Economy, Business, and Trade in China, Hong Kong, and Japan

Sri TellaMadhura BelaniDaniel Moisan

Agenda Economy : Sri Business: Madhura Trade: Dan

EconomyChina – Hong Kong - Japan

Key economic data

GDP Growth Comparison

Country-specific details

Economic Data

China Hong Kong Japan

Currency RMB/CNY HKD JPY

Exchange Rate (US$1)

RMB 8.30 HKD 7.80 ¥107.55

GDP (US$ bn) 1,596.61 164.03 4,673.65

GDP Growth Rate 9.3% 7.7% 2.9%

GDP per Capita (US$)

1,228.03 23,973.61 36,617.5

Inflation Rate 3.9% -0.4% 0.0%

Unemployment Rate

4.2% (Urban) 6.1% 4.7%

GDP Growth Comparison

GDP Growth

-6

-4

-2

0

2

4

6

8

10

12

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

GD

P G

row

th %

China Hong Kong Japan

China’s Economy Second largest economy globally next to the U.S.

Slowly moving to a market economy Still a significant amount of state-owned enterprise

Traditionally managed by controlling credit growth Raised interest rates for first time in 9 years in 2004

Accuracy of economic figures often questioned

GDP Breakdown Agriculture 14.8% Industry 52.9% Services 32.3%

China’s Financial Markets

Central bank – People’s Bank of China Link between interest rates and economic activity

uncertain since economy not truly a market system

Managed exchange rate policy Foreign reserves rising each year

Desire to slow investment to reduce excess capacity

Two major stock markets Shanghai Shenzhen

Hong Kong’s Economy

Economy is mainly a services center Agriculture 0.1% Industry 12.0% Services 87.9%

Manufacturing contributes only about 4% of GDP

Virtually no mineral resources

Capital flows freely into and out of Hong Kong High level of foreign investment and liquidity in

economy

Hong Kong’s Financial Markets

No central bank – Hong Kong Monetary Authority Serves some central bank functions Interest rates largely determined by actions of U.S.

Federal Reserve

HKD tied to USD since 1983 through a currency board Strongly links Hong Kong’s economy to that of the U.S. Foreign exchange reserves 5th largest in the world

Hong Kong Exchange Hang Seng Index

Japan’s Economy

Manufacturing comprises over 20% of GDP Agriculture 1.3% Industry 25.4% Services 73.3%

Asset bubble of the 1980’s led to tightened policy Slow recovery possibly due to protective trade measures Two-way trade 20% of GDP, compared to 70% for China Largely due to restrictions on imports

Japan’s gross debt is 150% of GDP Highest in the developed world

Japan’s Financial Markets

Bank of Japan Responsible for monetary policy and foreign exchange

Ministry of Finance Responsible for government fiscal policy

Floating exchange rate Current policy attempting to prevent significant Yen

appreciation Japan holds world’s largest foreign exchange reserves in

absolute terms

Tokyo Stock Exchange Nikkei Index

Business Government policies Foreign Direct Investment (FDI) Bureaucracy and corruption Legal aspects Labor market

China Government Control

China’s state-owned enterprises ( SOEs); ~46,800 Severe losses, inefficiencies and poor management

FDI Positive attitude: decentralization; simplified process 20% are invested towards buying SOEs Various Form

Wholly-foreign-owned venture (WFO): 70 % of total FDI Equity Joint Ventures: foreign investor hold > 25% Cooperative/contractual businesses

Bureaucracy and Corruption Businessmen are most likely to resort to bribery

China Legal

Lack of confidence in judicial system; spread of corruption; better in big cities

No antitrust legislation Anti-monopoly law drafted in 2004

Labor Although a large pool of labor, scarcity of managerial

skills Strikes have disrupted operations at many plants

Others Infrastructure Language and culture

Hong Kong Government policy

Ranked first in places in Asia to do business Intervention in currency and real estate market State owns/runs infrastructure: Railways, bridges and tunnels

FDI Second-largest recipient of FDI in Asia Simple procedures Advantages

No restrictions, strong legal system, free-port status, Disadvantages

Expensive labor, high rents, poor environmental quality

Hong Kong Legal

Price fixing and cartels are legal Monopolies exist state-owned, transportation and utilities IP protection laws not strong

Labor Expensive

Japan Government Policy

Slow privatization. E.g. Postal services

FDI Used to have restrictions; beginning to open Low relative to the size of the economy.

Bureaucracy and Corruption Centralized power Close ties between government, politicians and Japanese

industry

Japan Legal

Anti-competitive practices: keiretsu Infringement laws are weak

Labour Shrinking labor force. Highly skilled and educated work force Harmonious labor relations: Long-term employment

Regional Trade Overview China and Japan both maintain

trade a surplus Although Hong Kong has a

trade deficit, excluding the balance from China it has a significant surplus

Japan has a significant surplus due to tighter import restrictions

China and Japan both claim to have a trade deficit with the other. Most likely a position to provide negotiating leverage

471

224

383

232

438 413

China Japan Hong Kong

Exports Imports2003 Trade in GoodsTrillions of US $

Trade balance in 2003

China Japan Hong Kong

China 0.0 (11.4) 65.6

Japan (18.0) 0.0 15.4

Hong Kong (65.6) (15.4) 0.0

Sources: Japan Ministry of Finance, China Statistical Yearbook

Trade balance with . . .Region

Overview of trade in China China’s international trade has

grown considerably over the last five year (CAGR of 24%)

Two way trade is becoming a greater proportion of the country’s GDP (59% in 2003)

Machinery and transportation equipment is the largest category of exports followed by light industrial products

Machinery 43%

Other30%

Chemicals4%

Light industrial16%

Mineral fuels3%

Food & live animals

4%

Total = $438 BN

Exportsby type

0

100

200

300

400

500

1999 2000 2001 2002 2003

0%

20%

40%

60%

80%

100%Exports Imports % of GDP

International TradeBN US $

Trade restrictions in China 1950 – China withdrew from the GATT (General

Agreement of Tariffs and Trade) which was the predecessor to the WTO

After being admitted to the WTO, China revised 2,300 trade laws to conform to WTO regulations by September of 2003

Although there has been considerable negotiations between the US, China filed its first complaint in April 2003 over the imposition of US steel tariffs

Tariffs have declined from 15.3% in 2002 to 10.4% in 2004

Trade restrictions are expected to continue to decline in the near future

Overview of trade in Japan Japan’s international trade

has fluctuated over the last five years

Growth of two way trade is relatively low (4% CAGR)

International trade is a significantly lower portion of the overall economy in Japan

Machinery and transportation equipment account for 67% of Japan’s exports

Metals7%

Other18%

Non-electrical machinery

21%

Chemicals8%

Vehicles and transport

23%

Electrical Machinery

23%

Total = $565.5 BN

Exportsby type

0

100

200

300

400

500

1999 2000 2001 2002 2003

0%

20%

40%

60%

80%

100%Exports Imports % of GDP

International TradeBN US $

Trade restrictions in Japan Tariffs are imposed ad valorem on 90% of

products Tariffs on US goods are charged at WTO rates Special tariffs apply to vegetable oils, foodstuffs,

alcoholic beverages, and petroleum products No customs duties on imported cars Import quotas are in effect for various products to

protect the local economy; significant trade negotiations have taken place to try and ease these restrictions and increase access to the Japanese consumer

Overview of trade in Hong Kong

Hong Kong’s international trade continues to increase at a moderate rate (7% CAGR)

Re-exports continues to be the bulk of its trade – this yields two way trade at significantly above GDP because of pass-through merchandise

The bulk of exports are in consumer goods and semi-manufacturing

Capital Goods28%

Raw materials & semi-

manufacturing33%

Consumer Goods39%

Total = $565.5 BN

Exportsby type

0

50

100

150

200

250

1999 2000 2001 2002 2003

-25%

50%

125%

200%

275%

350%Exports Imports % of GDP

International TradeBN US $

Trade restrictions in Hong Kong Based on the agreement for the transition of Hong Kong back to

China, it participates independently in all international trade agreements

Because 90% of exports are re-exports, there are no tariffs on most goods

Excise duties are charged on four groups of commodities. This is purely to generate money for the government and applies equally to domestic and internationally manufactured goods

Under the Closer Economic Partnership Arrangement (CEPA) with mainland China, 374 product categories enter mainland China with no tariffs

Foreign companies located in Hong Kong fall under the guidelines of CEPA -> this is intended to spur growth in the region

References Economic Intelligence Unit ( The

economist) CIA World fact book Global Insight

Q & A