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31 May 2011
EM 101
Ben Laidler
(1-212) 622-5252 ben.m.laidler@jpmorgan.com J.P. Morgan Securities LLC
Rajiv Batra
(91-22) 6157-3568 rajiv.j.batra@jpmorgan.com J.P. Morgan India Private Limited
Faheem S Desai
(91-22) 6157-3329 faheem.s.desai@jpmorgan.com J.P. Morgan India Private Limited
Ravi Saraogi
(91-22) 6157-3305 ravi.saraogi@jpmorgan.com J.P. Morgan India Private Limited
748%
GDP Government Profits Income
Figure 2: China needs jobs for graduates, not in pouring concrete or manufacturing: Change in the non-graduate available workforce 15-39 years old
%oya, Millions
3% 2% 1% 0% -1% -2% -3% -4% -5% -6% 600 500 400 300 200 100 0
%oya
Number
Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation
See page 28 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
EM 101 Series
EM 101 key briefing notes for emerging market equity investors.
Table of Contents
Figure 1: Demographics should reverse this trend.......................................................1 Figure 2: China needs jobs for graduates, not in pouring concrete or manufacturing: Change in the non-graduate available workforce 15-39 years old ...............................1 Figure 4: Change in the non-graduate available workforce 15-39 years old................3 Figure 5: And reverse this trend...................................................................................3 Figure 6: Real GDP growth (2000=100)......................................................................4 Figure 7: Contribution to Chinas real GDP growth ....................................................4 Figure 8: Growth in per capita GDP & average national wages (%) ...........................4 Figure 9: From consumption to investment .................................................................5 Figure 10: Household income lagging profits and GDP growth..................................5 Figure 11: More 19 years old in Tertiary Education - Less for construction, manufacturing and agriculture .....................................................................................9 Figure 12: Change and absolute number of 19 year old non-graduates .......................9 Figure 13: Change in the non-graduate available workforce 15-39 years old..............9 Figure 14: Tertiary enrollment ratio as a percentage of 19 years old...........................9 Figure 15: China labor productivity growth (%)........................................................10 Figure 16: China export price index (%oya, nsa).......................................................10 Figure 17: China FAI breakdown ..............................................................................11 Figure 18: China ICOR..............................................................................................12 Figure 19: China export prices and US import prices from China.............................13 Figure 20: Export price trends - China, Korea and Taiwan .......................................13 Figure 21: Manufacturing wages relative to industry output .....................................13 Figure 22: Share of US import market.......................................................................14 Figure 23: Industrial enterprise profit margin ............................................................14 Figure 24: China exports by region............................................................................14 Figure 25: Lessons from other countries - Real GDP growth (5-year centered moving average %) vs. adjusted per capita GDP (US$) .........................................................16 Figure 26: Real GDP growth %oya (5-year centered moving average) over time.....17 Figure 27: Relative growth and wealth of provinces in China...................................18 Figure 28: Real GDP growth vs. Average CPI in the previous decades ....................19 Figure 29: Intensity of cement use; per-capita consumption of cement (tonnes) vs. adjusted per-capita nominal GDP ..............................................................................20 Figure 30: Intensity of steel use; per-capita consumption of steel (lbs) vs. adjusted per-capita nominal GDP ............................................................................................21 Figure 31: Per-capita consumption of oil (barrels per day per 1000 population) vs. adjusted per-capita nominal GDP ..............................................................................22 Figure 32: Total energy consumption in China higher than in the US but low at a percapita level; per-capita consumption of primary energy (tonnes of oil equivalent) vs. per adjusted capita nominal GDP...............................................................................23 Figure 33: Mobile subscription per 100 people vs. adjusted per capita nominal GDP ...................................................................................................................................24 Figure 34: China is already the worlds largest car marketbut still low per 1000 people; passenger cars per 1000 people vs. adjusted per capita nominal GDP..........25 Figure 35: Share of global nominal GDP (%) Chinas share is 10% in 2010 and forecast to be 17% in 2020.........................................................................................26
For more on this subject from J.P. Morgans economics team please see: Chinas consumption uptrend and role of labor market, 30 July 2010, Grace Ng et al Chinas export sector copes with rising wages, 4 March 2011, Grace Ng et al (See page 13) Riding on the coattails of Chinas rising labor cost, 25 March 2011, Sin Beng Ong et al
Figure 3: More 19-year-olds in Tertiary Education - Less for construction, manufacturing and agriculture
Millions
30.0 25.0 20.0 15.0 10.0 5.0 0.0 Under-graduates Non-graduates
Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation
Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
Fixed investment Private consumption Total consumption
3
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
Figure 8: Growth in per capita GDP & average national wages (%)
22 19 Per capita GDP Wages
There are no other countries that have achieved the same combination of low inflation and high growth that China had in the 2000s. For the past 30 years the country has developed with an assumption of unlimited labor, notably underemployed agricultural workers.
16 13 10 7 00 01 02 03 04 05 06 07 08 09 10
Investment-led growth in the 2000s Chinas economic development is a souped-up version of the Asian investment led growth model. The contribution of fixed investment to GDP growth surpassed the contribution from real consumption in 2003 (see Figure 7). In 2009 fixed investment contributed 8.6% of China's 9.1% real GDP growth, helping offset the sharp contraction in external demand. In the past decade, as a percentage of nominal GDP fixed investment increased from 34% to 46%. Consumption declined from 62% to 48%; private consumption fell from 46% to 35% (see Figure 9). Financing an investment growth model requires a wealth transfer from households to profits. The subsidy is achieved via low wages, low return on savings and an undervalued currency. The impact of this policy is clear in Figure 10; industrial profits grew at 25% CAGR from 2000-09, more than double the pace of household income growth of 11%. The 12th Five-Year Plan acknowledged the inequality of growth with an aim to balance revenue distribution among enterprises, individuals, central governments and local authorities. The intensity of commodity use increased sharply. Commodity consumption grew in the high teens in the last decade (see Table 2). In 2010, China accounted for over half of the worlds iron ore demand. China cement consumption is remarkable (see Figure 29). China's per capita cement consumption was 1.34tonnes in 2010. Korea in 1997 did reach the same level of per capita cement consumption that China achieved in 2010. But Korean per capita GDP in 1997 (in today's dollars) was four times Chinas current per capita GDP. In 1998 Korea had a current account crisis. Note the trend in Taiwans per capita cement demand. Taiwan property prices peaked in 1994, a year after the peak in cement demand. J.P. Morgans equity strategy team is less optimistic about China commodity demand than the consensus (see page 12). There are numerous reasons discussed below that require a move away from an investment-led growth model.
748%
GDP Government Profits Income
Table 2: China's dominant share of global commodity demand and CAGR 2000-10
China share of global demand (%) Aluminum Nickel Copper Iron ore 13 12 20 15 15 21 16 16 23 18 11 19 26 20 13 21 30 22 15 23 36 26 18 23 40 32 23 26 43 33 23 28 47 39 32 37 60 41 33 37 57 17.5 20.5* 14.6 19.9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CAGR (2000-10)
Source: J.P. Morgan commodities research and Brook Hunt historic. * Nickel demand CAGR is from 2003-10.
Demographic transition China published the results of it 2010 census in April. On 1 November 2010 the total population was 1,339,724,852. The growth from 2000 was just 73.9 million, or a 0.57% CAGR. The growth rate halved compared to the 1990s, which had a CAGR 1.07%. The decline in the fertility rate partly explains the reduction from 3.44 to 3.1 people per household. The number of households was 401.5million. The growth in total population is forecast to slow to 0.3% CAGR in 2010-20. In the 2000s the working age population increased by 12% a CAGR of 1.2%. This is the decade when China's working age population will start to decline. The working age population comprised 69% of the total population in 2010. It grew 12% from 2000 to 2010, a CAGR of 1.2%. According to the US Census, the working age population is expected to contract by 1.8%, or a -0.2% CAGR, this decade (see Table 3). The population under the age of 14 declined by 6.3% to 16.6%. The population is aging rapidly, with 13.3% over 60 years, an increase of 2.9% compared to 2000. The population is ethnically homogeneous, with 91% Han Chinese. The urban and rural split is now 50:50. The urban population is 665.6 million and rural 674.2 million. In 2000 the urban population was 36%. This is low even compared to other emerging markets (see Table 5). Chinas urbanization rate was a 3.8% CAGR in the last decade. This was the fastest rate of urbanization across EM and DM (see Table 4). Each year China added 21 million to its urban population. It is assumed that the urbanization rate will slow to 2.1% during this decade. The population is shifting, with an 81% increase in the population living in a different location than their town of registration. This growth rate may be exaggerated by a new methodology for counting unregistered migrant labor in the 2010 census. The shift is to the wealthy Eastern region. The peak in Chinas working age population is well known. It is the rate of urbanisation that is debatable. In the past decade it exceeded estimates. There is no clear relationship between per-capita GDP and the urbanization rate, and there is a large spread of urbanization rates across developed and emerging economies.
Source: US Census.
Source: United Nations, World Urbanization Prospects: The 2009 Revision Population Database.
Source: United Nations, World Urbanization Prospects: The 2009 Revision Population Database. Table sorted by urban population % of total in 2010.
Table 6: Sensitivity of potential GDP calculation to productivity using the growth in working age population
Parameters Working age pop growth Productivity growth Adjustment factor Potential GDP
Source: J.P. Morgan calculation
Table 7: Sensitivity of potential GDP calculation to productivity using the growth in urban working age population
Parameters Urban working age pop growth Productivity growth Adjustment factor Potential GDP
Source: J.P. Morgan calculation
2. Low cost of capital: The 12-month best lending rate is 6.31%. A real rate of 2.3% assuming the new CPI target of 4%. The discount to nominal GDP growth target is 3.7%. The low cost of capital relative to growth lowers the hurdle rate for productive capex. 3. Economies of scale and clustering: The large scale of manufacturing facilities in China permits the investment in R&D for customized automation. 4. Infrastructure: Huge investment in infrastructure increases logistic efficiency. Shorter delivery times and superior inventory management allow for premium pricing. The non-graduate labor shortage A key data point from the November 2010 census was: Compared with the 2000 population census, following changes took place in the number of people with various educational attainments of every 100,000 people: number of people with university education increased from 3611 to 8930; number of people with senior secondary education increased from 11146 to 14032; the number of people with junior secondary education increased from 33961 to 38788; and the number of people with a primary education decreased from 35701 to 26779. (Source: National Bureau of Statistics press release on Major Figures of the 2010 National Population Census). An increase from 3.6% to 8.9% of the population with a university degree means that the number of graduates in China increased by 73.9 million in the past decade. This figure is 116% higher than the Ministry of Education Data in CEIC. Based on the Ministry of Education website the discrepancy may be partly explained by the 1.9 million graduates in adult higher education institutes and the 1 million web-based graduates (see Table 11, http://www.moe.edu.cn/publicfiles/business/htmlfiles/mo e/s4969/201012/113484.html). Based on Ministry of Education press release, 180,000 students went abroad to study. Note that new entrants in 2010 were 8.4 million.
Table 8: Calculation of the change in the number of graduates in China 2000 to 2010 based on Census data
Year 2000 2010 Change Ratio 3.61% 8.93% 5.32% Population 1,265,824,852 1,339,724,852 73,900,000 Graduates 45,708,935 119,637,429 73,928,494
swing of 130 million will add to wage inflation in manufacturing and construction. We believe that this is the most important driver of the need for China to reduce its fixed asset investment. It reverses the commonly held belief that China must have growth above 8% to generate sufficient jobs.
Table 9: Key population statistics
Size (million) Population Working age population Over 60 population Over 60 population (%) Urban population (%) Urban population Household size Urban households 1990 1,148 724 63 5% 26% 299 3.7 81 2000 1,264 819 86 7% 36% 455 3.4 132 2010 1,330 921 115 9% 50% 665 3.1 215 2020 1,385 905 172 12% 62% 851 3.1 275 2030 1,391 830 239 17% 68% 950 3.1 306
We forecast a 90 million decline in the non-graduate working-age population. In the 2000s the non-graduate working age population expanded by 30 million. This
8
130 million decline in manual workforce We use a number of data sources and assumptions to calculate the change in the non-graduate workforce. As noted above the November 2010 Census highlighted a 74 million increase in graduates in China. This is higher than the CEIC data from the Ministry of Education. Combining both regular and adult data 8.4 million new graduates entered university in 2010. The enrolment-tograduate ratio is 3.5 (calculated from Ministry of Education website). We assume that the number of new entrants remains at 8.4 million through to 2049; this is conservative. The available non-graduate workforce aged 15-39 is calculated excluding cumulative graduate (of that age group) and those enrolled in university. The Chinese manufacturing sector has historically used young migrant labor. The combination of a shrinking pool of 15-39 years old and the upgrading of their skill set argues for a sharp decline in the workforce willing to work in manufacturing and construction. The challenge for China is generating jobs for the eight million graduates entering the work force each year. Graduate unemployment is already a source of concern. It is arguably harder for government policy to drive service sector employment than manual and semiskilled through stimulus programs.
Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation
Figure 13: Change in the non-graduate available workforce 15-39 years old
%oya, Millions
3% 2% 1% 0% -1% -2% -3% -4% -5% -6% %oya Number 600 500 400 300 200 100 0
Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation
Figure 11: More 19 years old in Tertiary Education - Less for construction, manufacturing and agriculture
Millions
30.0 25.0 20.0 15.0 10.0 5.0 0.0 Under-graduates Non-graduates
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation
Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
9
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
Net external demand a drag on growth? FT Confidential (7 April 2011) forecast 20-30% wage inflation for the 166 million migrant workers. In the same report Hong Kong Footwear Makers Association in Dongguan reported a 5% drop in orders post a margin protecting 15% increase in prices. Textile and footwear orders are shifting to Bangladesh, India and Vietnam. Minimum wages in India and Vietnam are US$96 and US$62 per month compares to China's lowest minimum wage in the Western provinces of US$130 (RMB850). The minimum wage in Shenzhen, Guangdong is US$200 (Rmb1320). Note that China already has a significant share in high value added exports including electronics and machinery. It is reasonable to assume that Chinas trade surplus narrows as it loses market share in low-value-added industry. This is potentially a win-win situation with China replacing low-value jobs with high-value service jobs, while less developed countries with rapidly growing working age populations win market share.
Changing composition of growth Below we explore the potential magnitude of deceleration in fixed investment growth if real GDP growth slows to a base case of 7% and the drivers of growth shift from fixed investment to consumption. Assumptions: Real GDP CAGR (2010-20): 7% Consumption, fixed investment and net external demand as a share of GDP return to 2000 levels (see Table 13).
Results: Fixed investment CAGR decelerates from 12.7% to 4.7% (2000-10). Consumption CAGR increases from 8.5% to 8.9% (2000-10). Private consumption CAGR increases from 7.5% to 10%. Net exports CAGR decelerates from 11% to 6% (2000-10)
Net external demand contributed an average 0.7% to real GDP growth in the last decade. In this decade if Chinese wage growth exceeds other EMs then net external demand may be negative.
Table 13: Potential consumption and investment CAGR (2010-20)
% Share of GDP in 2000 Share of GDP in 2010 Assumed share in 2020 CAGR (00-10) CAGR forecast (10-20) Real GDP Consn 56 47 56 8.5 8.9 Fixed Inv 38 47 38 12.7 4.7 Ext Dd 5 5 5 11.4 6.1
10.5 7
10
Cheap money and high ICOR The Incremental Capital Output Ratio is domestic investments divided by the change in real GDP. Chinas ICOR has been rising in the last three years. It has averaged 4.0 in the high growth period since 1979. This is higher than the ICOR in Korea, Taiwan and Japan during their respective high growth periods (See Table 14). Twice EM fixed investment to GDP ratio China fixed investment to GDP ratio is twice the EM average (see Table 15). Excess savings help fund this investment via the banking. The rapid rise in profits relative to GDP (Figure 10) provided the cash for reinvestment. As household income to GDP rises there will be a corresponding decline in profits to GDP. The low return on savings is a drag on consumption. Individuals save to meet future liabilities. The largest liability is their pension. Today bank deposit rates are more than 10% lower than nominal wage growth. The result is that individuals are forced to save larger and larger portion of their income in order to have sufficient capital to retire. It may be counterintuitive, but China needs higher interest rates to boost consumption. Its investment in human capital permits China to break away from its investment-led growth model. The risk is that the ministries and industries which thrive with investments are unwilling to reduce their share of GDP. Potential risks of this are poor allocation of capital and inflation.
Table 14: Real GDP growth, ICOR and average CPI during high growth periods
High growth period 1979-2010 1965-1990 1965-1990 1956-1970 1991-2010 Avg Real GDP growth % 9.9 8.8 8.9 9.9 6.9 Average ICOR 4.0 3.3 2.0 2.6 4.0 Average Annual CPI % 6.02 6.36 11.62 9.12 6.35
State Ow ned
Source: J.P. Morgan economics: Note: In Figure 9: From consumption to investment nominal rather real GDP is used to calculate the ratio.
11
Impact on commodity demand If fixed asset investment real growth slows from 12.7% to 4.7% in 2010s then Chinas demand for commodities will slow. In Table 16 we assume 4.7% growth in Chinas commodity demand. The difference in global demand, between the J.P. Morgans base case and the rebalance scenario in 2015, ranges from -12% (aluminium) to -3% (iron ore).
Figure 18: China ICOR
8 6 4 2 0 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Table 16: How slower investment could reduce commodity demand base case and 4.8% growth
2000 2010 2015e CAGR (2000-10) China CAGR (201015) base case Total CAGR (201015) base case Base case 2015 total volume Rebalance scenario volume Reduction Aluminium 13 41 49 17.5 10.8 7.0 58209 51360 -12% Nickel 33 41 20.5 10.4 5.6 1979 1791 -9% Copper 12 37 42 14.6 6.2 4.0 23359 22735 -3% Iron ore 20 57 57 19.9 5.8 5.8 2636 2567 -3%
Source: J.P. Morgan estimates, J.P. Morgan EM equity strategy team calculations
12
Export sector manages to move up value-added chain amid rising costs, with profit margins on the rise. As part of the growing global attention being paid to Chinas inflation, there is increasing concern that domestic inflation is being transmitted abroad through rising export prices. The latest US data showed that consumer goods import prices have begun to turn up on the back of rising prices in China. The broader worry is that overheating risks in the EM world will place significant upward pressure on DM consumer goods prices. Alternatively, for Chinas trade sector, the worry is that, faced with upward pressure on domestic production costs, which has become a more dominant concern than the gradual appreciation of the CNY/USD exchange rate, Chinese exporters may begin to lose export market share in the global economy. Chinas inflation: domestic vs. trade sector For Chinas inflation, we have highlighted that, in addition to near-term pressure from rising food prices, the recent upward trend in nonfood inflation has been notable as well: the nonfood CPI rose 2.6%oya in January, the fastest rise in 13 years. Within the nonfood CPI, however, it is the domestic service sector, in particular the housing component, that has been rising the fastest, with the housing CPI up 6.8%oya in January. Meanwhile, our estimate for the major consumer goods CPI component, which reflects the pricing trend in the tradables sector and is more relevant to Chinas export prices, rose a modest 0.5%oya in January, gradually emerging from the prevalent deflationary trend seen in recent years. Along with that, Chinas export price index in yuan terms (that is, before reflecting the currency effect) rose 4.7%oya 3mma by January. While the price increase in the tradable goods sector has been modest compared to overall domestic service prices, reflecting persistent, entrenched excess capacity in a number of manufacturing industries over the years, the general costs of production in Chinas manufacturing sector, including wages, have been rising. We constructed a measure of wage cost pressure by dividing
This ratio should reflect the trend in labor cost per unit of secondary industry output (dominated by manufacturing). Interestingly, while this measure was relatively stable during 2005-08 (except during the financial crisis period, when it fell somewhat), the index started to pick up
13
rather notably since early 2009. This trend to some extent reflects the gradual rise in overall labor cost in the manufacturing sector during the past two years. Regarding the implications for Chinas export prices, broadly speaking, the recent pace of gain in Chinas export prices has been generally in line with that in other major exporters in EM Asia such as Taiwan and Korea, as improving global demand allows Asian exporters to lift prices at a gradual pace.As such, the pace of gain in US$ export prices in over-year-ago terms is approaching the recent peak seen during 2H07-1H08. Meanwhile, this time the rise in Chinas export prices has been largely driven by the gradual rise in domestic prices, while in 2007-08 the notable appreciation in the CNY/USD exchange rate played an important role in the rise in Chinas US$ export prices (CNY/USD appreciated by about 10% between mid-2007 and mid-2008). This suggests that, in addition to the gradual, moderate rise in Chinas tradable goods prices, as the pace of CNY appreciation picks up further (we expect CNY/USD to rise about 5% this year), along with expected solid global demand, there could be more upward pressure on Chinas export prices (in US$ terms). Exporters adapting to rising wages The encouraging news is that despite growing concerns over rising production costs (hence the pressure to raise export prices), Chinas share of the US (and global) market, which had expanded significantly over the past decade, remained at an elevated level through 2010. In addition, profit margins for Chinas industrial enterprises, which suffered notably during the global financial crisis, have rebounded swiftly during the past two years. Indeed, profit margins for the export-related industrial enterprises in particular have advanced notably, significantly exceeding the average pre-crisis level. The fact that Chinas export sector is holding up well, despite growing cost concerns, has come on the back of steady industrial upgrading and moving up the value-added chain. Indeed, while the share of Chinas exports of lower end consumer goods (such as textiles and clothing) in the global market seems to be gradually peaking, Chinas share of the global market in many higher valueadded industries, such as machinery and high-tech sectors, has continued to expand in recent years. Another way Chinese exporters have attempted to manage production costs has been to move inland, where costs of labor and land are generally lower than in the coastal area. Indeed, a growing number of large-scale
US, European, and Asian manufacturers have moved part of their coastal production lines to the central and western parts of the country, with migration speeding up considerably over the past two years. As the Chinese government is set to speed up the urbanization process and infrastructure spending in inland regions under the 12th five-year plan, the improvement in the transportation network should further encourage manufacturers to move inland.
Figure 22: Share of US import market
% share, 12-month moving average 20 18 16 14 12 10 8 6 98 00 02 04 06 08 10 12 Japan EM Asia (ex-China) China Mexico
2
03 04 05 06 07 08 09 10 11
Source: J.P. Morgan economics
14
2000 1,264 819 86 7% 36% 455 3.4 132 2000 115 96 23 156 -0.26 52
2010 1,330 921 115 9% 50% 665 3.1 215 2010 67 102 29 14% 210 -0.34 82 2010 0.5% 1.2% 2.9% 3.9% -1.0% 5.0% 2010 6.7 10.2 2.9 21.0 8.2 2010 1,330 921 8.9% 118.8 802 73 28 160.3% 3.7%
2020 1,385 905 172 12% 62% 851 3.1 275 2020 54 -16 57 12% 186 0.00 60 2020 0.4% -0.2% 4.1% 2.5% 0.0% 2.5% 2020 5.4 -1.6 5.7 18.6 6.0 2020 1,385 905 14.0% 193.8 711 75 -91 63.1% -11.4%
2030 1,391 830 239 17% 68% 950 3.1 306 2030 7 -74 67 7% 98 0.00 32 2030 0.1% -0.9% 3.3% 1.1% 0.0% 1.1% 2030 0.7 -7.4 6.7 9.8 3.2 2030 1,391 830 19.3% 268.8 562 75 -149 38.7% -21.0%
2040 1,359 766 327 24% 76% 1,029 3.1 332 2040 -33 -64 88 8% 80 0.00 26 2040 -0.2% -0.8% 3.2% 0.8% 0.0% 0.8% 2040 -3.3 -6.4 8.8 8.0 2.6 2040 1,359 766 25.3% 343.8 422 75 -139 27.9% -24.8%
1990
2000 1.0% 1.2% 3.2% 4.3% -0.7% 5.1% 2000 11.5 9.6 2.3 15.6 5.2 2000 1,264 819 3.6% 45.6 774 11 84 32.4% 12.2%
1990
15
Methodology 1. We adjust per capita GDP to todays US$. We do this by inflating the historical per capita GDP by current deflator and converting to US$ using current exchange rate 2. The centered moving average is calculated as the average of current year, previous two years and next two years real GDP growth
Figure 25: Lessons from other countries - Real GDP growth (5-year centered moving average %) vs. adjusted per capita GDP (US$)
14
Singapore (1960-2010)
12
10
40000
50000
16
Figure 26: Real GDP growth %oya (five-year centered moving average) over time
US China
Singapore
14
12
10
-2 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: J.P. Morgan economics
17
Heilongjiang
Hainan Qinghai Sichuan Inner Mongolia Hubei Hunan Anhui Shaanxi Zhejiang Gansu Xinjiang Beijing Shanghai
Jilin Inner Mongolia Liaoning Xinjiang Beijing Tianjin Hebei Ningxia Shanxi Shandong Qinghai Gansu Henan Shaanxi Hubei Chongqing Hunan Guizhou Yunnan Jiangxi Fujian Jiangsu Anhui Shanghai Zhejiang
Tibet Sichuan GDP per capital (RMB) 60,000 80,000 40,000 60,000 20,000 40,000 0 20,000
Source: CEIC, J.P. Morgans Hands of China Team
Guangxi Guangdong
Hainan
18
Figure 28: Real GDP growth vs. Average CPI in the previous decades
Real GDP grow th % 12 China (2001 - 2010) China (1991 - 2001)
10
0 -1 1 3 5 7 9 Av erage CPI % 11 13 15 17 19
19
Figure 29: Intensity of cement use; per-capita consumption of cement (tonnes) vs. adjusted per-capita nominal GDP
Cement consumption per capita (tonnes) 1.4 China 2010 E 1993: per capita cement consumption peaked in Taiwan 1.2 China 2009
Russia (1991-2009E)
Brazil (1985-2009E) India (1985-2009E) China (1985-2010E) US (1930-2008) UK (1985-2009E) Germany (1985-2009E) Japan (1985-2009E) Taiwan (1985-2009)
Japan 2009E
0.6 Russia 2009E 0.4 Mexico 2009E Taiwan 2009 Germany 2009E
0.2 Brazil 2009E India 2009E 0.0 0 6000 12000 18000 24000 30000 GDP per capita (USD) 36000 42000 48000 UK 2009E US 2008
Source: US Geological Survey and J.P. Morgan estimates. Note: The GDP per capita is restated for todays dollars by adjusting the deflator series.
20
Figure 30: Intensity of steel use; per-capita consumption of steel (lbs) vs. adjusted per-capita nominal GDP
Per capita consumption of steel (lbs) 3,000 1993: per capita steel consumption peaked in Taiwan
South Korea (1970 - 2009E) United States (1950 - 2009E)
Taiwan (1977 - 2009E) Japan (1956 - 2009E) Germany (1968 - 2009E) China (1983 - 2009E)
2,000
S. Korea 2009E
1,500
Taiwan 2009E
Japan 2009E
India 2009E 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
21
Figure 31: Per-capita consumption of oil (barrels per day per 1000 population) vs. adjusted per-capita nominal GDP
Barrels per day per 1000 population 80
Russia (1991-2009) Brazil (1982-2009) India (1965-2009) China (1978-2009) US (1965-2009) UK (1965-2009) Germany (1968-2009) Japan (1965-2009) Taiwan (1965-2009) South Korea (1965-2009) South Africa (1965-2009)
60
S. Korea 2009
US 2009
40
Russia 2009
20
0 0 6000
22
Figure 32: Total energy consumption in China higher than in the US but low at a per-capita level; per-capita consumption of primary energy (tonnes of oil equivalent) vs. per adjusted capita nominal GDP
energy consumed per capita (tonnes of oil equivalent) 9
Brazil (1982-2009) India (1965-2009) China (1978-2009) South Africa (1965-2009) US (1965-2009) UK (1965-2009) Germany (1968-2009) Japan (1965-2009) Taiwan (1965-2009) South Korea (1965-2009) Russia (1991-2009)
US 2009
S. Korea 2009
Russia 2009
Taiwan 2009
Japan 2009
Germany 2009
2
UK 2009
Brazil 2009
12000
18000
24000
30000
36000
42000
48000
23
Figure 33: Mobile subscription per 100 people vs. adjusted per capita nominal GDP
Mobile subscription per 100 people 180 Russia 2009 160 Taiwan 2009 140 UK 2009 120 South Korea 2009 100 US 2009 80 India 2009 Brazil 2009 60
US (1989 - 2009) UK (1989 - 2009) Brazil (1992 - 2009) India (1995 - 2009) China (1992 - 2009) South Korea (1989 - 2009) Taiwan (1989 - 2009) Russia (1993 - 2009)
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China 2009
20
0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 GDP per capita (USD)
Source: Bloomberg. Note: Subscriber data is not adjusted for individuals using multiple SIM cards
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Figure 34: China is already the worlds largest car marketbut still low per 1000 people; passenger cars per 1000 people vs. adjusted per capita nominal GDP
Passenger cars per 1000 population 900
US (1930-2007) Germany (1995-2006) Italy (1995-2006)
US 2007
800
UK (1995-2006) Japan (1970-2008) South Korea (1970-2008) India (2001-2008) China (1991-2008)
700
600
500
400
UK 2006
Korea 2008
300
200
China 2014 E
Japan 2008
100
China 2008
40000
50000
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Figure 35: Share of global nominal GDP (%) Chinas share is 10% in 2010 and forecast to be 17% in 2020
100%
ROW
90% 80%
Other EM Japan
Developed Europe
India Russia
Source: J.P. Morgan economics, IMF. Note: Regions follow MSCI country definitions. The projections assume nominal GDP growth at potential real GDP growth and central banks inflation target. To compute FX for periods beyond 2011, we assume the normalization of REER over the forecasted period.
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