China Economic Overview

Summer 2004

 

Fast Growth

   China*s economy is unquestionably hot. The GDP growth in China during the second quarter of 2004 was 9.6% - again hot.

   Power shortages and transportation bottlenecks are obstacles for faster growth.  By mid-summer, 24 of China*s 31 province-level jurisdictions had already experienced power shortages in 2004, including previously exempt Beijing.  Manufacturers in certain areas (Zhejiang province, Guangdong, which has twice the national rate of electricity use) were worst hit.  Although China already produces more electricity than Japan, it currently plans to build 144 new power-generating plants in the coming years, including at least twenty nuclear plants.  At the same time, transportation bottlenecks 每 especially extreme demand on rail freight 每 are also having a cooling effect.

   Still, no matter what happens in the short-term, China*s growth rates will maintain the fast growth for long.  At a recent discussion at the Council on Foreign Relations in New York, a visiting U.S. Treasury official noted that if you look at the examples of Taiwan, ROK, Singapore 每 once the per capita GDP of these Asian tigers hit US$1,000, growth rates did not fall below 9/10% until the US$10,000 per capita mark was reached.  China is only just now hitting the US$1,000 mark.

 

Foreign Investment Remains Robust

 

  In 2003, China overtook the United States as the world*s largest recipient of FDI with US$52.7 billion.  By contrast, other emerging markets such as India (US$4 billion) and Russia (paltry US$1 billon) took in far less.

  With US$33 billion flowing into China during the first half of 2004, up 12% over same period last year, there is no sign of let-up and China is now well on track to top US$60 billion this year; some project US$100 billion annually by 2010.

  As of mid-2004, China had 480,000 foreign-invested enterprises with a total cumulative foreign investment of US$530 billion, of which over US$40 billion is by U.S. investors.  These enterprises accounted for 31% of China*s industrial output last year and 55% of its exports.

  Motorola, with US$3.4 billion of cumulative investment, is the largest foreign investor in China.  The company recently announced plans for its total investments in China to reach US$10 billion by 2006.

  China*s automotive sector has been a particularly hot destination for foreign investors over the last year 每 between US$12-13 billion in new investment announced from June 2003 to June 2004.  This is even more remarkable when one considers that total foreign investment in China*s auto industry was just US$22 billion since 1980.

 

 


China*s Growing Trade Deficit

   The U.S. goods trade deficit with China rose by more than 20% in 2003 to a record $124 billion, accounting for 23% of the total U.S. goods trade deficit.  U.S. trade with China - with $28 billion in exports as compared to $152 billion in imports from China in 2003 - is by far the US* most lopsided trade relationship.

   But from China*s perspective, the growth of imports into China far outstripped exports during the first quarter of 2004, leading to its first trade deficits since the mid-1980s.

   Exports grew 34.9% in the first quarter to US$115.7 billion, a strong showing largely due to continued demand by U.S consumers and its favorable currency position.

   Imports, however, grew even faster at 42.3%, up from 39.9% for 2003, and are expected by MOFCOM to grow more than 20% this year over last year to US$495 billion.

   The main drivers here are increased imports of raw materials for industry 每 steel, iron, non-ferrous metals, crude oil 每 and industrial equipment, which together accounted for 2/3 of imports.

   Foreign-invested enterprises accounted for a good portion of these imports (about 40% of machinery, for example) but Chinese consumers will begin to soak up more.

   In contrast to the US-China relationship, China now has trade deficits with almost all of its East Asian neighbors, including Taiwan, South Korea, Japan, the 10 member ASEAN group and Australia.  Imports from ASEAN, for example increased 51.7 percent in 2003, reaching $47.3 billion, for a trade deficit of $16.4 billion.  Taiwan*s trade surplus may exceed US$25 billion, or roughly 13% of their GDP.