Blogg

 

Source: Troika, State Statistics Service
 
Now, things have changed since 2004 when these overly bearish forecasts were made. An optimistic forecast made in 2010 suggests that the population will be around 147mn in 2025, which is roughly the same as in 2000. These long-term forecasts are very uncertain and it is fair to argue that demographics remains a problem in Russia but the negative trend has been broken and there are reasons to be optimistic.
 
Life expectancy is still not great in Russia but has increased from the record low noted in the early 00s. It has on average increased by 5 years to 63 for men and 75 for women.   
 

Source: Troika, State Statistics Service
 
The Russian population is still shrinking but the rate of decline has decelerated from more than 0.5% per year to around 0.1%. The reason is more births and that Russians are living longer. The Russian population actually grew by 100 000 people in 2011 with the difference being made up of official net (labor) immigration.  

Source: Troika, State Statistics Service

The positive changes have already caused the economically active population to increase, after a slump in the 00s following the negative demographics in the 90s, and this trend is expected to continue.
 

Source: Troika, State Statistics Service
 

Russia has not yet overcome its demographic challenge but it is fair to argue that things are going in the right direction. The underlying reason behind the positive development is probably that the standard of living has improved dramatically since the early 90s and that Russians have a more positive outlook today. The 90s was very hard on Russia while the 00s has been very good from an economic perspective. The Russian economy is ten times larger today compared with 2000 and the country has moved up significantly on various socio-economic indices while poverty has fallen sharply. UNDP’s broad human development index and the sub index on health capture the progress quite well.

Source: UNDP

The Asian Tiger has good Japanese cars, less smokers, fewer bikes, and all motorbikers wearing a helmet on, fast (and totally free) Internet. Besides the construction of the massive new highway from the airport to Taipei, there is little building activity to be noticed on an island where the major infrastructures have been built long time ago at the time of the Japanese occupation during the first half of the 20th century as well as in the 50s when Chiang Kai-Shek launched some strategic projects to give a job to thousands of its followers from Mainland China, or thoroughly rebuilt after each earthquake and typhoon that regularly plague the island.

The trains are not modern, but work well. The roads are not brand new, but well-maintained. I could hardly see any significant residential project being built in Taipei or Taichung (another major city in the middle of the island). Except in the more industrial area of Taipei, I could also enjoy some blue sky and fresh air, which sadly are a rare thing in China, and in general a much “greener” environment where you see Taiwanese doing sports, wearing masks not to contaminate people around when they have a cold and sneeze (also something one would dearly wish for in China!) and focusing on organic food.

Caption: Chiang Kai Shek’s favorite lake, the Ri Yue Tan (Sun Moon Lake) looks like Alpine scenery

Some Taiwanese sites are so safe, clean and nice that one could think it is Japan or Switzerland. But the culture and traditions are so definitely Chinese. Moreover, learning about the recent history of Taiwan is like reading a captivating book about China’s history, political, economic and diplomatic development during the last 60 years.
The visit of the amazing National Palace Museum in Taipei that exposes the finest part of the collection of the Chinese dynasties that have been created by great masters during thousands of years gives also another angle on the level of sophistication the Chinese civilization had reached such a long time before the Western civilization did.

Taiwan has a fascinating history; and this history could be analyzed following the different foreign nations that controlled it (the Netherlands, Spain, France, Japan, China) or dissecting its past growth drivers. There was a time when camphor trees were the largest export product of the island, there was also a time when Taiwan had one of the world’ biggest production of sugar and tea, then when gold was discovered in 1890 in the north by railway workers cleaning their rice bowl in the river and the gold rush had a big impact on the economy until the second World War.
WW2 and Chiang Kai Shek’s arrival to Taipei together with 2 million people, including members of the business elite of China, clearly transformed the island into a military-focused island with martial law until 1987. Taiwan however became one of the Asian Tigers demonstrating outstanding economic growth in the 70s and 80s, largely based on ultra-competitive exports of textile, then electronics to Europe and to the US.

Taiwan has its own challenges. Nowadays the island is experiencing annual GDP growth of 3.5%-4%, which many could envy but which seems very shy in comparison with the 8-10% of its giant neighbor.
Mainland China is not only growing much faster but it is also taking jobs away (as Taiwanese workers’ monthly wages are what Chinese workers earn per year), taking FDIs away (many multinationals prefer to establish themselves on the other side of the strait as despite an improvement of the relations between the two countries there are still tensions in the air and trade restrictions) and also brains away.

Thousands of Taiwanese white-collars now work in China, I’ve met quite a few in Shanghai. Usually these are people that have studied in the US and decided to come to China, which offers more managerial and entrepreneurship opportunities. Another cloud in the horizon for Taiwan is the changes in the tech space where the local extremely important PC manufacturing industry might be threatened if they fail the technological shift.
But there are opportunities as well, of course.

First, a 4% GDP growth is still offering opportunities and domestic demand has improved. Chinese tourists – first allowed in groups in 2009 now even individual travelers since 2011 - are still subject to a daily arrival quota, but are very visible and active in the shopping centers and hotels. When they stop being obsessed about shopping these tourists will also certainly start to appreciate the beautiful natural sites of the island. The Taiwanese industry’s high-quality qualified workforce is also attractive as there is a lack of such in mainland China, often cited as an obstacle on China’s path to climb the value chain.

Several Taiwanese companies have been very successful doing business in China, for instance some retailers. The bio-tech sector is also part of the strategic agenda in Taipei. Interestingly, the great migration in 1949 of 2 million followers of Chiang-Kai-Shek from all over China means that the island’s genetic base is extremely broad hence suitable for clinical testing of drugs for the Chinese population.

The genetic base might be very broad but Taiwan itself gave the impression of having a homogeneous development. Of course, the countryside seems poorer than the cities but the contrast is not as huge as in China; and the cities themselves seem to have reached comparable levels of development. The economy is maturing, what will be the next impetus for growth? This week, Taiwan announced a liberalization of the restrictions for Chinese capital inflow, expanding the list of sectors and lifting the current 10% cap to 50% for key sectors. That is expected to boost the economy thanks to more M&A and FDI. Further along the line another trigger could well be the long-awaited and much-discussed ASEAN Free Trade Area, AFTA that will be implemented in 2015, triggering more trade in between Southeast Asian Nations.

The answer to the last question is no, even if Zhou Xiaochuan, the governor of People’s Bank of China, said that the market is playing a bigger role in deciding the exchange rate of the yuan and that the bank’s long term goal is to build a more market-based foreign exchange system. 

He also said that the yuan is now getting closer to its fair value against foreign currencies, something many commentators immediately linked to the record high trade surplus in February (and probably also made the Conservative president candidates in the US upset as they often talk about the Chinese currency manipulation in their campaigns).

But what does the record high trade deficit in February really mean? First of all, it is important to remember that as the Chinese New Year took place in January this year and in February last year, the year-on-year comparisons of the statistics for both January and February are skewed by seasonal factors.

For example, during Chinese New Year, most factories close down and both exports and imports are hence lower. After Chinese New Year, the factories usually import commodities, machinery, and parts needed for this year’s production, which makes imports go up.

This is exactly what happened in February, and as there were uncertainties for the new year in early January, many orders for commodities and parts were likely cancelled, which made imports fall -15.3% in January, only to surge to almost 40% in February.

If we instead study the combined monthly trade statistics of January and February, we see that the trade deficit is indeed there, but only USD 4.25 billion. Also, if comparing year-on-year, we can see that exports were up 6.9% in January and February and imports up with 7.7% compared with January and February 2011. Of course, it is easy to put all the blame on the Chinese New Year, but it does play a major role in the statistics these two months.

What is interesting to note is that as the Production Manager Index, PMI, is actually increasing, from 50.5 in January to 51 in February, this shows that despite a slowdown of trade, which is a fact judging from the trade statistics, Chinese managers still remains quite optimistic regarding its economic growth and orders.

But what about the Chinese yuan? When will it be free floating? Our view is that governor Zhou is showing the road, which is long to go before the Chinese yuan is totally free floating. As China has strict capital controls today, it will be hard for the nation to change this policy quickly without getting disruptions in capital in- and outflows.

We believe that China will continue to let its currency appreciate slowly. It could be that the Chinese yuan is getting closer to its equilibrium now, which would mean a slower appreciation. We also believe that the record high trade surplus in February was partly seasonal, but also affected by the slowing exports to Europe, in February exports to Europe declined with 1.1%, while imports from Europe remained stable.

According to the World Bank, China now stands at a turning point after 30 years of economic reforms and rapid growth and needs new reforms in order to sustain its growth.

The changes suggested are to make structural reforms to strengthen the market economy in China including making state-owned enterprises more market oriented; increase the speed of innovation; develop a greener economy; provide social security for everybody; strengthen the fiscal system; and improve global economic relations. If China does not reform its economy the country risks to half its economic growth the next twenty years, according to the World Bank.

That China stands at a cross road and has to decide how to continue its way to growth is well known and only a year ago the 12th Five Year Plan (link to previous blog) outlined many ways on how to proceed. When it comes to reforms in China it is important to remember that reforms are usually gradual and do not happen overnight.

Often reforms are tested in small scale and if they are successful they will be implemented in all of China. This is how the reforms that started in 1979 began for example opening up special economic zones in some restricted areas for foreign trade. This is how a poor fishing village turned into a huge city like Shenzhen.

Another example is the household responsibility system, which is often put forward as the first and totally new step in the economic reforms as it revolutionized the collectivized countryside and improved productivity dramatically by allowing farmers to lease land and hold private plots rather than work in collective production teams.

This system was implemented on large scale in 1979, but had already been in use before: first in the late 1950s in areas resisting collectivization and then in early 1978 it reappeared again and set precedence in Anhui province to improve bad harvests.

Shenzhen has in 30 years become a major financial and business center. Here a picture taken today of Futian district, home to many headquarters and public buildings.

Today, we can see that China is experimenting in similar ways with potential reforms in different areas. For example, Guangdong province, together with some other provinces, is set to pursue a reform trying to scale down the official bureaucracy to create “a lean state and a great society” by crushing the so called iron rice bowl of life long bureaucratic employment. Already, this has been tried in Shenzhen successfully for two years.

Another reform that could be coming up is the progressive liberalization of the financial flows. The other day, the People’s Bank of China published a report calling for opening up of the capital account, and a rumor later refuted was spread that Shenzhen would allow people to transfer their money relatively freely to Hong Kong. Still, the debate on the issue means that something is going on and will happen.

Another example is a leak from a government official at the Ministry of Industry and Information Technology that electricity prices are to be adjusted for certain energy consuming industries in China. This is most likely another well needed reform that is starting to be implemented.

There are many challenges ahead for the Chinese economy if it is to continue to grow rapidly and the largest obstacles are vested interest groups that do not want to lose power. Another question is of course if China will listen to the World Bank’s recommendation.

Given the fact that one of the top economic research centers at the State Council actually contributed substantially to the report chances are quite good that adequate reforms will be carried out. After all, the main objective of the Chinese government is to create a modern, harmonious, and creative high-income society, and that can only be done by a continuous good economic growth.