The Global Economy and China

Tarhan Feyzioglu
Resident Representative
International Monetary Fund

The views expressed in this presentation are those of the author and should not be attributed
to the IMF, its Executive Board, or its management.
March 2010
The Global Economy

March 2010
 Across the globe, growth is returning and
unemployment has stopped rising…
15 9.0
Real GDP Growth Unemployment Rate 1/
(Percent; quarter on quarter annualized) (Percent) 8.5
10 8.0

7.5
5
7.0

6.5
0
6.0
World
5.5
-5 Emerging World
Emerging 2/ 5.0
Industrial
Industrial
-10 4.5
04 05 06 07 08 09 04 05 06 07 08 09
 …with production and trade seeing a recovery
since bottoming out in late 2009.
25 70
20
Industrial Production 70
Merchandise Exports
(Percent change; annualized 3mma) (Percent change; annualized 3mma) 50
15
World Emerging
10 Global IP 60 30
5
10
0 50
-5
-10
Global Manf. PMI Advanced
-10 40
(sa, 50+=Expansion; RHS)
-15 -30

-20 30
-50
-25

-30 20 -70
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Systemic risks have eased largely in response to
forceful policy efforts.
225 650
CDS Spreads for High-Grade Financials
200
(basis points) Lehman Bros. 550
175 Bear Stearns Bankruptcy
collapse 450
150

125 350

100 250
Europe
75 US (RHS)
150
50

50
25

0 -50
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
 While bank credit remains weak…
Bank Credit to Private Sector Bank Lending Surveys
(percent change year-on-year) (percent)
20 -40
15 -20
0
10
20
5
40
0 60
United States United States
-5 Euro Area Euro Area
80 United Kingdom
United Kingdom
-10 100
Mar-97

Mar-99

Mar-01

Mar-03

Mar-05

Mar-07

Mar-09
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
 …inflows to EM are strong.

 Push Factors Net Flows into Dedicated EM Funds

(billions of US dollars)
 Return of risk appetite 40
30 Debt Equity
 Low G-4 interest rates,
though little evidence of 20
leverage 10
0
 Pull Factors
-10
 Better growth prospects, -20
particularly in Asia -30
 Expectations of currency
Q107

Q307

Q108

Q308

Q109

Q309
appreciation
 The Global Economy is Set to Expand.
2010 2011
World Economic Consensus World Economic Consensus
Outlook Forecasts 1/ Outlook Forecasts 1/
World 3.9 4.0 4.3 4.2
Advanced Economies 2.1 … 2.4 …
United States 2.7 2.9 2.4 3.1
Euro area 1.0 1.3 1.6 1.6
Japan 1.7 1.3 2.2 1.5
Emerging and Developing
Economies 6.0 … 6.3 …
China 10.0 9.7 9.7 9.1
India 7.7 7.8 7.8 7.9
Brazil 4.7 5.4 3.7 4.5
Russia 3.6 4.1 3.4 4.5
1/ Consensus forecasts, Asia Pacific consensus forecasts (Jan. 11, 2010); Latin American consensus forecasts (Jan. 18, 2010); and Eastern European consensus forecasts (Jan. 18, 2010). India consensus forecast on
fiscal year basis.
Sluggish demand recovery and commodity prices
should keep inflation in check.
10
Global Headline Inflation
8 (Percent change from a year earlier)

6 Emerging

4
World
2 Advanced

0
-2
02 03 04 05 06 07 08 09 10
 This is a multispeed world.
Most advanced economies and
some emerging markets
 Slower growth
 Banks facing credit losses and
funding challenges
 Only limited exit in 2010
 Systemic risks lower on transfer
of risks to public balance sheets
 Expansion of sovereign debt an
increasing concern
Most emerging markets and some
advanced economies
 More solid growth
 Banks healthier
 Have already begun to tighten
or expected to tighten soon
 Systemic risks lower as growth
prospects improve
 Inflows and risk of asset price
bubbles
 Outlook subject to risks in both directions.

 Upside Risks:
 Stronger-than-expected improvement in financial market sentiment prompting a
surge in capital flows, trade, and private demand.
 New policy initiatives and additional stimulus aimed at reducing unemployment.
 Downside Risks:
 Premature and incoherent exit from supportive policies and a lack of progress in
bank restructuring and recapitalization.
 Weak household spending due to impaired financial systems, weak housing
markets, and rising unemployment.
 Rising fiscal sustainability concerns unsettle financial markets and raise
borrowing costs.
China

March 2010
 There are clear signs of recovery.

 The authorities acted early and decisively to counter the negative

impact of the global financial crisis.

 The economy grew 8.7 percent in 2009.

 Inflation stood at -0.7 percent in 2009.

 Investment growth is strong.

 Real estate investment 50.0 Share in FAI Fixed asset investment

recovered. The government 2009 growth

encourages more low-income 40.0

housing.
30.0

 Infrastructure investment
20.0
increased sharply and will
remain at this high level in 2010. 10.0

 Manufacturing investment grew 0.0

Manufacturing Infrastructure Real estate Other
rapidly.
 Consumption growth is strong.

 Labor markets recovered. 1 25

0.9
20
 Wage growth is strong,
reflecting rapid productivity 0.8

growth. 15
0.7

10
0.6
 The government is taking Labor demand-supply ratio in city labor markets (LHS)
Wage growth (real, ytd, in percent) (RHS)
important steps to boost 0.5 5
consumption. Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
GDP growth is expected to remain robust this year.

2008 2009 2010

GDP 9.0 8.7 10.0
Contrib.
C 4.1 4.6 …
I 4.1 8.0 …
NX 0.8 -3.9 …

Inflation 5.9 1.9 3.1

 Reorienting the economy toward consumption
remains a key challenge.
There are limits to export growth. Share of services needs to rise.
14 14
Market Share in Selected Economies Since Growth Take Off Benchmark From International Experience
0.8 0.8

Share of Employment in Service Sector

12 Japan (1955–2008) 12
Korea (1961–2008)
China (1979–2008) Japan
10 NIEs excl. Korea (1965–2008) 10
0.6 0.6
China forecast (2009–14)
8 8
Korea
6 6 0.4 0.4
China

4 4
0.2 0.2
2 2

0 0 0.0 0.0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 0 10 20 30 40
Per Capita Income (US$ thousands, PPP)
What does this all mean for China’s iron ore imports?

70 60
Iron ore imports and domestic steel production Steel production and downstreams
60 (in million tons) 50 (y/y growth, in percent)

Imports of Iron Ore 40

50
Crude Steel Production
30
40
20
30
10
20
0
Equipment Manufacturing Output
10 -10 Floor Space under Construction
Crude Steel Production
0 -20
1996

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Thank you.

March 2010