Notes on China’s Economy Today

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Filed under: FinCom

Notes on China’s Economy Today

Inflation is the top economic concern of the Chinese government, said Kok-Chi Tsim, Managing Director and Senior Relationship Executive at JPMorgan Chase Bank, Chicago. He spoke March 30 at the monthly luncheon of the Economic Development Council of Chicago on “China’s Economic and Business Environment.”

The concern for inflation flows from one underlying economic fact: “China is a rich country with still a lot of very poor people,” with large differences between the coastal and the western inner provinces. Inflation is a concern because the hyperinflation of the 1940s led, in part to the ousting of Chaing Kai-shek in 1949 in favor of Mao Zedong and the communist state. The current government does not want to risk creating the same situation, especially when a portion of the population would suffer greatly should its income be eroded by inflation.

Inflation is running at 11% annually. Labor costs are also increasing. The minimum wage will increase by 15% this year. Last year, wages in major cities increased by 21%.

“That raised a lot of red flags among the Chinese government,” Mr. Tsim said. “Fighting inflation is the Chinese government’s top priority.”

To combat inflation, the Chinese government has allowed its currency, the renminbi (RMB), typically referred to as the yuan, to appreciate. This makes exports more expensive, which is a risk for the Chinese because the economy is driven by inexpensive exports.

For details and information on China’s desire to see the RMB become a global trade and reserve currency like the dollar, see Mr. Tsim’s webinar, “China: Internationalization of Renminbi (RMB).” This development is good for U.S. companies doing business in China, as it opens other payment options, given that RMB denominated accounts are now available in Hong Kong.

Other interesting facts and analysis from Mr. Tsim included:

  • The Chinese government does not have many tools for monetary control. The major method the government uses to control the money supply is putting quotas on bank loans. It’s difficult, however, because bank loans are the only source of financing in the country. Chinese do not invest in local stock because Chinese companies do not follow standards of corporate governance like western companies and are riskier investments as a result. Instead, they invest in real estate, with its boom-and-bust bubbles.
  • The largest pollution problem in China is not air pollution, as you may expect from the reports and reality of poor air quality in Beijing. It’s water pollution. The Chinese government is expected to spend hundreds of billions on water infrastructure in the coming years.
  • Overseas direct investments by China are increasing. “Access to natural resources, including agriculture, is the biggest challenge facing Chinese growth,” Mr. Tsim said.
  • The major hindrance to Chinese investments here is the U.S. government’s restrictions on the import of high-performance computer technologies. Given rising labor costs in China, productivity increases are critical, as they have been in every major industrial country. “Automation is absolutely necessary. That’s where U.S. companies can help.”
  • In response to a question on Chicago Mayor Daley’s trips to China and their influence, Mr. Tsim smiled and said, “You want me to be quite honest? I don’t think there’s much impact.”

—Collin Canright