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  1. China – a new economic power BUSI_3001_Spring_2011 February 28, 2011 Charles Mo & Company

  2. Topics • Overview of the China Economy • What does it represent to be number 2? • Largest companies in China • Issues in China • Impact of the 585 billion Chinese stimulus program, • Difference of the stimulus programs between the US and China • Trade tension between the US and China • US trade restrictions imposed on Chinese products • A potential stock market bubble in China • Overseas hunt for energy resources • Conflict with international politics • Environmental pollution • Undervaluation of the RMB • Changing workforce • Success and failure stories of American firms

  3. Economic Statistics of China

  4. What does it mean to be the second largest economy? • China topped Japan as the second largest economy in the world. 2-14.2011 • China has passed the US to become the world’ biggest energy consumer. Wsj 7-20-2010 • In 2009, China overtook the US as the number one auto market with 45% increase to 13.1 million cars. • In December, 2009, China overtook Germany's US$917 billion export to become the top exporter with export valued at US$957 billion (Wall Street Journal) • Largest mobile phone network with 679 million phones (Apr. 2009) • Boeing predicts China will be the largest market for commercial air travel outside the US for the next 20 years • In 2008, China replaced the US as the world’s largest internet user • Largest global steel producer and consumer • ICBC – largest bank in the world in terms of market cap, China Construction Bank(3), Bank of China(5) • Petro China – largest market cap oil company • The US is poised to lose its 110-year run as the world's biggest manufacturing nation by output in 2011 to China - though it still claimed the top spot last year - according to IHS Global Insight figures released on Monday, Financial Times reported. The US created 19.9% of world manufacturing output last year, compared with 18.6% in China, despite the global downturn.

  5. Being No 2 brought more changes to China • Higher wages – in 2010 alone, wages for factory workers in 20 major exporting provinces raised 20-30%. Wages will continue to increase in double digits in the years to come. • Higher commodities price – cotton price increased 40% in 2010 and expected to increase another 50% next year. • Overall increase in prices – gasoline, water, utility, and real estate • Increased R&D spend – from 0.5% of GDP a decade ago to 1.5% of GDP. China now outspends Japan in R&D. • Industries and businesses are moving inland. • Higher export costs

  6. China’s trading partner USCBC Table 7 • China's Top Trade Partners 2009 ($ billion) Source: PRC General Administration of Customs, China's Customs Statistics • Rank Country/region Volume% change over 2008 • 1 United States 298.3 -10.6 • 2 Japan 228.9 -14.2 • 3 Hong Kong 174.9 -14.1 • 4 South Korea 156.2 -16.0 • 5 Taiwan 106.2 -17.8 • 6 Germany 105.7 - 8.1 • 7 Australia 60.1 0.7 • 8 Malaysia 52.0 - 3.0 • 9 Singapore 47.9 - 8.8 • 10 India 43.4 -16.3

  7. Continued • 2.7 trillion in foreign exchange reserves, Feb, 2011 • 801 billion of US treasury, Dec, 2009 • 750 billion of US treasury, Jan 2010 • 895 billion of US treasury, March, 2010 • 900.2 billion of US Treasury, April, 2010(Japan 795.5)

  8. Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan Dec Country 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2009 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ China, Mainland 891.6 895.6 906.8 883.5 868.4 846.7 843.7 867.7 900.2 895.2 877.5 889.0 894.8 Japan 883.6 877.2 875.0 862.1 833.8 818.6 801.2 784.8 793.8 783.3 768.2 765.2 765.7 United Kingdom 541.3 511.8 478.5 459.8 450.3 376.5 363.7 350.9 321.1 279.0 233.5 208.3 180.3 Oil Exporters 218.0 210.4 213.9 221.5 217.8 215.4 216.3 228.6 232.9 223.4 211.9 211.9 201.1 Brazil 180.8 184.4 177.6 175.6 165.1 162.3 158.5 161.5 164.4 164.5 170.9 169.0 169.2 Carib Bnkng Ctrs 155.6 146.3 133.8 144.7 159.7 151.2 165.9 166.3 153.2 148.2 144.4 143.6 128.2 Hong Kong 138.2 138.9 139.2 135.9 137.8 135.2 141.0 145.7 151.8 150.9 152.4 146.6 148.7 Canada 134.6 134.7 124.0 114.3 102.7 100.8 93.7 84.8 81.9 77.1 67.1 54.7 52.8 Taiwan 131.9 131.1 131.2 130.0 130.2 130.5 128.6 126.2 126.9 124.8 121.4 119.6 116.5 Russia 106.2 122.5 131.6 128.5 129.0 130.9 123.4 126.8 113.1 120.1 120.2 124.2 141.8 Switzerland 100.6 100.6 101.3 103.6 106.6 105.4 100.1 84.4 80.0 78.8 81.8 84.4 89.7 Luxembourg 85.4 81.0 77.5 85.2 78.0 97.9 96.6 75.6 76.9 83.9 77.8 79.1 88.4 Singapore 70.1 59.4 63.6 53.9 52.7 52.6 50.5 40.6 42.4 45.5 42.6 41.3 39.2 Thailand 65.5 65.7 66.2 64.0 60.9 54.4 49.3 46.3 46.9 43.5 42.1 33.3 33.3 Germany 62.3 60.4 60.1 59.7 58.7 57.1 54.0 55.8 54.8 53.7 50.0 49.0 47.8 India 41.6 40.7 41.1 41.0 39.0 39.4 36.4 29.3 31.0 32.0 31.6 32.7 32.5 Ireland 38.4 42.6 41.4 44.0 42.0 43.6 48.3 48.0 45.7 43.3 38.7 39.2 43.6 Korea, South 37.9 41.5 41.1 40.4 41.6 39.3 38.7 37.8 38.7 40.1 39.8 39.7 40.3 Mexico 33.6 32.7 34.9 37.0 36.2 33.6 33.2 34.2 33.1 36.1 33.9 34.4 36.8 Egypt 30.4 34.2 34.9 35.0 33.6 30.3 29.4 28.0 21.1 21.4 21.7 19.4 18.9

  9. Conference Board: China’s GDP To Surpass U.S.? • GDP (constant) in millions US$, ppp-adjUnited StatesChina 2000 12,219,604 4,337,325 2001 12,351,532 4,800,704 2002 12,575,547 5,396,402 2003 12,888,712 6,213,749 2004 13,349,260 6,841,338 2005 13,757,016 7,552,836 2006 14,124,714 8,511,474 2007 14,399,780 9,719,364 2008 14,399,670 10,651,923 2009 * 14,020,652 11,621,248 2010 14,385,189 12,783,373 2011 14,557,812 14,009,231 2012 14,848,532 15,286,673 2013 15,145,057 16,680,600 2014 15,447,505 18,201,634 2015 15,755,992 19,861,363 2016 16,151,298 21,434,069

  10. Nominal_GDP_IMF_2008_millions_of_USD.jpg‎

  11. Four Trillion RMB Stimulus Program • Announced in November, 2008, largest stimulus program at the time • Resulted in a budget deficit of 3% of GDP in 2009 • 1998 1.1% deficit of GDP • 1999 1.9% • 2000 2.5% • Central government contributed 1.18 trillion • 2009 & 2010 600 billion each • Rest of the fund from private sectors and local governments • Budget deficit • 3% China 2009 • 12.3% US 2009

  12. China’s 4 Trillion RMB (US$585 Billion)Stimulus Program • China objective - it will keep its own economy in good shape • China’s stimulus program totals 18% of its 2008 GDP • Paulson’s 700 billion TARP bailout and Obama’s 785 billion stimulus program together amounts to 10.7% of 2008 GDP • After the initial 585 b stimulus program was announced, BJ requested local governments to submit proposal and the returned request totaled 1 trillion, over twice the stimulus amount • Central government encouraged banks to lend to identified 10 industries • Total yearly government expenditure in China for 2009 is below 20% of GDP • US government expenditure in 2009 now amounts to 20% of GDP

  13. Boosting the economyBreakdown of China’s stimulus packageTotal spending:4 trillion yuan ($585.76 billion)

  14. The US and the China Stimulus Program

  15. Source: USITC

  16. 2010 –source US Commerce Department

  17. True US GDP • GDP is defined as the gross value of the products and services created by an economy. • Value of products are measured at the retail value • US GDP amounts to 14.5 Trillion, 70% of it in retail consumption. • How much of the 11.31 are manufactured in the US?

  18. Rising US China Trade Tensionwsj16-09-09 P1, p18,p19 • Rising US China trade tension threatening G20 meeting this week • 35% tariff on Chinese tires for the next 3 years to preserve union jobs • 17% of the tire market are imported by the Chinese • Chinese tires manufacturers may loose 100,000 jobs • Chinese wants to avoid wider conflict in trade • More Chinese say in the IMF • US sanction on Chinese steel pipe in December , 2009 • The U.S. will impose duties on $2.8 billion in steel-pipe imports from China after saying subsidies on the products may harm American steelmakers, a move that threatens to escalate trade tensions between the two countries. (BusinessWeek 12/31/2009)

  19. RMB exchange to the US $

  20. Protectionist measures ramp up-wsj150909p4 & p13 • 130 protectionist measures drafted and to be implemented • Russian planned across-the-board tariff increases • S. African change purchasing rules to favor domestic firms owned by non whites • Japan rewriting sanitation policies to restrict food import. • 35% tariff on tires from China which constitutes 17% of the US tire market • 55 countries issued protective measures against China, 49 against US, and 46 against Japan • Move pleases labor but complicate policy • Chicken trade retaliation could be dangerous • Buy American in US stimulus program; Buy Chinese in Chinese stimulus program

  21. Global hunt for energy resources • Acquisition of Australian mines • Acquisition of Sub Sahara African oil field • Cooperation between Russia natural gas • Financing Venezuela • Offshore drilling in Southern China Sea

  22. International political conflict • UN Security Council conflict over Iran nuclear program • North Korea nuclear issue • Venezuela Chavez • Obama’s potential meeting with Dalai Lama • China’s expressed displeasure over arms sales to Taipei • Prosecution and execution of foreign expats • Rio Tinto executive detained • UK citizen executed for possession of Cocaine

  23. China pushes Australian tie wsj6-22-10p3

  24. China’s new role

  25. Environmental pollution & food safety • Environmental scare - Diesel spill in tributary contaminates China’s second longest waterway, Yellow River (wsj 010409) • Food safety scandal - December, 2009 shut down of Shanghai Panda Dairy of selling 2008 recalled milk product which contains Melamine. • 2008 Melamine in dairy product, eggs, chicken feed, livestock feeds, pet foods. Melamine was blamed for killing six infants and sickening 300,000 babies • 2008 Lead in toys resulted in the largest toy recall by Mattel. New Cadmium scare prompts Walmart to pull children's jewelry

  26. Historical Chart of the RMB (Chinese Yuan)

  27. Issues • China’s refusal to adopt a floating currency system • Zhang Bin, a researcher at the Chinese Academy of Social Sciences (CASS), has encouraged Chinese officials to consider a one-time 10% appreciation of the renminbi's value against the dollar, Bloomberg reported. The move, suggested as a means to reduce speculative inflows of capital, would be accompanied by a 3% annual limitation on the appreciation or depreciation of the currency relative to the dollar. While Zhang could not predict whether the government would accept his advice or allow the currency to appreciate from its current value of approximately RMB6.83 to the dollar, he stated that a 10% revaluation would not seriously impact export growth and that China should take an "active strategy" to reduce the threat from short-term capital inflows.

  28. Changing workforce • Wsj6-1-10, Honda strike spurs Honda to raise pay by 24% even though the strikers demanded 57% increase • Honda shut down all four of the Chinese joint-venture final-assembly plants because of lack of components from its parts manufacturing plants • Foxcomm announced a salary increase of 20% in May, 2010

  29. Honhai bends amid scrutiny – wages to rise 30% WSJ 6-3-10 p

  30. Low tech solution

  31. Successes • GM China auto sales up 67% in 2009 • Coca-Coca, Nike, surpassed 1 billion in revenues in 2006 • Other successes by American companies • Intel, Microsoft, Big 4 CPA’s, Law firms, • Small companies success stories • Element Fresh (9 locations in Shanghai, 2 in BJ) • Blue Frog Bar & Restaurant(7 in SH, 2 in BJ, 1 in Macau) • DE Global founded by Ed Gwinn(offices in Vietnam, Taiwan and HK) • B&L Group founded by Phil Branham (project management firm for the US Pavilion in the coming World Expo

  32. Failures • Best Buy began to close all its branded stores in China on February 22nd. • Home Depot started to close all of its China stores two years ago. Just closed its last one in BJ last month. • Whirlpool to close washing machine plant in Shanghai(4-10-2009) • Yahoo dismal results in China • eBay admits FAILURE in China, eBay Eachnet to close (12-19-2006) • Polaroid China bankrupted and closed in 2002 • Hertz entered China in the 90’s and did not re-enter until the 2000’s • Walmart slow start in China, union problem, has a total of 84 stores in China after acquiring Trustmart. Carrefour has 148 stores in China. • Law firms cannot operate in China except through rep office • Numerous small American businesses failed over the years or continue to incur losses

  33. Charles Mo is a Certified Public Accountant in the US. He is the General Manager and founder of Charles Mo & Company, a wholly owned American consulting firm specializing in recruiting, opening new factories and business, outsourcing accounting, and providing HR related assessment tools for corporations. Charles is an independent board member and the chairman of the audit committee on the Board of Directors of Omnialuo, Inc. and China Ritar Power Company, both OTC public companies in the US. In January 2009 he was appointed to the Board of Director of NIVS Intellimedia, a NYSE Alternext listed company. • Charles moved to China in 1995 as the Controller/General Manager for Polaroid China, and later served as the Chief Financial Officer for Nike China, and finally as the Chief Operating Officer for Coca-Cola in Shanghai until 2005. Prior to that Charles worked for Wang Laboratories, Inc. in Massachusetts in various financial management capacities. • In 2003 Charles joined American Chamber of Commerce in Shanghai, and was appointed CSR Committee Vice Chair in 2004, Board Treasurer in 2005, and elected Board Vice Chairman in 2006, 2007, and 2008. Charles was also the Chairman of the Audit Committee in 2005 and member of the Audit Committee in 2006 and 2007. • Charles has an MBA from California State University Fullerton and a BA in Business Administration from Hong Kong Baptist College. • More on his profile: http://people.forbes.com/profile/charles-c-mo/59941 • www.charlesmo.com