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Understanding Chinese economy. Professor JIANWEI WU TONGJI University 2014. Map of P.R. China. Chinese economic features. Fastest growing economy in the world, GDP much larger than GNP, thanks for FDI Save more, invest more and consumer less

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understanding chinese economy

Understanding Chinese economy

Professor JIANWEI WU

TONGJI University


chinese economic features
Chinese economic features

Fastest growing economy in the world, GDP much larger than GNP, thanks for FDI

Save more, invest more and consumer less

Hundreds million people swing between the East and West regions, or on the way

A poor developing country with huge amount USD reserves, GDP per capita ranks the poorest 30%, while foreign currency reserve reached 3.82 trillion USD on 31, 2013

No luxury brand is designed by Chinese, most of them made in China and half of them shipped back to China


chinese economic features1
Chinese economic features

One of the most polluted countries managed to produce solar and wind generators

A socialist country trapped in monopoly industries, struggling to build market system

GDP per capita is $6920 in 2013

Four wheels of the economy: cheap labor, open door policy, reform, urbanization;

energy driven: from high saving rate to high rate of investment


introduction of chinese macroeconomic environment political factor
Introduction of Chinese macroeconomic environment, political factor

Earliest market regime in the world

Property heritage system formed an inward looking society

Emperors Wen and Jing only taxed 1/15 to 1/30 of people’s income

Leading roles of Chinese Communism party can be found in the various administration levels, real decision makers

State and regional governments regulate economic affairs and share tax revenue – 49.4% to 50.6% in year 2012.



Extra 30% from selling land!

Governments get 30% extra revenue from selling land


economic and social factor of urbanization and mega cities
Economic and social factor of urbanization and mega cities
  • Economy of scale, scope, industrial cluster and economic networking
  • High value added industry in CBD: finance, services and entertainment
  • Face to face communication (dating and appointment), emotional needs, social networking
  • Tank of skills and talents
  • Employment and recruitment opportunities
cardinal challenges and opportunities to modern chinese economy are urbanization and employment
Cardinal challenges and opportunities to modern Chinese economy are urbanization and employment

Up to 53.7% of residents are categorized as city and town citizens and 46.3% as farmers, respectively in 2012. Hundred million youth migrates from inland China, particularly countryside to cities and coast areas, looking for jobs.

More than 60% of the Chinese will be settled in urban area by year 2020. Therefore, there have to be enough jobs, shelters and infrastructure to accommodate new immigrates.

Number of cities with one million or more population are 150 in China in 2010.


labor force and employment
Labor force and employment
  • Working forces (age between 15-64) was 644 million in 1980 and 941 million in the peak year 2011. Labor force shrink 3.5 million since 2012.
  • The ratios of labor to total population are:

1980 64.4%; 2009 72.4%; 2030 67.4%; 2050 63%

urbanization and road communication in china
Urbanization and road communication in China
  • Rapid train system, over 10000 Km and competing with airlines

The total turnover of cargos in harbors is 3.42 billion tons in 2006 and 9.47 billion tons in 2012.

The national highway project “7918” will be constructed based on the planning of Ministry of Transportation, namely 7 routes radiating centered in Beijing, 9 North-South and 18 East-West rotes cross mainland China, making total mileage of 85000 km. All 319 cities which have population more than 200,000 will be connected in year 2020.


widening distribution of income between coastal and inland urban and countryside
Widening distribution of income between coastal and inland, urban and countryside
  • The gaps of income between coast areas and inland China are huge and still enlarging. Gini coefficient was 0.28 in early 1980s, increasing to 0.38 in 1995, 0.458 in 2001 and over 0.47 in 2012.
  • Social stability, comparison between China, India and Brazil (0.515 in year 2008)
  • Disposable income per person in cities and towns were RMB8472 in 2003, 26955 in year 2013. By contrast, average net income of rural residents was only RMB 2622 in 2003; 8896 in year 2013 .
  • Social welfare coverage is close to 100% but at very basic level
everlasting unemployment issue
Everlasting unemployment issue
  • Because of limited arable land, people ages between 15 to 50 move to cities to find jobs.
  • Left home ages and children, not only an economic issue
  • The hidden unemployment is a serious problem, but it provides abundant supply of labor.
  • Supply of employment posts in the near future should come from the service sectors and near major cities.
  • The development of Chinese industry has constraint of shortage of skilled labor
industrial performance in year 2005 and 2013
Industrial performance in year 2005 and 2013
  • Electricity bn KW/hour, 2474.7 to 5397.6, shortage
  • Coal mn tons, 2190 to 3680, transportation problem, slowing down
  • Steel mn tons, 352 to 779, over capacity and constrained on ores importing
  • Cement mn tons,1060 to 2420, pollution
  • Car million, 5.7 to 22.12, mild growing
  • Construction value added bn, 690 to 3900, demands slow in real estate and more on infrastructure
con t
  • Investment for real estate bn, 1543 to 8601, growth rate slowing down
  • Consumer retail 6718bn to 23781bn, booming sector
  • Saving in financial institutes 30 trillion to 94.3 trillion, slowdown since year 2010
  • Money supply of M2 29.9 trillion to 110.7 trillion. hard to get loan
  • China is facing the threaten of the bubble economy and deflation
gdp in 2011 where does fuel come from
GDP in 2011, where does fuel come from?

GDP = C + I + G + (X – M)=49.1(C+G)+48.3(I)+2.6X

High level of saving in banks, liquidation mismatch problem, SME is hunger for loan, loan for the poor (Shanghai miracle in the 1920s and Bangladesh country banks)

Insufficient development of financial market, bond and other security markets

Less enthusiasm of consumption

Overheating of regional government investment and expenditure

Underground economy

Surging in foreign currency reserve, over export and flowing in speculative money

Price index and interest rate


continuous growth of chinese economy
Continuous growth of Chinese economy
  • Divergent interests of central government versus regional governments, increasing gaps of development
  • Potential of the service industry: the road from secondary position to leading sector of GDP; value of emotion and information, from GE to IBM, from physical manufactures to the new economy
  • Resurging of commodity economy, materials and agriculture and economic products
  • Further opening up industrial sectors to private and foreign investors
  • Why do we need a ever growing model, pollution also cost 10% of GDP
a long way from oem to odm and self owned intellectual property
A long way from OEM to ODM and self-owned intellectual property
  • The cost of intellectual property, barriers for catching up economies, overwhelming patent applications from the overseas
  • Emerging of ODM in the coast regions
  • Insufficient input on R & D, case of the Chinese pharmaceutical industry
  • Lessons learned from pattern of development in South American
Can growth of Chinese economy rest on soaring prices of raw materials in the global markets?
  • Sustainability of resource-based model in China
  • Who enjoys large stake of economic fruits: China, MNCs, developed countries, resource-rich nations?
  • Political, environment and financial risks and challenge for Chinese firms through mining in the overseas
global value chain and ladders
Global value chain and ladders
  • Material supplied in resource rich countries
  • Processing nations
  • Assembly basis
  • Call centers
  • Logistic and harbors
  • Trading centers
  • Financial centers, monetary markets: gold, currency issue and circulation, FX market
global value chain and ladders1
Global value chain and ladders
  • R & D centers
  • Information processing centers: software, media, culture products
  • Design centers
  • Industrial code and standards: visa group
  • International organization
  • Value circle, environment friendly production
chinese energy industry
Chinese energy industry
  • Choosing a right industry is the key of business success in emerging economies
  • The energy industry in China: bottleneck or business opportunities
  • What business opportunities can you observe from the growing demand for energy supply in China: investment for shares listed in the major stock markets, consulting, technology transfer, trading in oil, environment protection?
the rapid development of automobile industry acceleration of urbanization
The rapid development of automobile industry, acceleration of urbanization

Cars manufactures have been growing dramatically

  • Causing sever problem of traffic congestion.
  • Lifestyle changing and urban spending
  • Limited space of parking space in residential blocks and CBD
  • Vehicle purchase, tariff and toll gates, experience in Sydney

Housing price and income ratio in Shanghai

Price per SQ meter: Inner circle 55518; middle 29281; out circle 16541


major facts of fdi in china
Major facts of FDI in China
  • Approved FDI firms are over 800,000 and accumulated investment over $1300 bn by the end of March 2013
  • 99.8% of FDI have been approved by regional and local governments, 0.2% by the Ministry of Commerce
flood in hot money
Flood in hot money
  • Overseas mutual funds: strategic moves
  • Appreciation of RMB: pro and con, but inevitable, case of investment of water business
  • High margin of interests between loan and saving account: 3.0% in year 2012
  • Business reaction: speculation, gamble and investment
  • Firm’s decision: going to abroad?
chinese invest in the overseas
Chinese invest in the overseas
  • Property in Hong Kong, Australia, US and Canada
  • Firms
  • Resources, forests, oil, mining field
  • Antiques and art
  • Labs
  • Stocks
  • Wine
  • Sovereigntydebt
understand chinese traditional and buying behavior
Understand Chinese traditional and buying behavior
  • Aesthetics, big is better, auto
  • Face value, mianzi and courtesy
  • International homogeneous behavior or differentiation in local market
  • Role of family in decision making
  • Class and status of wealth
  • Buying behavior of new generation
emerging middle class in china
Emerging middle class in China

Definition: family annual income RMB80k+ (E$10k) in year 2012; population is 220m, and expected to 800m and 58% by 2020

Standard of middle class varied significantly between different tiers of cities and regions

Up middle class: ages from 25 to 44; family annual income 120k to 200k (in year 2011), total population reached 13 million in 2011, and 76 million by 2015


emerging affluent class and lower middle class in china
Emerging affluent class and lower middle class in China

Affluent class: family assets for investment annual income is more than 6 million, total population is 2.7 million in year 2012. Their average assets is 50 million, spend 1.5 million in consumption, and average age is 39.

Their demand for banking services are tour, health services and children education.

Population of family assets more than 100 million is estimated 63500.


emerging middle class in china1
Emerging middle class in China

Lower middle class – ignorable consumers: family annual income 30k to 60k, total population is over 300 million in 2010 and 500 million by 2020

Very fragile to social security, less covered by social welfare, then hesitate to spend money

China is the third largest consumer market, 9% of the world market share; will be the second largest market and 14% in 2015 and 22% in 2020

Residents are willing to consume more in small and medium size cities than in large cities


social class and their income in shanghai in 2014
Social class and their income in Shanghai in 2014
  • Current wages and salaries of employees working in enterprises are as follows (in RMB per month per person):
  • Senior management personnel 50k and more,
  • Ordinary management personnel 8k-50k,
  • Skilled labor 6k-20k
  • Ordinary labor 1.82k-6k
  • Social average 4.8k per person
the luxury industry in china eden or hell for international corporations
The luxury industry in China: Eden or hell for international corporations?
  • Second largest market of luxury goods in the world, are expected to reach 30% of the world market in year 2015
  • Regular buyers are 10 to 13 million in 2005, and 180 million by 2015
  • Potential in 30 secondary cities
  • Limitation of growth: less qualified servants, expensive shops, logistics, cultural difference (Danish china plates)
the luxury industry in china eden or hell for international corporations1
The luxury industry in China: Eden or hell for international corporations?
  • Cluster of world famous brands
  • Face value and showing off society
  • Tax incentives: antique and art works
  • Gift giving society
  • Domestic jewelry market is 279 billion RMB in year 2011, second largest in the world
consumption by tourists in the overseas in year 2012 billion
Consumption by tourists in the overseas in year 2012, billion $

Chinese 102(72.6 in 2011),

German 83.8(85.9 in 2011),

American 83.7,

British 52.3,

Russia 42.8

The World Tourism Organization (UNWTO/OMT)


law of ownership of land
Law of ownership of land
  • Ownership of land by the State is not affected by the transfer of land use rights for valuable consideration.
  • Unless otherwise stated in the grant contract, or disallowed for planning reasons, the term may be extended on application by the grantee; the land use right may be assigned or mortgaged by the grantee, as well as inherited.

The maximum terms for granting of land use right:

For residential purpose 70 years

For industrial purpose 50 years

For the purpose of education, scientific research,

culture, public health and sport 50 years

For commercial, tourism and recreational purpose 40 years

For comprehensive purpose or other use 50 years

sum up
Sum up
  • Cultural communication skills, face value and social contacts
  • Talent personnel and high turnover
  • Regional differences, potential in rural areas
  • Availability of infrastructure
  • Emerging industries
  • Increasing labor costs
  • Opportunities in luxury industries, examples
  • Branding orientation
  • From OEM to OBM