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How China is Reorganizing the World Economy

How China is Reorganizing the World Economy. Mgr. Martin Tomanek. From Mao ’ s Revolution to Modernization. Mao Zedong : The Great Leap Forward and Cultural Revolution unique autarkic , anti - capitalist and anti -market policies

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How China is Reorganizing the World Economy

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  1. How China isReorganizingtheWorldEconomy Mgr. Martin Tomanek

  2. FromMao’s Revolution to Modernization • MaoZedong: The Great LeapForwardandCulturalRevolution • uniqueautarkic, anti-capitalistandanti-market policies • 1959–1962: oneoftheworstfamines in humanhistory (overtwentymillionpeopledied) • China had fought a warwiththeUnitedStates in Korea • Militaryconfrontationsoverthe Taiwan • ReoccupationofXinjiangand Tibet • Sino-Indian War (1962)

  3. DengXiaoping: ReformandOpeningUp • Radicalshifts in policy – e.g. abolitionofthecommunesystem in thecountryside de facto privatizedfamilyfarming • China embracedtraditional Western economicprinciplesassociatedwithRicardiantheoriesofcomparativeadvantage  developmentoftrading relations • reformswerecharacterized by gradualism, decentralizationandexperimentalism • SpecialEconomicZones  FDI by overseasmultinationalcompanies (tax holidays,..) • GradualprivatizationoftheSOEs • 2001: China memberoftheWorldTradeOrganization

  4. ChineseEconomyatpresent • In lessthanthreedecades, China has grownfromhaving a negligible role in worldtrade to beingoneoftheworld’s largestexportersandsubstantialimporterofrawmaterialsandgoods. • Per capita GDP growthrateshaveaveragedclose on 10 % per annumfortwenty-fiveyears. • China’s rapid growthsince 1980 has allowed more than 400 millionofitscitizens to pullthemselvesabovethepoverty line.

  5. China as theworld’s largestexporter • In 2009 China surpassedGermany to becometheworld’slargestexporter. • A large part ofChineseexportsinvolvescontractingmanufacturing so-calledprocessingtradeinvolvesimportinginputsinto China, which are assembledthereandthenexportedagain (classicexample: iPhone) • Processingtradeaccountsfornearly half of China’s exports.

  6. RisingSophisticationof China’s Exports The composition of exports by technology intensity, 1995 vs 2007 (in % of total exports) Source: own calculations based on COMEXT Latin-America: Mexico, Brazil, Argentina; NIEs:Korea, Singapore, Taiwan; ASEANs: Indonesia, Philippines, Malaysia, Thailand, Vietnam Calculation based on the OECD’s classification of industries by technology intensity. High-tech: pharmaceuticals, office and computer, electrical appliances (radio, TV), medical, optical appliances Medium- tech: basic chemicals, machinery, electrical machinery, transport machinery, rubber and plastic, non-metals, basic and processed metal, Low-tech: food, textile, clothes, footwear paper and furniture, other manufacturing

  7. Study ofEuropeanCentral Bank (2011) Conclusions: • China has gainedqualitycompetitivenessrelative to othercompetitorssince 1995. • Theoverallqualityof China’s exports to EU marketsishighrelative to otherdevelopingeconomies. • Relative to othercompetitors, China’s exports are under-pricedgiventheirqualitylevel.

  8. China istheworld’s largestcreditornation • China isthebiggestforeigncreditorofthe USA • Hugetradeandcurrent-accountsurpluses China has accumulatedmore than 3 trilliondollars in foreigncurrencyreserves! • Most ofthosereserves are held in dollars investments in Treasurybondsandother dollar-denominatedsecurities • Only U.S. bond market isbigandliquidenough to absorb China’s foreign money. • Beijing has tried to diversifyitsforeignexchange portfolio • Acquisitionofnaturalresources, sovereign weatlhfund,.. • Thevast majority ofreservescontinue to bedestinedfor U.S. bond market

  9. China istheworld’s largestcreditornation „Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option . . . . We know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.“ ----- Luo Ping, director-generalatthe China BankingRegulatoryCommission -----

  10. HowDangerousIs U.S. GovernmentDebt? • 1961: BelgianeconomistRobert Triffindescribedthedilemmafaced by the country atthe center oftheinternationalmonetarysystem • Dilemma: to supplytheworld’s risk-free asset, the center country must run a currentaccount deficit and in doingsobecomeever more indebted to foreigners • Theworldwillbuyso much ofthatassetthatitsissuerwillbecomeunsustainablyburdened • Endgame to Triffin’s paradox: globalsell-offof center country’s securities • Higherinterestrates (yields) andslowereconomicgrowth

  11. TheMythof China’s GiantFiscalDeposits Indian-AmericaneconomistJagdishBhagwati: • TheChinesepopulationisrapidlyaging (one-childpolicy) • TheEconomist: China is still likely to be the first country to grow old before it gets rich • growingneedforsocialsecurity  needforhugefiscalreserves • Dani Rodrik: „Domesticconsumer[in China] will demand more health care, housing and entertainment – not more steelorelectronics...“ • China will not savewealthyEurope!!! • Socialsecurityorinstabilityandsocialunrest!

  12. Exports % change Imports % change China’s TradewiththeWorld, 2001–2010 ($ billion) Total % change Balance Source: US-China Business Council

  13. China’s Top TradePartners, 2010 Source: US-China Business Council

  14. China’s Top Exports, 2010 ($ billion) Source: US-China Business Council

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