Highly recommended: the World Bank’s latest China Quarterly.
What jumped out at me in the latest quarterly from the World Bank’s Beijing office?
First, the data showing that labor income is falling as a share of Chinese GDP. Moreover, its fall seems to have accelerated recently, just after the Chinese government started talking about the need to rebalance the economy. See Figure 9 on p. 7. As the World Bank hints, it will be hard to shift the basis of Chinese growth toward consumption if labor income keeps falling as a share of GDP…
Second, the data on China’s processing trade, or perhaps, the beginning of the end of China’s processing trade. Non-processing exports are now growing faster than processing exports. And processing import growth didn’t keep up with processing export growth (See Figures 3 and 4). As the World Bank notes in a footnote:
“The import/ export ratio in processing started to decline in 2005, after years of broad stability.”
Why? Most likely because more and more components are made in China.
Stage one involves shifting final assembly to China. But once the one-off cost savings from that shift have been realized, getting more cost savings requires shifting parts production. Stage two consequently involves shifting component production to China.
The development of an internal Chinese supply chain for its final assembly plants is, I suspect, a bit reason why China’s trade surplus has increased so dramatically recently.
Third, the World Bank’s forecast for China’s 2007 balance of payments. The World Bank’s economists forecast a slowdown in export growth (maybe, but there isn’t yet much evidence that it is happening) will keep China’s current account surplus from increasing by all that much. It rises from $230b in 2006 to $260b in 2007 (See Table 2 of the Quarterly). Personally, I think China’s 07 surplus will be higher. They also forecast continued net FDI inflows.
Fair enough: China wants to buy more oil companies, but most don’t seem to be for sale – and right now, there is still quite a strong incentive to locate production in China. Indeed, high levels of investment in China may explain relative low levels of investment in the US. Ragu Rajan, formerly of the IMF:
“”Indeed, it makes less and less sense for corporations in industrial countries to make large domestic investments in the manufacturing sector. But as they look to invest in non-industrial countries, they become subject to the uncertainties of policy there. Not only do they have to worry about whether China is a better place to invest than Vietnam but also whether it will continue to be better 10 years from now.”
I agree more with the first point Rajan makes (about limited investment in the manufacturing sector of [formerly] industrial countries) than the second – there doesn’t seem to be any shortage of investment, foreign or domestic, in Chinese manufacturing right now. Capacity is growing so fast that the increase in China’s 2007 exports could match its total exports in 2001 … .
The trade and current account though is only half of the balance payments. Capital flows matter too. Add $52b in net FDI flows to the projected $260b current account surplus and 2007 Chinese reserve growth should be $312b range. The World Bank only forecasts $268b. They implicitly are forecasting $44b in non-FDI capital outflows.
Hmmm. China’s stock market is doing pretty well. The RMB is expected to appreciate significantly. The Bank of China hasn’t been able to convince private Chinese investors to buy dollar or euro bonds. I could go on. It isn’t clear to me why lots of Chinese savers will want to buy US or European assets. Not unless they are forced to. Both the dollar and euro are expected to depreciate against the RMB. You don’t need to take my word for it either. Those on the ground seem to agree:
““Under the current circumstances, all ordinary folks would prefer to keep their money at home,” said Yu Rongquan, chief investment officer of Fortune SGAM Fund Management Co. Ltd., a Sino-French securities fund with around 25 billion yuan.”
Suppose China’s current account surplus is a bit bigger – say $300b. Say suppose more money wants to get into China than get out. Then rather than offsetting FDI inflows, private non-FDI flows would add to them … and China’s total foreign asset growth might approach $400b.
It just probably won’t all show up in the PBoC’s reserves.
Finally kudos to Louis Kuijs, Bert Hofman and the rest of the Beijing office for another superb report. Their ongoing analysis really is essential to understanding the fast changing Chinese economy.
Does anyone know how the chinese labor income figure is collected?
Personally, I don’t really buy that number.
Brad:
Does your estimate of Chinese foreign asset growth (around $400B) include the (expected) rise in the value of yuan? If so, what value did you use and why?
Thanks
LC — it assumes that the RMB appreciates by around 5%, enough to encourage non-FDI inflows to China but not enough to really dent the ongoing growth in China’s exports (especially since a stronger RMB may just improve China’s terms of trade — the world buys almost as much Chinese assembly, but just pays more for it).
Guest. For details on how the labor income data is collected, look at the footnote in the China quarterly.
(1) If China is vertically integrating, then declining activity in the processing trade should be seen in improving trade balances with neighbors like Hong Kong, Taiwan, Japan, and South Korea.
(2) Labor’s share of GDP is falling in China? So much for this worker’s paradise. A capitalist roader’s paradise largely free of delusionary Western nonsense like labor rights and environmental standards maybe, but certainly not a worker’s paradise. To get rich may be glorious, but you ain’t likely to get rich wage-slaving in China. Chinese socialism is as fake as a Louis Vuitton knock-off from Haining.
The US government as leading currency manipulator with Dollar hegemony policy
http://www.atimes.com/atimes/China_Business/IB15Cb03.html
” No government leaves the exchange rate of its currency to market forces. This is particularly true of the US, which sings free-trade lyrics to protectionist music. The trade distortions have been created by US policies of Dollar hegemony, and the China critics are in effect telling Beijing to pay for American errors. “
Factory wages may rise in certain areas, but there is a serious oversupply of university graduates:
http://www.chinadaily.com.cn/english/doc/2004-02/10/content_304574.htm
“A software firm in Zhongguancun, Beijing’s equivalent of Silicon Valley, had an opening. When the applicants were whittled down to the final three, they had one thing in common: they all held master’s degrees from overseas. But the position paid only 2,500 yuan (US$300) a month, not a princely sum for the high-tech profession”
http://www.chinadaily.com.cn/china/2006-11/18/content_736662.htm
“1.24m grads can’t find major-related jobs”
Nothing but Flotsam and Jetsam, with perhaps a Dragon to boot.
Brad,
Can you explain the World Bank’s comment “In the third quarter of 2006 non-FDI capital flows were negative, led by domestic financial institutions, which some argue was done at the request of the authorities..” ? (p. 4, below the graphs)
I’m not sure what they’re trying to measure.
Thanks.
* * *
Emmanuel,
Consumption expenditure in China rose better than 7.5% a year - in real terms - over the last 15, 20 or 25 years (take your pick). OK, it isn’t a workers paradise, but how about a consumer’s ?
DOR –
On the first point — think of it this way. reserve growth was below the sum of the current account and net FDI inflows — so, by definition, there were non-FDI capital outflows (as in h1). Given the difficulties with the QDII program, these outflows don’t seem to have come from individuals operating through the established channels, and they aren’t unrecorded outflows which would show up in errors and ommissions either. So most think that the outflows came from state banks/ state insurance cos/ state pension funds buying dollars … perhaps b/c they were encouraged to do so by the authorities.
on your second point — 7.5% consumption growth and 10% real growth = a fall in C/ GDP, which is what the World Bank reports has happened recently ….
If surplus labor in China is suppressing returns to labor *even in China* then the global labor arbitrage must have a *long* way to run!
Is it possible this is an artifact of the data collection process?
Brad,
Would you care to comment on what the effect on Japanese exporters could be given the shifting of component manufacturing to China? It seems to me that this could be a significant negative for the Japanese export sector, and by extension Japan’s prospects for GDP growth. I have a few thoughts on this at my blog post Shifting of Component Manufacturing to China likely negative for Japanese exporters.
Fascinating in-depth article on the comparative growth seen in recent years in China and India. lots of useful facts and statistics