China's New Development Plan

An Expert's View about Banking, Finance and Insurance in China

Last updated: 21 Mar 2010

This is a White Paper analyzing how the global financial crisis impacted China's development plan, and how China's development plan may affect the world economy.

ROYAL ROOTS How the Global Financial Crisis Impacted China?s Development Plan, And How China?s Development Plan May Affect the World Economy By Anita Tang, Managing Director, Royal Roots Global Inc. December 28, 2009 The global financial crisis has furthered China's efforts to reposition its economy so as to address domestic issues and to more broadly interact with both the developed and developing nations. The Global Financial Crisis: Challenge or Opportunity for China? The dominoes started to fall in 2007 with the subprime mortgage crisis in the U.S. Other risky loans and over-inflated asset prices got exposed, leading quickly to the bankruptcy of Lehman Brothers. The fall of Lehman Brothers further accelerated the collapse, which infected the global financial market. Every economy ? big and small ? was adversely impacted. The industrialized world suddenly found itself in a deep economic recession. This economic recession, which is heavily affecting the developed economies, is also creating setbacks in developing economies. China?s growth, for example, relies fairly significantly on international trade, and its exports dropped dramatically as the recession kicked in. This White Paper reflects insights and opinions shared by experts at the 15th Annual Meeting of the Chinese Association of Productivity Science (CAPS) held in Beijing, China, November 19-20, 2009, and the European Productivity Conference held in Grimsby, England, October 28-29, 2009. It includes analysis, observations, and experience of the writer, who attended these meetings, and is further informed by her frequent business visits to China and her continuous involvement in U.S.-China cross-border business strategy advisory work helping clients from both the United States and China. Mr. Jiang Zhenghua, Vice Chairman of the Standing Committee of the National People's Congress, proposed in his opening address at the 15th Annual © 2009 Royal Roots Global Inc. All Rights Reserved. 1 Meeting of the Chinese Association of Productivity Science on November 19, 2009, that China should turn the current challenge into opportunity through (1) increasing domestic consumption, (2) lowering carbon emissions, (3) promoting a green economy, (4) supporting the ?Go Out? Policy, and (5) improving China?s financial system. The Crisis Offers An Opening For China to Reposition The New Chinese Economic Development Model Mr. Chen Shengchang, Vice President of the World Confederation of Productivity Science, told the October 2009 European Productivity Conference that the current financial crisis has brought good opportunities for China to move forward with economic reform, economic development and innovation, and improve the Chinese economic development model. Mr. Chen pointed out that the old Chinese economic development model was founded on China?s special situation which simultaneously consisted of three different dispositions ? a developing country + a country transitioning to a market economy + a socialistic country. This investment- oriented and export-based type of ?survival? model of development was weighted heavily on growth and lightly on development. It looked for quick results in which success was measured by material wealth, and growth was for the sake of growth while putting resources and the environment in jeopardy. To emerge from the 2008 economic crisis, China not only undertook a series of economic stimulus plans, but is also adjusting and modifying its economic development model of nearly 30 years. China is now steering towards achieving ?people-oriented? development with which it aspires to realize ?a prosperous, strong, democratic, culturally- advanced, and harmonious modern country?. China?s Three Pillars of Growth China?s new growth and development model is based on three pillars: (1) net exports, (2) domestic investment, and (3) domestic consumption. (1) Although world trade declined in 2009 because of the recession, China itself is winning a larger piece of a shrinking pie. Consumers demanded lower-priced goods, and the Chinese government, determined to keep the country?s export machine humming, found ways to deliver. In 2009, China © 2009 Royal Roots Global Inc. All Rights Reserved. 2 surpassed Germany to become the world?s biggest exporter, with the most striking gains coming in the U.S. where China has displaced Canada as the U.S.?s largest supplier of imports. In late December 2009, China announced that it would maintain its export stimulus measures in 2010, including export tax rebates, to keep the export sector vibrant. (2) As for domestic investment, China introduced a RMB 4 trillion stimulus package in which RMB 1.18 trillion would be designated for investment from the central budget by the end of 2010. This, together with other stimulus measures, helped boost China?s GDP growth in 2009 ? revised in late December 2009 ? to an estimated 9.6 percent. Nevertheless, Mr. Zheng Xinli, Deputy Director of Policy Research Office of CPC Central Committee, pointed out that non-government investment in 2009 only increased by 2 percent from that of the previous year. Macroeconomic planning for 2010, therefore, cannot rely on government investment in infrastructure such as in 2009 ? it needs to boost private investment and extend bank credit to private companies in order to sustain growth. Shortly thereafter, in late December, the People?s Bank of China reaffirmed its plans to keep a ?moderately loose? stance for 2010. It is however important to note that the extra money in the financial system is increasing the risk of asset bubbles and resurgent inflation. (3) As many experts have expressed pessimism about overseas demand for Chinese exports in 2010, it becomes even more important for the Chinese government to boost domestic consumption. Though China overtook the U.S. as the world?s biggest auto market and is the world?s second largest market for luxury goods, this consumption pattern does not translate into a nationwide vista. China has had high savings rates estimated to be between 30 to 40 percent for the last 30 years. The Chinese tend to save for their children?s education, and for their own healthcare and retirement needs. To encourage domestic consumption, China?s State Council announced at the end of 2009 that it would raise the state pension payment for retirees by 10 percent and enable hundreds of millions of migrant workers to transfer their retirement benefits when they move across provinces ? a move to improve the social security system to encourage people to spend more money rather than save for their retirement and future medical expenses. © 2009 Royal Roots Global Inc. All Rights Reserved. 3 A Big Developing Economy Going on to a Mid-Level Developed Economy High Growth, High Efficiency, Low Resource Consumption, Low Emissions ?It is vital for China to continue growth and continue improving the livelihood of the Chinese people,? said Mr. Wang Maolin, President of the Chinese Association of Productivity Science. ?The Chinese economy, though having grown strongly, is not balanced,? Mr. Wang candidly shared in the association?s 15th annual meeting. To avoid being seriously affected by any global economic unrest, China needs to eliminate fundamental issues that exist in its system and devise a stable long- term growth strategy. To achieve that, China needs a model that offers high growth, high efficiency, low resource consumption, and low emissions. Mr. Zheng Xinli concurred, suggesting that there should be structural changes in the Chinese economy to rectify the high energy usage and high pollution created by its industries. To become a mid-level developed country, China needs to, according to Mr. Wang, own its technology to help its manufacturing industry succeed. China?s primary and secondary industries will only reduce their demand for labor if they can achieve higher productivity through the use of technology. The continuing development of China?s tertiary industry can offer compensating employment opportunities. Acknowledging Mr. Wang?s perspectives, Mr. Zheng put forward a few suggestions: (1) Increase income, especially in the rural areas; (2) Raise domestic consumption from the current 35 percent of income to 50 percent of income in three years; (3) Focus more on the service industries; (4) Encourage innovation by investing more in research and development; and (5) Take advantage of China?s manufacturing capability and high foreign reserves by looking into conducting overseas mergers and acquisitions, manufacturing and selling overseas, selling directly to overseas markets via local channels, and promoting cross-border trade with RMB as the settlement currency. © 2009 Royal Roots Global Inc. All Rights Reserved. 4 China is Looking for Like-Minded Partners In its Development into a Harmonious Modern Country To develop a country with a strong economy from a country with a big economy, China needs to strengthen its currency and financial system. Using RMB as a trade settlement currency is one route, which the current financial crisis has prompted China to explore. China is testing this regionally to prepare for an eventual launch globally. On July 6, 2009, the first cross-border RMB trade settlement was transacted as part of China?s State Council pilot program to help reduce foreign exchange risk for Chinese exporters seeking to increase international trade business with partners in Hong Kong, Macau, and the ASEAN region. China and ASEAN are currently each others? fourth largest trade partners. Their trade in 2008 amounted to US$231.07 billion, but RMB settlement was mainly adopted in border trade which accounted for only some 10 percent of the China-ASEAN bilateral trade. However, the RMB is expected to play a bigger role in regional trade with the China-ASEAN Trade Area to be realized on January 1, 2010. Mr. Xu Ningning, Executive Secretary General of China-ASEAN Business Council, commented at the 6th China-ASEAN Expo held in Nanning, China, in October 2009 that ?free trade demands free flow of currency, making possible the regional use of RMB? and that ?RMB was a very stable currency and expanding its use could help reduce risks faced by the ASEAN countries in using the U.S. dollar, which has become highly volatile as a result of the global financial crisis.? China is signaling its developing strategies to the rest of the world. For example, on November 26, 2009, 11 days before the U.N. climate conference opened in Copenhagen, China?s State Council announced that the country would reduce its energy intensity by between 40 to 45 percent by 2020 compared with the 2005 level. Dispute the controversial statements and actions of nations at the Copenhagen climate conference, an Accord ? a political but not a legally binding agreement ? was negotiated by the United States with China, India, Brazil and South Africa. It is crystal clear that putting a cap on emissions is not the entire solution to the problem; low-carbon development holds part of the key. China, going forward, will put a great deal of emphasis and resources in developing a green economy ? clean water, renewable energies, green-tech and bio-tech ? and the United States is going toward a low-carbon development strategy to sustain its global leadership position. There is a good possibility that a carbon currency ? whether various currencies individually or a basket of currencies ? can be a part of the reconstruction of the international currency system. © 2009 Royal Roots Global Inc. All Rights Reserved. 5 The Worst Time is Over, But a True Recovery will be Slow and Unstable Mr. Wang Mengkui, Vice Chairman, China Development Institute, shared a few thoughts on China post-crisis. He believes that ?the worst time is over but it is going to be difficult.? China?s recovery is faster than expected because the world is relatively peaceful and economic globalization has helped. In addition, China?s macroeconomic planning has proven effective. However, he warned that ?a true recovery will be slow and unstable, and that it will take time for the world to rebalance its economy.? Mr. Wang asserted that the current financial system issue has brought about (1) the realization that the U.S. dollar cannot fulfill the need as the only trading currency for the entire world; (2) the recognition that the system is in deficiency regarding management and monitoring issues; and (3) the acknowledgement that there is a structural issue in the market with an imbalance in supply and demand. It will take great effort and close cooperation by different players and stakeholders to help rebalance the world economy. The United States, leader of the developed economies, and China, leader of the developing economies, are slated by default to take the lead roles. As Mr. Wang Maolin and many other experts repeatedly noted, ?ongoing China-U.S. dialogue is essential.? China, while maintaining its targeted 8 percent annual growth rate, is engaging in more active roles as a leader on the global stage. Chinese companies, while building and developing their businesses within China, are evaluating opportunities to expand overseas. China seems well positioned to continue to be a winner in global economic development. Other players who are willing to engage their resources and expertise to help speed up and stabilize the recovery will also be winners. © 2009 Royal Roots Global Inc. All Rights Reserved. 6
Posted: 21 March 2010, last updated 21 March 2010

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Royal Roots Global Inc.

Royal Roots Global Inc.

U.S.-China Business Strategist

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