short-term capital inflows.
Changing workforce



Wsj6-1-10, Honda strike spurs Honda to raise pay by 24% even though the
strikers demanded 57% increase
Honda shut down all four of the Chinese joint-venture final-assembly plants
because of lack of components from its parts manufacturing plants
Foxcomm announced a salary increase of 20% in May, 2010
Honhai bends amid scrutiny –
wages to rise 30% WSJ 6-3-10 p
Low tech solution
Successes



GM China auto sales up 67% in 2009
Coca-Coca, Nike, surpassed 1 billion in revenues
in 2006
Other successes by American companies


Intel, Microsoft, Big 4 CPA’s, Law firms,
Small companies success stories




Element Fresh (9 locations in Shanghai, 2 in BJ)
Blue Frog Bar & Restaurant(7 in SH, 2 in BJ, 1 in Macau)
DE Global founded by Ed Gwinn(offices in Vietnam, Taiwan and HK)
B&L Group founded by Phil Branham (project management firm for the
US Pavilion in the coming World Expo
Failures










Best Buy began to close all its branded stores in China on February 22nd.
Home Depot started to close all of its China stores two years ago. Just closed its
last one in BJ last month.
Whirlpool to close washing machine plant in Shanghai(4-10-2009)
Yahoo dismal results in China
eBay admits FAILURE in China, eBay Eachnet to close (12-19-2006)
Polaroid China bankrupted and closed in 2002
Hertz entered China in the 90’s and did not re-enter until the 2000’s
Walmart slow start in China, union problem, has a total of 84 stores in China
after acquiring Trustmart. Carrefour has 148 stores in China.
Law firms cannot operate in China except through rep office
Numerous small American businesses failed over the years or continue to incur
losses






Charles Mo is a Certified Public Accountant in the US. He is the General Manager and founder
of Charles Mo & Company, a wholly owned American consulting firm specializing in recruiting,
opening new factories and business, outsourcing accounting, and providing HR related
assessment tools for corporations. Charles is an independent board member and the chairman
of the audit committee on the Board of Directors of Omnialuo, Inc. and China Ritar Power
Company, both OTC public companies in the US. In January 2009 he was appointed to the
Board of Director of NIVS Intellimedia, a NYSE Alternext listed company.
Charles moved to China in 1995 as the Controller/General Manager for Polaroid China, and
later served as the Chief Financial Officer for Nike China, and finally as the Chief Operating
Officer for Coca-Cola in Shanghai until 2005. Prior to that Charles worked for Wang
Laboratories, Inc. in Massachusetts in various financial management capacities.
In 2003 Charles joined American Chamber of Commerce in Shanghai, and was appointed CSR
Committee Vice Chair in 2004, Board Treasurer in 2005, and elected Board Vice Chairman in
2006, 2007, and 2008. Charles was also the Chairman of the Audit Committee in 2005 and
member of the Audit Committee in 2006 and 2007.
Charles has an MBA from California State University Fullerton and a BA in Business
Administration from Hong Kong Baptist College.
More on his profile: http://people.forbes.com/profile/charles-c-mo/59941
www.charlesmo.com