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Business Cycle Analysis
Overview- From the end of World War II to the early 1970s, China was relatively isolated from the global landscape. It was a part of the Soviet Communist Bloc, but remained inwardly focused on improving its own infrastructure and economy, all the while poised for rapid modernization. Openness towards the West began around 1978 with increased trade, a small amount of additional transparency internally, and at least the semblance of allowing more capitalistic templates like ownership of businesses, development of more modernized factories, etc., and less journalistic control. After 1978, Mao's successor Deng Xiaoping realized that the government had to increase the standard of living for its population, or face revolt. Deng's, and subsequent regimes, focused on market-oriented economic development. By the turn of the century, for instance, Chinese output had quadrupled, living standards improved as well as personal choices -- to a degree. There has been increased global trade, outreach, dialog, and participation in international organizations of all types (Central Intelligence Agency, 2013).
Data from China can be problematical at times prior to 2007-2008. Reporting measurements change and the opening of the economy to more capitalistic measures indicates data that are far more viable after 2010. However, data is correct enough to at least get a trending in overall GDP growth since 2007 a pinnacle in early 2010 with a downward curve until 2012, then flattening out. See Figure 1 -- (Trading Economies, 2013)
Real GDP -- China's real GDP growth for 2012 was the slowed since 1999 to roughly 7.8% as opposed to 9.3% in 2011 and 10.4% in 2012. Real GDP reached about $8.28 trillion U.S., likely the result of the growth of industrial production combined with the government's shift of reducing inflation to stabilizing growth (See Figure 2) (Xinhu, 2013).
Price Inflation -- In 2012, China's inflation slowed to a 23-month low due primarily to falling food prices; slowing to 3.0% (See Fig. 3) (China's inflation eases further, 2012)
Figure 3 - China's inflation rate
Private Consumption -- Private consumption plays quite a small role in China's economy, particularly when compared with the developed world. However, right now there are millions of Yuan hidden and disproportionately in the hands of the rich (The Economist, 2012) (Fig. 4).
Fixed Investment -- China's fixed asset investment rose 20.6% to 5.81 trillion dollars in 2012; down a bit from 2011, but growing overall because of agriculture and investment in industry (see Fig. 4) (English News China, 2013)
Inventory Investment- Inventory investment at the end of 2012 was rather critical for China because of lax lending policies and an oversupply of real estate -- with higher than average manufacturing inventories expected to react negatively in 2013.
Level of unemployment/employment- Unemployment figures for China are problematic at best, for the last several years they have hovered at 4.1%. China's official unemployment figures are calculated by only those urban workers who are formally registered and eligible for benefits -- leaving out 230 migrant workers or surplus agricultural workers (See Fig. 4-5) (Roberts, 2013).
Productivity- Despite rapid urbanization and globalization, the labor market in China is still fairly inexpensive. To put it in perspective, despite the major cities and booming economy, the country as a whole has wages lower than Mexico. Wages, then, are not completely indicative of Chinese productivity. Instead, most economists suggest that measuring Chinese productivity should be done on a combination of what labor produces and that capital investment in China yields higher dividends with greater output per worker than ever before (Cowen, 2010). As seen in Figure 6-7, China has helped power global economic growth and keep inflation low; with the cost of real median family income and wages that have remained stagnant despite increases in economic activity.
Short-term interest rates- China's interest rates remain highly controlled showing very little variability cine 2008 -- or hovering between 5.5 and 6.5. Most analysts see the last few years trending because of higher than average interest rates, high home prices in the major cities and the People's Bank of China's decision not to inject liquidity into the marketplace (Figure 7) (Trading Economics, 2013).
Growth in monetary supply- The money supply is an aggregate amount of monetary assets available. For China, the money supply has been steady from 2005 to 2010, then rising as investment and disposable income increase savings levels within the country (See Figures 7 and 8) (Trading Economics, 2013)
Figure 8 - Long-Term money supply
Figure 9-2012-13 Money Supply Increase
Nominal Exchange Rate- Many in the developed world believe that China undervalues its exchange rate; but it has strengthened since 2005 by about 50%. This takes into account private movements in comparative countries, which means real and nominal rates will be different (See Figure 9-10).
Real Exchange Rate -- This shows that prices are rising faster in China, meaning higher prices in China make Chinese firms less competitive, just as if their currency rate had risen drastically (The Economist, 2010).
Trade Balance- Trade balance is the difference between the value of exports and imports between two countries -- or the relationship between a nation's imports and exports. In terms of China, this is country dependent, of course. Between China and the United States, trade rose from $5 billion in 1981 to $536 billion in 2012 with China as the U.S.'s second largest trading partner. China is now a $250 billion market for U.S. firms, but the issues remain complex. Historically, we see a huge trade imbalance up until 2009, with the balance narrowing between 2010-2012 (Morrison, 2013).
Yield Curve- Over the last few years, China's short-term rates have been nearly reversed, but the yield curve has not changed much since the valley of 2008.
Figure 12 - Yield Curve (The Global Yield Curve, 2012).
Stock index -- Stocks show that the extreme growth of 2007-2008 has not been sustainable and shows a trend in a reduction of tourism, rising real estate prices and less confidence in the market since about 2011 (MISH's Global Economic Trend Analysis, 2012)
Commodity Price Index- The three largest trading partners globally are China, the U.S. And the EU. New economic data is showing that recently China has evened out on commodity prices, approaching parity with the U.S. And the EU (See Fig. 14) (Talk, 2013):
Figure 14 - Consumer comparison
Consumer Confidence Index -- The Chinese economy is still evolving, particularly when it comes to consumerism. Consumers are more trained in the urban areas regarding prices, price fluxuations, and price elasticity of goods and services. Not having a lengthy history and a consumer culture for decades has left them less suspicious and jaded about prices (note comparison to the U.S. And the world average) (China Internet Watch, 2013).
House price index -- Traditionally, Chinese have not had a long history of housing ownership. However, the recent rise in urban apartments, condominiums and even single-family homes result in the period of 2001-2009 seeing large increases in home ownership with reasonable prices. Lately, though, since 2011, housing prices in the major cities have drastically jumped, some as much as 20% as the government refrains from introducing property curbs and regulations (Bloomberg Business Week news, 2013).
Government Debt - China's government debt was 23% of GDP in 2012 having hovered around 12% from 1984 to 2011/12. China's foray into a more capitalistic economic structure globally but retaining socialism internally means that the government will still need to spend in order to retain urban and technological growth and a population that remains satisfied with the direction of the economy.
Conclusions - China's massive growth now shows an economy about 1/4 ths size of the U.S. economy. China's output will exceed America's in the 2020s, and their standard of living overall will continue to grow. China has looked at the long-term economic paradigm rather than the short-term model favored by many American investors. Through 2012, for instance, they received $59 billion in direct investment, ahead of the U.S. By $2 billion. "China's biggest attraction to global investment is now its huge market, contrasting the long-time low cost, which is now ranked third or fourth…. The economy is growing in China, outperforming the U.S. And the EU, which are suffering medium- or long-term troubles" (Trifunov, 2012).
Another Bubble Bursting. (2012). The Los Angeles Times -- China. Retrieved from: http://www.latimes.com/news/nationworld/nation/wire/sns-graphic-china-housing-gx,0,1151349.graphic#axzz2jEFZT3cw
The Global Yield Curve. (2012). Macro Investing Strategy. Retrieved from:
Bloomberg Business Week news. (2013, October 22). China Major Cities Home Prices Jump. Retrieved from bloomberg, com: http://www.bloomberg.com/news/2013-10-22/china-home-prices-rise-led-by-record-gains-in-four-major-cities.html
Bureau of Labor Statistics. (2013). International Labor Comparisons: China. Retrieved from: http://www.bls.gov/fls/china.htm
Central Intelligence Agency. (2013, January). World Factbook - China. Retrieved from cia.gov: https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
China Internet Watch. (2013, June 15). New Buying Behavior of Chinese Consumers. Retrieved from chinainternetwatch.com: http://www.chinainternetwatch.com/category/economy-trade/
China's inflation eases further. (2012, June 9). Retrieved from English News China: http://news.xinhuanet.com/english/china/2012-06/09/c_131641255.htm
Cowen, T. (2010, July 16). The important thing is Chinese productivity is rising. Retrieved from The Economist: http://www.economist.com/economics/by-invitation/guest-contributions/important_thing_chinese_productivity_rising
Durden, T. (2010, June). China's Trade Balance By Country. Zero Hedge. Retrieved from: http://www.zerohedge.com/article/chinas-trade-balance-country-and-why-fx-action-less-deal-media-will-have-you-believe
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