China’s GDP in 2009 is about $5 trillion whilst that of the US is $14 trillion – nearly 3 times larger. China overtook Japan to be the 2nd largest economy this year. So, when will China overtake the US to be the world’s largest economy?
The relative GDP figures of 2 countries depend not just on the growth rate. It is also impacted by things like inflation and currency exchange rate. China, which traditionally has a higher inflation rate, will get a boost on its GDP from inflation. Similarly, a strengthening Yuan will help bolster its value of goods and services produced.
In the last decade, the real GDP growth averaged 10.5% for China and 1.7% in America; inflation averaged 3.8% and 2.2% respectively. Since 2005, the Yuan has appreciated an average of 4.2% annually.
Extrapolating from the past, conservatively, we assume an average growth rate over the next decade of 7.5% for China and 2.5% for the US, inflation rate of 4% and 1.5% respectively and the Yuan gaining 3% per year, China should pass the US as the biggest economy in the world by 2020. If, however, China’s growth falters to 5%, then the overtaking date would be 2022 – a mere 2 years later.
So, it is no more a question of whether China will overtake the US as the world’s biggest economy. Rather, it is a matter of when only.
Monday, December 27, 2010
Wednesday, December 1, 2010
Stewed in the Irish juice
Up to the late 80s, Ireland was a backwater economy – with high unemployment & huge government debt. In 1987, the unemployment rate was 18 % and the government’s debt was 120 % of the GDP. It was largely an agricultural economy.
Then the government pushed through dramatic economic reforms. Corporate taxes and business regulations were lowered. This opened the economy to the rest of Europe and attracted a lot of biotechnology and high tech investments. The country prospered. Its per capita income growth rate shot to 6 % from the historical rate of 3.5 %. Similarly, its GDP growth touched a figure of 10 %.
Wages rose and with it prices. Housing became a good investment. The banks borrowed huge amounts from the international wholesale market and loaned it to the domestic housing market. The feed of easy liquidity engendered a huge housing boom and it snowballed. House prices, construction company stocks, land prices and all things related to construction skyrocketed. By late 2006, the average new house costs 10 times the average earnings.
The boom peaked in late 2006. By the middle of 2007, unsold housing units began to accumulate. Banks began to feel the heat. In late September 2008, a run started in the wholesale markets on Anglo Irish Bank. It was quite clear that the domino effect or contagion would take hold. The government took the unusual step of guaranteeing all deposits and senior debt in the six Irish banks, nationalized Anglo Irish and invested 3.5 billion Euros in two other banks. And that is the start of the Irish economic decline.
Then the government pushed through dramatic economic reforms. Corporate taxes and business regulations were lowered. This opened the economy to the rest of Europe and attracted a lot of biotechnology and high tech investments. The country prospered. Its per capita income growth rate shot to 6 % from the historical rate of 3.5 %. Similarly, its GDP growth touched a figure of 10 %.
Wages rose and with it prices. Housing became a good investment. The banks borrowed huge amounts from the international wholesale market and loaned it to the domestic housing market. The feed of easy liquidity engendered a huge housing boom and it snowballed. House prices, construction company stocks, land prices and all things related to construction skyrocketed. By late 2006, the average new house costs 10 times the average earnings.
The boom peaked in late 2006. By the middle of 2007, unsold housing units began to accumulate. Banks began to feel the heat. In late September 2008, a run started in the wholesale markets on Anglo Irish Bank. It was quite clear that the domino effect or contagion would take hold. The government took the unusual step of guaranteeing all deposits and senior debt in the six Irish banks, nationalized Anglo Irish and invested 3.5 billion Euros in two other banks. And that is the start of the Irish economic decline.
Sunday, November 28, 2010
Malaysia's household debt
Malaysia’s total household debt is a whopping RM 560 billion as at 31 August 2010 – 55 % of the banking system’s total loans. This is about 72 % of the GDP. The debt is made up of borrowings in residential property, passenger car, credit card, securities and personal use. Residential property and passenger car comprise the largest portions with value of RM 230 billion and RM 123 billion respectively. This is equivalent to 48 % and 26 % of the total debt. Credit card debt is fast rising and has a cumulative value of RM 29 billion – 6 % of the total loans.
Malaysia’s average income per capita is about RM 2000 per month. The household debt to personal disposable income is 140 % in 2009. This figure is higher than Singapore’s 105 % and US’ 123 %. As the disposable income is about 70 % of the gross income, Malaysians owe double the amount they earn.
Of particular concern is Malaysia’s passenger car debt of RM 123 billion. At a quarter of household debt, this is a world record. The reason for this is the high car price in Malaysia and our penchant for wheels. With a population of 28 million, we have 19.8 million registered vehicles as at August 2010. This is a depreciating asset as the value and usability of the car reduces over time.
Malaysia’s average income per capita is about RM 2000 per month. The household debt to personal disposable income is 140 % in 2009. This figure is higher than Singapore’s 105 % and US’ 123 %. As the disposable income is about 70 % of the gross income, Malaysians owe double the amount they earn.
Of particular concern is Malaysia’s passenger car debt of RM 123 billion. At a quarter of household debt, this is a world record. The reason for this is the high car price in Malaysia and our penchant for wheels. With a population of 28 million, we have 19.8 million registered vehicles as at August 2010. This is a depreciating asset as the value and usability of the car reduces over time.
The kimchi punch
Two significant news on South Korea caught my attention. First, it is the final medal tally for the just completed Asian Games. South Korea came in at number two – behind host nation China but ahead of Japan. SK, with a population of just 48.6 million, managed to gather a total of 76 gold medals. Japan, on the other hand, with a much bigger population of 127 million managed to collect only 48. How did the South Koreans do it?
The second is the results of the Car of the Year 2010 awards conducted by New Straits Times & Maybank. Of the 18 awards available, South Korean manufacturers picked up 5. They even beat Japan who managed to score only in 3 categories. Again, how did they do it?
South Korea is one of the most ethnically and linguistically homogenous society in the world. Technically, they are still at war with their brother state in the north. This makes them very united and competitive. Also, the humiliation suffered by the country in 1997 when it was bailed out by the IMF has made them resolved to better themselves. That is the new spirit of the South Koreans.
One other factor is the country’s emphasis on education and the development of its human capital. Its local universities produced a total of 10,322 Phd holders in 2009. In the same year, 82 % of its high school graduates are enrolled in tertiary educational institutions. A total of 19,847 doctoral positions were offered by their universities. All this has not taken into account the Phd degrees obtained from foreign universities.
They have become very strong in research and development. They are also very innovative. They have become world leaders for a host of electronic products. Watch them. They will become more prominent in the future.
The second is the results of the Car of the Year 2010 awards conducted by New Straits Times & Maybank. Of the 18 awards available, South Korean manufacturers picked up 5. They even beat Japan who managed to score only in 3 categories. Again, how did they do it?
South Korea is one of the most ethnically and linguistically homogenous society in the world. Technically, they are still at war with their brother state in the north. This makes them very united and competitive. Also, the humiliation suffered by the country in 1997 when it was bailed out by the IMF has made them resolved to better themselves. That is the new spirit of the South Koreans.
One other factor is the country’s emphasis on education and the development of its human capital. Its local universities produced a total of 10,322 Phd holders in 2009. In the same year, 82 % of its high school graduates are enrolled in tertiary educational institutions. A total of 19,847 doctoral positions were offered by their universities. All this has not taken into account the Phd degrees obtained from foreign universities.
They have become very strong in research and development. They are also very innovative. They have become world leaders for a host of electronic products. Watch them. They will become more prominent in the future.
Tuesday, November 23, 2010
Singapore vs Malaysia
Malaysia and Singapore separated 45 years ago. Back then, Singapore’s GDP per capita was $512 while Malaysia’s was $335. Fast forward 45 years, Singapore’s GDP per capita has leapfrog to $36,537 compared to Malaysia’s $6,975. In the same period, Singapore’s GDP has risen 189 times but Malaysia’s only managed about a third of that rate.
By the end of this year, Singapore’s GDP is expected to overtake that of its northern neighbor. The former should chalk up a figure of about $210 billion whilst the latter about $205 billion. This is despite Singapore being only 2.1 % the size of Malaysia and has no natural resources. They make up for the disadvantage by optimizing their human capital.
On the currency front, the currencies of the two nations were at par at the time of separation. 45 years later, the Singapore dollar is worth about RM 2.40. What a world of difference. Singapore’s foreign reserve is $220 billion whilst that for Malaysia is $100 billion. In addition, Singapore has two sovereign wealth funds with a combined asset value of about $480 billion. Khazanah Nasional, Malaysia’s sovereign fund, has a net worth of $25 billion.
Dr. Mahathir has an explanation for this contrasting growth rate. He reasoned that Malaysia lacked behind because it has a social restructuring goal to fulfill. By this, he meant the fair distribution of wealth among the races. Perhaps, its lost focus on growing the economic pie and instead concentrated on dividing the pie. What a pity.
By the end of this year, Singapore’s GDP is expected to overtake that of its northern neighbor. The former should chalk up a figure of about $210 billion whilst the latter about $205 billion. This is despite Singapore being only 2.1 % the size of Malaysia and has no natural resources. They make up for the disadvantage by optimizing their human capital.
On the currency front, the currencies of the two nations were at par at the time of separation. 45 years later, the Singapore dollar is worth about RM 2.40. What a world of difference. Singapore’s foreign reserve is $220 billion whilst that for Malaysia is $100 billion. In addition, Singapore has two sovereign wealth funds with a combined asset value of about $480 billion. Khazanah Nasional, Malaysia’s sovereign fund, has a net worth of $25 billion.
Dr. Mahathir has an explanation for this contrasting growth rate. He reasoned that Malaysia lacked behind because it has a social restructuring goal to fulfill. By this, he meant the fair distribution of wealth among the races. Perhaps, its lost focus on growing the economic pie and instead concentrated on dividing the pie. What a pity.
Wednesday, November 3, 2010
China's trade surplus
The US trade deficit with China for June and July 2010 was $25.9 billion and $26.2 billion respectively. This represents 60% and 52.6% of the total US trade deficit of $42.8 billion and $49.8 billion for the same periods. The September 2010 figure was $16.9 billion. For 2004 & 2005, the US deficit was $160 billion and $201 billion respectively. That for 2006 was about $230 billion. China’s share of US imports was 14.6% in 2005.
This trade imbalance is making the US very angry with China. They see the Chinese export as a threat to some US industries and also its manufacturing employment. They alleged that China is dumping its exports at below cost and engages in currency manipulation to gain an advantage in the export market.
China is the world’s largest exporter. It exports earned a total revenue of $1.2 trillion in 2009. Its trade surplus for 2008 and 2009 are $297 billion and $198 billion respectively. For 2010, it is expected to net a surplus of about $160 billion. Exports of goods and services constitute about 40% of the GDP.
What does China exports? Its major exports are office machines and data processing equipment, telecommunications equipment, electrical machinery and apparel and clothing. But, many of these products are ‘value-added manufacturing’ where components are imported from several East Asian countries and assembled in China and then re-exported. China’s value add to the products is only 20%. In the mid 1990s, the value-added trade made up about 55% of total China exports. This means China’s net trade surplus should be only about 56% of its reported figure. Consequently, its trade surplus with the US should be correspondingly lower too.
This trade imbalance is making the US very angry with China. They see the Chinese export as a threat to some US industries and also its manufacturing employment. They alleged that China is dumping its exports at below cost and engages in currency manipulation to gain an advantage in the export market.
China is the world’s largest exporter. It exports earned a total revenue of $1.2 trillion in 2009. Its trade surplus for 2008 and 2009 are $297 billion and $198 billion respectively. For 2010, it is expected to net a surplus of about $160 billion. Exports of goods and services constitute about 40% of the GDP.
What does China exports? Its major exports are office machines and data processing equipment, telecommunications equipment, electrical machinery and apparel and clothing. But, many of these products are ‘value-added manufacturing’ where components are imported from several East Asian countries and assembled in China and then re-exported. China’s value add to the products is only 20%. In the mid 1990s, the value-added trade made up about 55% of total China exports. This means China’s net trade surplus should be only about 56% of its reported figure. Consequently, its trade surplus with the US should be correspondingly lower too.
Monday, November 1, 2010
The Chinese foreign reserve
The rival sovereignty claim over some uninhabited islands - known as Senkaku in Japan and Diaoyu in China – caused a diplomatic spat between the two Asian giants. A Chinese fishing boat captain was detained by the Japanese authorities. Demands and protests were made for the freeing of the captain. Other diplomatic channels were also deployed.
In the financial market, China applied pressure on Japan by buying substantial quantities of Japanese bond. It purchased a total of $25.5 billion in the first 7 months of this year. This purchase, made with Yen bought from the open market, drove up the value of the Yen. The Yen had appreciated by 15% against the dollar since April. What is most infuriating for the Japanese is that the Chinese can buy their bonds, but they are no means for a reciprocal action.
The Japanese eventually released the Chinese captain. Almost simultaneously, the Chinese sold down their holding on Japanese bonds. This episode illustrates the mightiness of the huge Chinese foreign-exchange reserve. You can expect to see more flexing of this muscle in the future.
In the financial market, China applied pressure on Japan by buying substantial quantities of Japanese bond. It purchased a total of $25.5 billion in the first 7 months of this year. This purchase, made with Yen bought from the open market, drove up the value of the Yen. The Yen had appreciated by 15% against the dollar since April. What is most infuriating for the Japanese is that the Chinese can buy their bonds, but they are no means for a reciprocal action.
The Japanese eventually released the Chinese captain. Almost simultaneously, the Chinese sold down their holding on Japanese bonds. This episode illustrates the mightiness of the huge Chinese foreign-exchange reserve. You can expect to see more flexing of this muscle in the future.
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