The Second Global Shift and China’s Rise in the 21 st Century Victor F.S. Sit Advanced Institute for Contemporary China Studies Advanced Institute for Contemporary China Studies Hong Kong Baptist University March, 2009

Outline I. China ’ s Economy and the First Global Shift II. The Second Shift in 21 st Century Globalization III. Financial Tsunami and the New Global Economic Environment IV. China ’ s Global Strategic Options

A. Historic growth in the past 3 decades B. Major economic power house in 21 st century C. Lessons from the First Global Shift I.China’s Economy and the First Global Shift

China’s Share in International Sourcing

Major Economic Achievements (targets) of the three Recent 5-year Plan (target) GDP Average annual growth rate8.3%7.5% 2000/2005 total (billion ￥ ) 8,94018,20026,100 per capita (yuan)7,09913,98519,270 (US $)8801,6852,569 Budgetary Revenue Average annual growth rate16.5%17.6% 2000/2005 total (billion ￥ ) 1,3383,163 FDI Total (billion US$) Increase over the previous 5-year79%94% Foreign Trade 2000/2005 total (billion US$)4741,422 Increase over the previous 5-year69%200% 2000/2005 total export (billion US$) Increase over the previous 5-year67%206% Foreign Exchange Reserve 2000/2005 total (billion US$) Increase over the previous 5-year92%396%

C. China Benefitted from the First Global Shift Achievements in rapid growth Global forces: FDI & export-push Labor-intensive, low scale Global size and potentials Spatial concentration

China’s Contribution to Global Economic Growth in 2005

World GDP Distribution, 2006 (value at purchasing power parity)

II. The Second Global Shift A. Meaning and content of the Second Global Shift B. Reasons

A. The Second Global Shift Main Shifts Developed Countries China Less Developed Countries (1)Financial Sector (2)Consumer Durables; Capital Goods

B. Reasons: High savings and real economy VS overspending “derivatives” will overtake US as the largest economy advantages of large pool of labor – cost and range organizational strength – ‘socialist-market system’ potential of the largest home market

Finance for Chinese Enterprises, 2006 Source% Retained Profits60 Bank Loans25 Shares and Stocks15

III. Financial Tsunami and the New Economic Environment A. ‘Demise’ of the Western Capitalism system B. New financial and economic landscape C. Post-Tsunami scenario for ‘developed’ countries D. China’s Response

The Financial Tsunami: Selected key events

A. ‘Demise’ of Western Capitalism? 1. Basic of Western Economy under Question confidence in the market system of regulation international institutions infallibility of the ‘greenback’ 2. Key policies (bailouts and others) nationalism subsidy protectionism

B. New financial and Economic landscape World GDP growth forecast for 2009 Of the top 10 banks (by market cap) 4 are Chinese Top 3, all Chinese RegionGrowth rate (%) World0.2 E.U.-0.6 U.S.-0.5 China7.5

C. Post-Tsunami Scenario for ‘developed’ Countries Slow down in overall economic growth, a 2-3 year recession – the worst record since the Second World War. Major contraction of the financial sector with increased tightness and conservatism both in its operation and regulation, leading to increase costs and a clamp on credit even after the initial shock due to de-leverage induced by the Tsunami. Devaluation in both financial and real assets will tighten credit further and impact negatively on production and consumption. The result is an overall shrinkage of market demand. To protect local jobs, countries may tilt towards trade protectionism. High-tech, high value added and knowledge intensive industries will be the likely bright spot in developed economies. Hence, global competition in such products will be very keen.

D. China’s response to the “Financial Tsunami” step up pace of development of the financial sector, especially in internationalization of the Renminbi, such that China’s lagging financial sector may catch up with its real economy. Yet, overall progress will contingent on the lapse of the Financial Tsunami and cycles of the global economy. stimulate and develop local demand guided by the quest for environmental and economically sustainable growth. revamp past convention of export-led growth by “walking on two legs”, i.e. future growth will be propelled by the twin engines of exports and domestic market demand. deepen technology and increase value-added of conventional industries sectors. aim for a balanced economy in line with the low skill and large size of China’s working population.

IV. China’s Global Strategic Options A. Key issues for China in the 21 st Century B. The New China Economy and Business opportunities C. Potential new regional Patten

A. Key Issues for China Major concerns Energy source Security China’s global political role Peace and harmony Fair trade and development

B. The New China Economy and Business Opportunities Possible new development trends: RMB will be Asia’s major hard currency SOE and large private enterprises will globalize Shares and stocks will be major means for fund raising of Chinese enterprises China investment corporations will lead the way and be major players in global investment and M&A Major banks in China will globalize through M&A More free flow of private funds from China to the rest of the world participate deeper in the global economy

Coastal region concentration will remain Hong Kong will serve as China’s new global financial centre and rivaling New York Port city regions will be converted to high-tech, high-value added global production platforms Western margin will assume faster growth C. Potential new regional pattern