china presentation george iliev aubg published on linkedin

China Business and Economy

George ILIEV

george.iliev@alumni.lse.ac.uk

American University in BulgariaNov 28, 2010

1. China’s economy: GDP and growth

2. Exchange rate & forex reserves

3. Foreign trade

4. Investment flows & stock market

5. China’s relationship with the West

2

Contents

1) China Business Development Manager at VC network Merar

2) Three years of teaching Economy of China at Sofia University

3) Four years of editing Chinese and Japanese business news for publications on Dow Jones Factiva and Reuters Business Briefing

4) Author of a series of articles on the Chinese economy and business for Bulgaria's main business weekly Kapital

5) Six-month advertising internship in China

6) BA in Chinese Studies from Sofia University, 2002

7) MSc on China from the London School of Economics, 2008

8) One-year exchange at Anhui University in China, 2000-2001

9) One-semester at the Hong Kong University of Science and Technology (2009), part of an MBA at Emory University

3

My China Background

4

1. GDP and GDP growth

5Source: The Economist

GDP growth index of BRIC (1990=100), 1990-2005

0

50

100

150

200

250

300

350

400

45019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Brazil

Russia

India

China

Source: World Bank

Nov 20, 2007Privatisation & Globalisation. WTO & China’s Trading Blocks

Flying Geese Model:International Division of Labour

8

Flying Geese Model within China

Source: The Economist

1980-2005: China was a cost-cutting destination

2008 Beijing Olympics showcased a high-tech China with growing R&D spending

Chinese tourists abroad buy more per head (since 2005) than any other nation

Large luxury goods market: Audi now sells more cars in China

(including Hong Kong) than in Germany Sales to Chinese (at home and travelling)

make up 18% of Louis Vuitton’s revenue

9

Moving up the value chain

Source: The Economist

Growth below 7-8% poses social problems Growth above 10% leads to overheating and

formation of bubbles (in stocks, real estate, industrial capacity, infrastructure)

10

China’s breakneck growth

Source: The Economist

11

12

China Stock MarketRoller Coaster

2. Forex Reserves & Exchange Rate

13

Accumulation of reserves in Asia &easy creditprecipitated 2007/8financial crisis

14

China Forex Reserves

Source: The Economist

Nominal (to theUS dollar): 24% up

Real (includinglabor costs): another 21% up

Labor shortagessince 2004

Japan in 1960/70s as comparison

15

China’s exchange rate since 2005

Source: The Economist

16

China wages

Migrant labor is driven by a four-stroke engine

The option of going to the countryside means there are no ghettos in China

Source: The Economist

17

China’s high savings rate

Source: IMF

18

China demography

20502000

Source: prb.org

19

3. China exports & imports

Transformation from public ownership (blue) to private ownership (purple)

late 1970s mid-1980s early 1990s 2009

% of foreign-invested companies in foreign trade, 1992-2008

0

10

20

30

40

50

60

70

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

total export import

Source: 中国统计年鉴

Discrepancy between Chinese and foreign trade surplus statistics results from:

1. Re-exports via Hong Kong not counted2. Exports at FOB, Imports at CIF3. Disguised capitalinflows

23

China’s trade surplus conundrum

Source: The Economist

GDP composition (expenditure method)

52.547.2

35.3

14.615.2

13.3

32.536.6

43.5

0.4 17.9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1981 1992 2008

net exports

capital formation

government spending

private consumption

Source: 中国统计年鉴

25

Domestic Value Added Exports

Source: McKinsey Quarterly

G20 excludingUSA is in tradebalance withChina Vast exports to

China (machines,raw materials)

26

China’s role as importer

Source: The Economist

27

4. Investment flows & stock market

Foreign direct investment in China, 1985-2008 (US$ 100 million)

050

100150200250300350400450500550600650700750800850900950

1000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Source: 中國統計年鑑

Note: Figures from 2006 onward include investment in capital markets & financial institutions.

FDI in China (scale up to $100 B.)

In some years China is the biggest FDI destination in the world

IPOs of Chinese companies in Hong Kong, London, New York, Singapore

Foreign investments in China

29

Source: The Economist

H-share companies listed on stock exchanges in HK, US, UK, & Singapore, 1993-2008

615 18

25

42 43 4652

60

75

93

111122

143153 150

0

20

40

60

80

100

120

140

160

180

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: 中国证券期货统计年

Combined: second biggest in the world (A+H shares): USD 3.3 trillion market cap at end-2009

Mainland China only: ◦ third largest market cap◦ ninth highest free float◦ second highest daily trading volume (churn)

A shares & H shares: arbitrage opportunities

31

China and Hong Kong stock markets

Hong Kong Stock Exchange

32

156 H-share companies & 97 red chip companies listed in Hong Kong as of June 2010

China ranked the world's fifth largest outbound direct investor in 2009, up from 12th place in 2008

China’s FDI abroad was $56.5 billion in 2009

China Investment Corporation (sovereign wealth fund), created in 2007 with $200 billion of China’s forex reserves. (Now $300 billion)

Provincial sovereign wealth funds, like Guangdong Rising Asset Management, have also been launched

33

Chinese investments abroad

34

Source: The Economist,Nov 11, 2010

35

Source: The Economist,Nov 11, 2010

1. To reduce inflationary pressure and RMB revaluation (appreciation) pressure

2. To make use of the USD in its currency reserve while the dollar is still valuable

3. To buy up assets before other emerging powers like India and Brazil have started buying

36

Reasons for China’s shopping spree

Resources: oil, metals, agricultural products (Rio Tinto; assets in Australia, Canada, Kazakhstan, Africa)

Financial investments (Blackstone, Morgan Stanley, Fortis, Standard Bank, Barclays, Rothschild, AIA)

Technology & telecoms (Volvo, Hummer, Saab, Rover)

37

What China invests in

well-known Chinese brands

Chinese investments abroad are getting rebuffed:◦ CNOOC’s 2005 blocked offer for U.S. Unocal◦ Failed acquisitions in Australia, Canada

Foreign investments in China are getting rebuffed: ◦ Coca Cola’s $2.4 bn bid for juice company

Huiyuan◦ Carlyle’s bid for Xugong Construction Machinery• Yet, some (timely) Chinese investments have

been welcomed: CIC owns 10% in Morgan Stanley

39

Investment hurdles

China no longer takes its cues from the West (nor from Russia)

WTO member since 2001 (though lacking market economy status till 2016)

$2.6 trillion of forex reserves (mostly treasuries)

Huge government purchases in friendly countries

Own technological standards (3G, RFID); R&D in GMOs, nuclear fusion

Only a US/EU weapons embargo remains (since 1989)

40

5. China’s relationship with West

41

Yin & Yang

Thank you

george.iliev@alumni.lse.ac.uk