china in the global economy · china in the global economy— international trade china has also...

China in the Global Economy

Lawrence J. Lau 刘遵义 Ralph and Claire Landau Professor of Economics, The Chinese Univ. of Hong Kong

and Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University

Symposium on China in the Global Economy and the Opportunities for Hong Kong

Hong Kong Development Forum Hong Kong, 16th January 2014

Tel: (852)3550-7070; Fax: (852)2104-6938

Email: [email protected]; WebPages: www.igef.cuhk.edu.hk/ljl *All opinions expressed herein are the author’s own and do not necessarily reflect the views of

any of the organisations with which the author is affiliated.

2

Outline Introduction China in the Global Economy—GDP The High Domestic Savings Rate China in the Global Economy—International Trade The Internationalisation of the Renminbi The Rising Importance of Intangible Capital The Partial De-Coupling Hypothesis Projections of the Future Concluding Remarks

3

Introduction China has made tremendous progress in its economic

development since it began its economic reform and opened to the World in 1978. China is currently the fastest growing economy in the World—averaging 9.7% per annum over the past 36 years. It is historically unprecedented for an economy to grow at such a high rate over such a long period of time.

Between 1978 and 2013, Chinese real GDP grew more than 26 times, from US$356 billion to US$9.28 trillion (in 2013 prices), to become the second largest economy in the World, after the U.S.

By comparison, the U.S. GDP (approx. US$16.2 trillion) was less than 2 times Chinese GDP in 2013.

4

Actual Real GDPs and their Annual Rates of Growth: China & the U.S.

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0

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PercentUS

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, 201

2 pr

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The Real GDP and Its Annual Rates of Growth of China and the U.S.(trillion 2012 US$)

Growth Rate of U.S. Real GDP (right scale) Growth Rate of Chinese Real GDP (right scale)

U.S. Real GDP Chinese Real GDP

5

Introduction Despite its rapid growth, in terms of its real GDP per capita,

China is still a developing economy. Between 1978 and 2012, Chinese real GDP per capita grew

16 times, from US$354 to US$6,101.9 (in 2012 prices). By comparison, the U.S. GDP per capita of approximately

US$49,879, was 8.2 times Chinese GDP per capita in 2012.

6

China in the Global Economy—GDP In 1970, the United States and Western Europe together

accounted for over 60% of World GDP. By comparison, East Asia accounted for just above 10% of World GDP.

By 2012, the share of United States and Western Europe in World GDP has declined to approximately 45% whereas the share of East Asia has risen to approximately 25%.

The Japanese share of World GDP declined from a peak of 18% in the mid-1990s to 8% in 2012 while the Mainland Chinese share of World GDP rose from 3% in 1970 to over 11% in 2012.

The Distribution of World GDP, 1970 and 2012, US$

7

Brunei 0.01%

Cambodia0.02%

Mainland China3.2%

Hong Kong0.1%

Indonesia0.3%

Japan7.2%

Korea0.3%

Malaysia0.1%

Philippines0.2%

Singapore0.1%

Thailand0.2%

Taiwan, China0.2%

United States35.4%

Euro Zone21.5%

Other Economies31.1%

The Distribution of World GDP in 1970

Brunei 0.0%

Cambodia0.0%

Mainland China11.6%

Hong Kong0.4% Indonesia

1.2%

Japan8.3%

Korea1.6%

Lao 0.01%

Macao0.1%

Malaysia0.4%

Philippines0.3%

Singapore0.4%

Thailand0.5%

Vietnam0.2%

Taiwan, China0.7%

United States21.8%

Euro Zone17.0%


The Distribution of World GDP in 2012

8

The Shares of East Asia, China, Japan and South Korea in World GDP, 1960-present

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The Shares of East Asia, China, Japan and South Korea in World GDP, 1960-present

East Asian Economies

Mainland China

Japan

Korea

9 Lawrence J. Lau, The Chinese University of Hong Kong 9

The Growth of Real GDP in East Asian Economies, 1970-2012

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Real GDP of East Asian Economies in 1970 and 2012, in 2012 USD trillions

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The Growth of Real GDP per Capita in East Asian Economies, 1970-2012

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Real GDP per Capita of East Asian Economies in 1970 and 2012, in 2012 USD thousands

1970 2012

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The High Domestic Savings Rate Chinese economic growth since 1978 has been underpinned

by a high domestic savings rate, on the order of 30% and above, except for a brief start-up period in the early 1950s, enabling a consistently high domestic investment rate. The saving rate has stayed around 40% since the early 1990s and has at times approached or even exceeded 50% in more recent years.

This means, among other things, that the Chinese economy can finance all of its domestic investment needs from its own domestic savings alone, thus assuring a high rate of growth of the tangible capital stock without having to depend on the more fickle foreign capital inflows (including foreign portfolio investment, foreign direct investment or foreign loans). The national saving rate in China will remain high even though it is expected to decline gradually.

The Saving Rate and Real GDP per Capita: East Asian Economies

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National Savings Rate and Real GDP per Capita

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10 100 1,000 10,000 100,000Real GDP per Capita, in 2000 US$

Perc

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China

Hong KongIndonesia

JapanKorea, Rep.

MalaysiaPhilippines

SingaporeTaiwan

Thailand

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Saving Rates of Selected Asian Economies (1952-present)

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Perc

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Savings Rates of Selected East Asian Economies

China, Mainland Hong KongIndia IndonesiaJapan KoreaMalaysia PhilippinesSingapore TaiwanThailand

14

China in the Global Economy—International Trade China has also grown into the second largest trading nation

in the World in terms of the total value of international trade in goods and services, after the U.S.

While China is the largest exporting nation in terms of goods and services, followed by the U.S., the U.S. is the largest importing nation in terms of goods and services, followed by China. China is also the largest exporting nation in terms of goods alone, followed by the U.S. The U.S. is the largest exporting as well as importing nation in terms of services, followed by respectively the United Kingdom and Germany.

15

International Trade & Its Rate of Growth: A Comparison of China and the U.S.

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The Value of International Trade and Its Rate of Growth:A Comparison of China and the U.S.

Rate of growth of total Chinese international trade, % (right scale)

Rate of growth of total U.S. international trade, % (right scale)

Total Chinese trade in goods and services (US$ trillions)

Total U.S. trade in goods and services (US$ trillions)

Percnet

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China in the Global Economy—International Trade In 1970, the United States and Western Europe together

accounted for over 60% of World trade. By comparison, East Asia and South Asia combined accounted for less than 10% of World trade.

By 2011, the share of United States and Western Europe in World trade has declined to below 45% whereas the share of East Asia and South Asia has risen to 30%.

17 17

The Distribution of Total International Trade in Goods and Services, 1970

Brunei 0.0%

Cambodia0.0%

Mainland China0.6%

Hong Kong SAR0.9%

Indonesia0.4%

Japan5.4%

Korea 0.4%

Lao 0.0%

Macao 0.0% Malaysia

0.4%Philippines

0.4%Singapore

0.7%Thailand

0.3%Vietnam

0.0%Taiwan, China

0.0%


United States32.3%

Euro Zone43.3%

The Distribution of Total International Trade in Goods and Services in 1970

18 18

The Distribution of Total International Trade in Goods and Services, 2011

Brunei 0.0%

Cambodia0.0%

China9.7%

Hong Kong 2.5%

Indonesia1.0%

Japan4.2%

Korea 2.8%

Lao 0.0%

Macao 0.1%

Malaysia1.1%

Philippines0.3% Singapore

2.1%Thailand

1.2%Vietnam0.5%Taiwan,

China1.5%


United States10.8%

Euro Zone22.8%

The Distribution of Total International Trade in Goods and Services in 2011

19

China in the Global Economy—International Trade The East Asian share of World trade rose from 10% in 1970

to just below 25% in 2011. The Chinese share of World trade rose from 1% in 1970 to

10% in 2011. Chinese international trade accounted for more than 40% of

East Asian international trade in 2011.

20 20

The Share of China in Total World Trade, 1950-present

The Share of Chinese Trade in Total World Trade, 1950-present

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The ratio of Chinese Exports to World Exports

The ratio of Chinese Imports to World Imports

The ratio of Chinese Total Trade to World Total Trade


The Share of China in Total East Asian Trade, 1952-present

TheShare of Chinese Trade in Total East Asian Trade, 1952-present

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The Ratio of Chinese Exports to East Asian Exports

The Ratio of Chinese Imports to East Asian Imports

The Ratio of Chinese Total Trade to East Asian Total Trade

22

China in the Global Economy—International Trade Contrary to the public impression, the ratio of exports to

GDP is actually relatively low compared to other East Asian economies (see the next charts). This is really a reflection of the fact that China is a large economy. Most large economies, such as the U.S. and Japan, have relatively low exports to GDP ratios.

Exports of Goods and Services as a Share of GDP in East Asian Economies

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Exports as a Share of GDP of East Asian Economies

1980 1990 2011

Exports of Goods as a Percent of GDP: East Asian Economies

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Exports of Goods as a Pecentage of GDP of Selected East Asian EconomiesBrunei Cambodia Hong Kong MacaoMainland Indonesia Japan KoreaLao Malaysia Myanmar PhilippinesSingapore Taiwan Thailand Vietnam

Lawrence J. Lau 25

The Internationalisation of the Renminbi The Renminbi is increasingly used as an invoicing and

settlement currency for cross-border transactions, especially those involving Chinese enterprises as transacting parties.

The proportion of Mainland Chinese international trade settled in Renminbi has grown rapidly, from almost nothing in 2010Q1 to US$160 billion in 2013Q1 or16.4% of the total value of trade in goods and services. In absolute value, some US$640 billion of Chinese international trade is now settled in Renminbi annually.

The central banks and monetary authorities of many countries and regions have entered into swap agreements with the People’s Bank of China, the central bank of China.

Lawrence J. Lau 26

Renminbi Settlement of Cross-Border Trade, Billion US$ and Percent

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Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013

Perc

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US$

Bill

ions

Renminbi Settlement of Cross-Border Trade

Absolute Value (left scale)

Percent of Total (right scale)

Lawrence J. Lau 27

The Internationalisation of the Renminbi The exchange rate of the Renminbi relative to U.S. Dollar is

likely to hold steady or appreciate modestly over the next few years. This should facilitate the further internationalisation of the Renminbi.

Capital account convertibility is expected to be achieved before 2020. It can occur sooner if short-term capital flows, both outbound and inbound, can be appropriately “discouraged”.

28

The Rising Importance of Intangible Capital The principal sources of Chinese economic growth will

gradually evolve from the growth of tangible inputs such as tangible capital and labour, to the growth of intangible inputs such as human capital, R&D capital, and reputational capital (branding and goodwill).

Sustained investment in human capital and research and development (R&D) is essential for the occurrence of technical progress or growth in total factor productivity in an economy.

China has also begun to invest heavily in R&D in recent years—its R&D expenditure has been rising rapidly, both in absolute value, and as a percentage of GDP. But it still lags behind the developed economies as well as the newly industrialised economies of East Asia. (The Chinese R&D Expenditure/GDP ratio is targeted to reach 2.2% in 2015, still below the historical average of 2.5% for the U.S.)

R&D Expenditures as a Ratio of GDP: G-7 Countries, 4 East Asian NIES & China

29

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R&D Expenditures as a Percentage of GDP: G-7 Countries, 4 East Asian NIEs and China

The U.S. Japan Germany The U.K.

France Canada Italy South Korea

Singapore Taiwan China Hong Kong

30

The Rising Importance of Intangible Capital One indicator of the potential for technical progress

(national innovative capacity) is the number of patents created each year. In the following chart, the number of patents granted in the United States each year to the nationals of different countries, including the U.S. itself, over time is presented.

The U.S. is the undisputed champion over the past forty years, with 121,026 patents granted in 2012, followed by Japan, with 50,677. (Since these are patents granted in the U.S., the U.S. may have a home advantage; however, for all the other countries and regions, the comparison across them should be fair.)

Patents Granted in the United States: G-7 Countries, 4 East Asian NIEs & China

31 1

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Patents Granted Annually in the United States: G7 Countries, 4 East Asian NIEs and China

US JapanW. Germany U.K.France CanadaItaly Hong KongSouth Korea SingaporeTaiwan China

32

The Rising Importance of Intangible Capital The stock of R&D capital, defined as the cumulative past real

expenditure on R&D less depreciation of 10% per year, can be shown to have a direct causal relationship to the number of patents granted (see the following chart, in which the annual number of U.S. patents granted is plotted against the R&D capital stock of that year for each country).

The chart shows clearly that the higher the stock of R&D capital of an economy, the higher is the number of patents granted to it by the U.S.

Because China has had both a much lower R&D expenditure to GDP ratio and a much lower GDP than the United States and other developed economies in the past, it will take more than a couple of decades before the Chinese R&D capital stock can catch up to the level of U.S. R&D capital stock (and hence to the number of U.S. patents granted each year).

Patents Granted in the United States and R&D Capital Stocks, Selected Economies

33 1

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100

1,000

10,000

100,000

1,000,000

1 10 100 1,000 10,000 100,000 1,000,000 10,000,000

Num

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f Pat

nets

Gra

nted

in th

e U.S

.

R&D Capital Stocks, in 2011 USD millions

Patents and R&D Capital Stocks of Selected Economies

U.S. ChinaHong Kong KoreaSingapore JapanFrance GermanyU.K. CanadaItaly AustraliaAustria BelgiumDenmark FinlandIsrael NetherlandsSweden SwitzerlandIndia Taiwan

34

The Rising Importance of Intangible Capital However, innovation also depends on the existence of

competition. Monopolies are generally not very good in innovation and not very good in making full use of their innovation. China must create and maintain a competitive market environment with free entry and exit so as to encourage innovation.

In addition, in order to encourage innovation, China also needs to protect intellectual property rights vigorously. The resolutions of the Third Plenum of the Central Committee of the Chinese Communist Party held in November 2013 called for the study of the establishment of a national intellectual property court, which is an important step towards better protection of intellectual property rights, both Chinese and foreign.

Finally, in order that “break-through” innovation can occur in China, the Chinese Government must commit a much greater share of its R&D expenditure to the support of basic research.

Basic Research Expenditure and Its Share in Total R&D Expenditure: China & U.S.

35 0

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PercentUS

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Basic Research Expenditure and its Share in Total R&D Expenditure:A Comparison of China and the U.S.

U.S. Basic Research Expenditures

Chinese Basic Research Expenditures

The Percentages of Basic Research Expenditures to Total R&D Expenditures in the U.S. (right scale)

The Percentages of Basic Research Expenditures to Total R&D Expenditures in China (right scale)

36

The Partial De-Coupling Hypothesis Throughout the 2007-2009 global financial crisis, as well as

the subsequent European sovereign debt crisis, the East Asian economies and the economies of the BRICS countries (Brazil, Russia, India, China and South Africa) continued to do reasonably well. China, in particular, has been able to maintain its real rate of growth above 7.5% since 2007, lending credence to the “Partial De-Coupling Hypothesis”, that is, the Chinese and East Asian economies can continue to grow, albeit at lower rates, even as the U.S. and European economies go into economic recession.

This partial de-coupling can occur because of the gradual shift of the economic centre of gravity of the World from the United States and Western Europe to Asia (including both East Asia and South Asia) over the past three decades.

37

The Partial De-Coupling Hypothesis A particularly interesting development is the rise in intra-

East Asian international trade. The share of East Asian trade destined for East Asia has risen to over 50% in the past decade. This is a sea-change compared to 30 years ago when most of the East Asian exports was destined for either the United States or Western Europe.

Similarly, the share of East Asian imports originated from East Asia has remained above 45%.

38 38

The Share of East Asian Exports Destined for East Asia

The Share of East Asian Exports Destined for East Asia

35

37

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pr-9

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%


The Share of East Asian Imports Originated from East Asia

The Share of East Asian Imports Originated from East Asia

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Jan-

12

%

40

The Partial De-Coupling Hypothesis The fact that the Chinese economy has continued to grow at an

average rate of almost 10% per annum since the beginning of the global financial crisis in 2007 is further proof that the Chinese economy has been at least partially de-coupled from the rest of the World economy, and in particular, from the United States and Europe, both of which have been mired in economic recession and recovering very slowly.

Any doubt that the Chinese economy can be partially de-coupled from the World economy should be resolved by an examination of the following three charts on the rates of growth of exports, imports and real GDP of East Asian economies. Even though Chinese exports and imports fluctuate like those of all the other East Asian economies, the rate of growth of real GDP of the Chinese economy has been relatively stable compared to those of the other East Asian economies.

41 41

Quarterly Rates of Growth of Exports of Goods: Selected East Asian Economies

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

Q1 19

97Q2

1997

Q3 19

97Q4

1997

Q1 19

98Q2

1998

Q3 19

98Q4

1998

Q1 19

99Q2

1999

Q3 19

99Q4

1999

Q1 20

00Q2

2000

Q3 20

00Q4

2000

Q1 20

01Q2

2001

Q3 20

01Q4

2001

Q1 20

02Q2

2002

Q3 20

02Q4

2002

Q1 20

03Q2

2003

Q3 20

03Q4

2003

Q1 20

04Q2

2004

Q3 20

04Q4

2004

Q1 20

05Q2

2005

Q3 20

05Q4

2005

Q1 20

06Q2

2006

Q3 20

06Q4

2006

Q1 20

07Q2

2007

Q3 20

07Q4

2007

Q1 20

08Q2

2008

Q3 20

08Q4

2008

Q1 20

09Q2

2009

Q3 20

09Q4

2009

Q1 20

10Q2

2010

Q3 20

10Q4

2010

Q1 20

11Q2

2011

Q3 20

11Q4

2011

Q1 20

12Q2

2012

Q3 20

12Q4

2012

Q1 20

13Q2

2013

Annu

alize

d Per

cent

per

annu

m

Year-over-Year Quarterly Rates of Growth of Exports of Goods in US$ (Percent)

China,P.R.:Hong Kong IndiaIndonesia KoreaMalaysia PhilippinesSingapore ThailandChina,P.R.: Mainland JapanTaiwan Prov.of China

42 42

Quarterly Rates of Growth of Imports of Goods: Selected East Asian Economies

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

Q1 19

97Q2

1997

Q3 19

97Q4

1997

Q1 19

98Q2

1998

Q3 19

98Q4

1998

Q1 19

99Q2

1999

Q3 19

99Q4

1999

Q1 20

00Q2

2000

Q3 20

00Q4

2000

Q1 20

01Q2

2001

Q3 20

01Q4

2001

Q1 20

02Q2

2002

Q3 20

02Q4

2002

Q1 20

03Q2

2003

Q3 20

03Q4

2003

Q1 20

04Q2

2004

Q3 20

04Q4

2004

Q1 20

05Q2

2005

Q3 20

05Q4

2005

Q1 20

06Q2

2006

Q3 20

06Q4

2006

Q1 20

07Q2

2007

Q3 20

07Q4

2007

Q1 20

08Q2

2008

Q3 20

08Q4

2008

Q1 20

09Q2

2009

Q3 20

09Q4

2009

Q1 20

10Q2

2010

Q3 20

10Q4

2010

Q1 20

11Q2

2011

Q3 20

11Q4

2011

Q1 20

12Q2

2012

Q3 20

12Q4

2012

Q1 20

13Q2

2013

Annu

alize

d Per

cent

per

annu

m

Year-over-Year Quarterly Rates of Growth of Imports of Goods in US$ (Percent)


43 43

Quarterly Rates of Growth of Real GDP, Y-o-Y: Selected East Asian Economies

-20

-15

-10

-5

0

5

10

15

20

Q1 19

94Q2

1994

Q3 19

94Q4

1994

Q1 19

95Q2

1995

Q3 19

95Q4

1995

Q1 19

96Q2

1996

Q3 19

96Q4

1996

Q1 19

97Q2

1997

Q3 19

97Q4

1997

Q1 19

98Q2

1998

Q3 19

98Q4

1998

Q1 19

99Q2

1999

Q3 19

99Q4

1999

Q1 20

00Q2

2000

Q3 20

00Q4

2000

Q1 20

01Q2

2001

Q3 20

01Q4

2001

Q1 20

02Q2

2002

Q3 20

02Q4

2002

Q1 20

03Q2

2003

Q3 20

03Q4

2003

Q1 20

04Q2

2004

Q3 20

04Q4

2004

Q1 20

05Q2

2005

Q3 20

05Q4

2005

Q1 20

06Q2

2006

Q3 20

06Q4

2006

Q1 20

07Q2

2007

Q3 20

07Q4

2007

Q1 20

08Q2

2008

Q3 20

08Q4

2008

Q1 20

09Q2

2009

Q3 20

09Q4

2009

Q1 20

10Q2

2010

Q3 20

10Q4

2010

Q1 20

11Q2

2011

Q3 20

11Q4

2011

Q1 20

12Q2

2012

Q3 20

12Q4

2012

Q1 20

13Q2

2013

Annu

alize

d Rat

es in

Per

cent

Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies


44

Projections of the Future It is projected that the Chinese and the U.S. economies will

grow at average annual real rates of approximately 7.3% and 3.3% respectively between 2012 and 2030. Chinese real GDP is projected to catch up to U.S. real GDP in approximately 15 years’ time--around 2029, at which time both Chinese and U.S. real GDP will exceed US$27 trillion (in 2012 prices), more than three times the Chinese GDP and not quite two times the U.S. GDP in 2012. By that time, China and the U.S. will each account for approximately 15% of World GDP.

45

Actual and Projected Real GDPs and their Annual Rates of Growth: China & the U.S.

-4

0

4

8

12

16

20

-6

-3

0

3

6

9

12

15

18

21

24

27

30

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

PercentUS

D tr

illio

ns, 2

012

price

s

Actual and Projected Real GDPs and their Annual Rates of Growth of China and the U.S., (trillion 2012 US$)

Growth Rate of U.S. Real GDP (right scale)Growth Rate of Chinese Real GDP (right scale)U.S. Real GDPChinese Real GDP

46

Projections of the Future By 2030, the Chinese real GDP per capita is projected to

exceed US$20,100 (in 2012 prices), which would still be just a quarter of the projected then U.S. per capita real GDP of US$80,000. It will take around 45 years, almost till 2060, for China to catch up to the United States in terms of real GDP per capita.

47

Actual and Projected Real GDP per Capita’s and their Annual Rates of Growth

-4

-2

0

2

4

6

8

10

12

14

16

-20

-10

0

10

20

30

40

50

60

70

80

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

percentUS

$ tho

usan

d, 20

12 p

rices

Actual and Projected Real GDP per Capita of China and the U.S., US$ thousands, 2012 prices

Growth Rate of U.S. Real GDP per Capita (right scale)Growth Rate of Chinese Real GDP per Capita (right scale)U.S. Real GDP per CapitaChinese Real GDP per Capita

48

Concluding Remarks The centre of gravity of the World economy has been gradually

shifting to East and South Asia. The centre of gravity of the East Asian economy has been gradually shifting to China.

The Chinese and East Asian economies have been partially de-coupled from the United States and Europe.

The growth of tangible capital, supported by a high domestic saving rate, has been the principal source of past Chinese economic growth.

The growth of intangible capital (human capital and R&D capital) will have to become a much more important source of Chinese economic growth as it has already become in the more developed East Asian economies such as Japan, South Korea, Singapore and Taiwan.

The Chinese economy will catch up to the U.S. economy in terms of aggregate GDP some time around 2030. However, it will be past the middle of this century before the Chinese economy can catch up to the U.S. economy in terms of per capita GDP.

china in the global economy · china in the global economy— international trade china has also...

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