The Dragon’s Tail

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Presentation - SCAFP

The Dragon’s Tail

China’s Rebalancing

Karl Schamotta

Senior Market Strategist

© 2012 Western Union Holdings, Inc., All Rights Reserved. Western Union Confidential

Friday, 11 January, 13


Friday, 11 January, 13

Historical Context


25%

Share of Global GDP

Early Imperial Era

BCE 221 – CE 960

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22%

Share of Global GDP

Early Qing Dynasty

CE 1644 – CE 1722

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22%

Share of Global GDP

There is nothing we

lack. We have never set

much store on strange

or ingenious objects,

nor do we need any

more of your country’s

manufactures”

Late Qing Dynasty, 1792

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11%

Share of Global GDP

Late Qing Dynasty

CE 1722 – CE 1911

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4%

Share of Global GDP

People’s Republic

CE 1949 – CE 1976

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Deng Xiaoping

It doesn’t matter if the

cat is black or white...

...so long as it

catches mice.

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Engineered Growth


Household

Income

Strategic

Investment

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Capitalism With

Chinese Characteristics

Capital Controls

Captive Savings

Directed Lending

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Real Interest Rates

Brazil + China

2002 - 2011

40%

Source: World Bank, 2012

30%

20%

10%

0%

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1

2

3

4

5

6

Exchange Rates

CNYUSD

1981 - 2012

Source: Federal Reserve, 2012

7

8

9

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46%

Gross Fixed Investment

International Ranking

2011

Source: CIA World Factbook, 2011

USA

UK

Brazil

EU

Japan

Russia

Canada

Australia

India

China

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6

5

4

Economic Growth

Gross Domestic Product

Trillions USD, 1980 - 2012

3

Source: World Bank, 2012

2

1

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Structural Limitations


40

30

Vulnerability

Export % of GDP

1970 - 2012

Source: World Bank, 2012

20

10

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F

1000

800

600

Demographics

United Nations, Estimated

Working Age Population

Millions, 1950 - 2050

Source: United Nations, 2012

400

200

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$ 549 Retail

Source: Federal Reserve, 2011

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$ 172.40 Parts From Other Countries

$ 10.74 Parts From United States

$ 6.50 Assembly In China

Source: Federal Reserve, 2011

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24

23

22

21

20

Returns

Global Manufacturing

Value Added Share of GDP

1980 - 2010

Source: World Bank, 2012

19

18

17

16

15

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1998

M2 Broad

Money Supply

Source: People’s Bank of China, 2012

10

Trillion

Yuan

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2005

M2 Broad

Money Supply

Source: People’s Bank of China, 2012

28

Trillion

Yuan

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2012

M2 Broad

Money Supply

Source: People’s Bank of China, 2012

85

Trillion

Yuan

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12 Years

815%

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Resource Misallocation?

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We are keenly aware that we still have

a serious problem in that our

development is not yet well balanced,

coordinated…or sustainable.

Wen Jiabao

Premier and Party Secretary

March 2011

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Engineered Transition


25,000

Income

20,000

Average Wages

CNY

Source: Ministry of Human Resources and Social Security, 2012

15,000

10,000

5,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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500

Safety

Pension Coverage

Millions

Source: Ministry of Human Resources and Social Security, 2012

300

100

2007 2008 2009 2010 2011

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500,000

Japan

US

400,000

300,000

China

200,000

Productivity

Patents By Origin

1980 - 2011

Source: World Intellectual Property Organization, 2012

Korea

Germany

100,000

France

UK

Swiss

Canada

Australia

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6.5

7.0

Exchange Rate

CNYUSD

2005 - 2012

7.5

Source: Federal Reserve, 2012

8.0

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20

15

10

5

0

Capital Outflow

Net Foreign Exchange Purchases

Chinese Banks, USD

USD, October 2011 - November 2012

Source: State Administration of Foreign Exchange, 2012

-5

-10

-15

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10%

Trade Balance

Current Account

% of GDP

5%

Source: State Administration of Foreign Exchange, 2012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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100

80

60

“China Slowdown”

Google Searches

March 2008 - November 2012

Source: Google Trends, 2012

40

20

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Global Opportunities


2009/July

Pilot Scheme Commenced

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2010/December

Approved Enterprises

365 to 67,359

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2011/August

Entire Country

Approved Enterprises

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2012/March

Entire Country

All Enterprises

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NDF

Offshore

One Currency

Two Markets

CNY

Onshore

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NDF

Offshore

CNH

Deliverable

One Currency

Three Markets

CNY

Onshore

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6.5

7.0

Exchange Rate

CNYUSD

2005 - 2012

7.5

Source: Federal Reserve, 2012

8.0

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14.8%

Renminbi Adoption

Compound Monthly Growth

2011

Source: Society for Worldwide Interbank Financial Telecommunications, 2012

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450

350

250

150

Emerging Markets

Foreign Net Direct Investment Inflow

Billions USD, 1990 - 2012

50

Source: International Monetary Fund, 2012

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260

210

160

Raw Materials

Industrial Inputs, Metals, Crude

IMF Price Indices

1980 - 2012

Source: International Monetary Fund, 2012

110

60

10

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35%

AUD

25%

NZD

CAD

15%

Currencies

Real Effective Exchange Rate Indices

April 2009 - October 2012

Source: Bank for International Settlements, 2012

GBP

JPY

-5%

-15%

USD

EUR

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60

50

40

30

Exposures

Net Raw Material Exports

% of Total

2011

Source: International Monetary Fund, 2012

20

10

Russia Australia Norway New Zealand Brazil South Africa Mexico Canada

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15

United States

12

Europe

Japan

9

6

Daily Caloric Intake

Kilojoules, Millions Per Capita

1962 - 2011

Source: United Nations, World Bank, 2012

India

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15

United States

12

Europe

China

Japan

9

6

Daily Caloric Intake

Kilojoules, Millions Per Capita

1962 - 2011

Source: United Nations, World Bank, 2012

India

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0.7

Growth

Household Consumption

Trillions USD, 2011

0.5

Source: International Monetary Fund, 2012

0.3

0.1

Russia Germany Brazil Japan United States China

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China

Changes

World

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China

Changes

World

World

Changes

China

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Question & Answer

karl.schamotta@westernunion.com

Karl Schamotta

Senior Market Strategist

© 2012 Western Union Holdings, Inc., All Rights Reserved. Western Union Confidential

Friday, 11 January, 13