Section 2 Excess production capacity, excess debts, resource … · 2018-11-21 · (1) Slowdown of the Chinese economy and excess production capacity (A) Basic structure of the Chinese

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Section 2 Excess production capacity, excess debts, resource price declines and the world

economy

1．Excess production capacity and signs of protectionism

(1) Slowdown of the Chinese economy and excess production capacity

(A) Basic structure of the Chinese economy (shift to a new normal)

As mentioned in the previous section, China has maintained high economic growth but the various

conditions supporting the growth have been changing. To be more specific, the working-age population

has peaked and labor costs have risen due to a labor shortage in urban areas. These factors, coupled with

a rise in the exchange rate of the Chinese yuan, have caused a change in the manufacturing industry’s

export competitiveness. Since the global economic crisis in 2008, China has temporarily managed to

maintain growth while implementing a variety of economic measures, including a 4-trillion-yuan

economic package, but the growth of the Chinese economy has continued to decelerate moderately on

the whole.

Below, an overview of the basic structure of the recent Chinese economy will be provided (Figure

I-1-2-1-1). In the 2000s, China achieved high economic growth, driven by brisk investment activities,

including investment in infrastructure and production facilities, and expansion of exports realized by

attracting foreign companies (Figure I-1-2-1-2). As a result, the shares of gross capital formation and

net exports (exports in particular) in gross domestic product increased and the share of private

consumption declined, so China’s economic growth increasingly became one led by external demand

and investment (Figure I -1-2-1-3). After the outbreak of the global economic crisis in 2008, external

demand, mainly in the United States, shrank rapidly, so net exports fell deep into the minus column,

exerting strong downward pressure on the Chinese economy. In response, the Chinese government

curbed the slowdown of the economic growth rate by substantially expanding gross capital formation

through the implementation of the 4-trillion-yuan economic package. However, in this process, state-

owned enterprises and local governments rapidly increased their debts and production capacity

considerably expanded. The additional money supply thus created flowed into the real estate and stock

markets in pursuit of domestic investment destinations, which were limited due to the effects of interest

rate restrictions and regulation of capital movement.

69

Figure I-1-2-1-1 Basic structure of Chinese economy

Figure I-1-2-1-2 Changes in China’s real GDP growth rate and contributions by demand

components

Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.

-5

0

5

10

15

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Final consumption Gross capital formation

Net exports GDP growth rate

(%)Gross capital formation

contributed remarkably in the

2000s and the shift of net exports Global

economic

crisis (2008)

After the global economic

crisis, net exports dropped to

negative values and were

compensated for by gross

capital formation.

70

Figure I-1-2-1-3 Changes in China's GDP composition ratio

Note: Exports are calculated based on the balance of payments basis (exports of goods and services).


Currently, while investments have slowed down in China, consumption is growing only at a

relatively moderate rate due to the deceleration of the income growth rate, the effects of the frugality

campaign and the continued high savings rate. In addition, exports are not growing as strongly as in the

past due to the rise in the exchange rate of the yuan and increasing labor costs, and this means that the

economy is shifting to a so-called new normal.

Under these circumstances, structural challenges, such as demographics and regulations affecting

economic efficiency, have been pointed out. Below, this white paper will take a closer look at the current

status of such structural challenges in order to think about China’s future growth.

-20

0

20

40

60

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Private consumption Government consumptionGross capital formation Net exportsExports

(%)

Global economic

crisis (2008)

45.9

37.9

2.7

13.5

23.7

Gross capital formation

Exports

Net exports

71

Column 1 China’s economic growth rate and employment

In China, since an earlier time, there has been the idea that the economic growth rate of 8% must be

maintained because if the growth rate falls short of 8%, sufficient jobs cannot be provided to the growing

population. Indeed, when China was recording a growth rate higher than 10% before the global

economic crisis, the annual economic growth target of 8.0% was already being advocated (Column Table

1-1). The target was lowered to 7.5% in 2012 and to 7.0% in 2015, and a target range of 6.5% to 7.0%

was set for 2016. Under the 13th Five-Year Plan (2016 to 2010), the target is set at 6.5% at a minimum.

Column table 1-1 Target and performance of China’s economic growth rate

(%)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Target 8.0 8.0 8.0 8.0 8.0 8.0 8.0 7.5 7.5 7.5 7.0 6.5～7.0

Performance 11.3 12.7 14.2 9.6 9.2 10.4 9.3 7.7 7.7 7.3 6.9 -


China’s growth rate in 2015 fell slightly below 7%, to 6.9%. However, as far as judging from official

statistics, there is apparently no major problem concerning the employment situation. Looking at the

labor supply-demand balance in urban areas, the ratio of job offers to job seekers has stayed above 1

(Column Figure 1-2). In addition, the unemployment rate has remained almost stable at around 4.1%,

although it should be kept in mind that the data does not cover migrant workers from rural areas (Column

Figure 1-3).

Column figure 1-2 Changes in ratio of job offers in urban areas in China

Source: Ministry of Human Resources and Social Security of the People’s Republic of China and CEIC

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(ratio)

1.1Global economic

crisis (2008.9)

Rise in ratio of job offers

Ratio of job offers reached the

levels of approximately 1 (0.98)

Job seekers > job offers

(year/Q)

72

Database.

Column figure 1-3 Changes in registered unemployment rate in urban areas in China

Note: Migrant workers (so-called farmer mechanics) that have no family register in urban areas are

excluded.


Database

As factors behind the favorable employment situation that represents a contrast to the economic

slowdown, a decline in the working-age population and a change in the industrial structure have been

pointed out.

On the labor supply side, the working-age population peaked in 2011 and has continued to decline

since 2012 (Column Figure 1-4).

3.8

3.9

4

4.1

4.2

4.3

4.4

4.5

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2008 2009 2010 2011 2012 2013 2014 2015

(%)

(year/Q)

73

Column figure 1-4 Changes in working-age population (performance) in China

Note: Working-age is defined as "age of 16-59” taking into account the press release regarding the

economy in 2015 issued by National Bureau of Statistics of the People’s Republic of China.


On the labor demand side, the tertiary industry, which is said to have a high job-absorbing capacity,

has continued to expand with respect to the industrial structure (Column Figure 1-5). A comparison in

terms of the average number of employees per 1 million yuan of GDP shows that the tertiary industry

has a job-absorbing capacity that is around 20% higher than the capacity of the secondary industry

(Column Table 1-6).

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

880

890

900

910

920

930

940

950

960

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Working-age population Growth rate (right axis)

(mil.) (%)

Peak in working-age

population (2011)

74

Column figure 1-5 Changes in employed population in China

Note: Employed population is based on employment statistics and self-employed workers are not

included.

Source: National Bureau of Statistics of the People’s Republic of China, Ministry of Human Resources

and Social Security of the People’s Republic of China and CEIC database.

Column table 1-6 Average number of employed persons required for production valued at 1

million Yuan GDP

(Unit: Person)

All types of industry Primary industry Secondary industry Tertiary industry

11.4 36.0 8.3 9.6

Note: Calculated based on GDP and employment data for 2015.

Source: National Bureau of Statistics of the People’s Republic of China, Ministry of Human Resources

and Social Security of the People’s Republic of China and CEIC database.

However, the above statistics are on a nationwide basis, and there may be a job mismatch by region

or by type of job. As an example of regional difference, the ratio of job offers to job seekers is relatively

low in the northeastern region of China, an area where there are many industries with excess investments

and where the economic slowdown was significant (Column Table 1-7). Meanwhile, it has been pointed

out that although factory workers are said to be somewhat in short supply, the types of job requiring

higher education that college graduates seek are attracting an excessive number of applicants.

0

10

20

30

40

50

60

70

80

90

100

0

100

200

300

400

500

600

700

800

900

1,0001990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Tertiary industry Secondary industry Primary industry

employed population Primary industry Secondary industry

Tertiary industry

(employed population) (share)

(mil.) (%)

Increase by approx. 20 %

75

Column table 1-7 Ratio of job offers by city

(%)

City Ratio

Zhengzhou (Henan) 1.75

Chongqing 1.40

Chengdu (Sichuan) 1.35

Wuhan (Hubei) 1.26

Hefei (Anhui) 1.18

Nanjing (Jiangsu) 1.17

Shanghai 1.12

Xi'an (Shaanxi) 1.05

Shijiazhuang (Hebei) 1.03

Shenyang (Liaoning) 0.93

Note: Values for 2015 Q4.


database.

(B) Expansion of excess production capacity

When the 4-trillion-yuan economic package was implemented, investments assuming a high

economic grow rate were apparently made, so excess production capacity has emerged as a problem in

a broad range of sectors. Among the specific sectors with excess capacity is the steel industry, in which

the capacity utilization rate has stayed low, ranging between 60% and 80% while production capacity

has continued to expand (Figure I-1-2-1-4). In 2013, five industries ― steel, cement, aluminum, glass

and shipbuilding ― were specifically pointed out by the State Council of China as industries with excess

investment, and the capacity utilization rates in these industries have been published. The rates are

between 70% and 80% in all these industries, according to published data (Table I-1-2-1-5). According

to a questionnaire survey conducted with Chinese business managers, the average capacity utilization

rate for Chinese companies stayed low at between 70% and 80% after 2012, and the figure is presumed

to have declined further recently (Table I-1-2-1-6).

76

Figure I-1-2-1-4 Changes in production capacity and capacity utilization rate in main

industries

Source: Relevant industrial association

Source: Forecast of Global Supply and Demand Trends for Petrochemical Products, publication of

Ministry of Economy, Trade and Industry

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Production of crude steel Excess capacity

Capacity utilization rate

(100 mil.t) (crude steel)

(year)

0

10

20

30

40

50

60

70

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2006 2007 2008 2009 2010 2011 2012 2013 2014

Excess capacity Production performance


(%)(1000 t)(High-purity terephthalic acid)

(year)

77

Note: Capacity utilization rate = Production volume / Production capacity. Production capacities are not

indicated for the periods in which statistic data is not published.


Table I-1-2-1-5 Sectors with excess production capacity and capacity utilization rates in China.

Data from Guiding Opinions of State Council on Resolving the Serious Excess Production

Capacity (October 2013)

(%)

Steel Cement Aluminum Plate glass Vessel

72.0 73.3 71.9 73.1 75.0

Note: Target time period of the capacity utilization rates is not specified but considered to be a recent

time period for 2012 or 2013.

Source: Guiding Opinions on Resolving the Serious Excess Production Capacity (October 2013), State

Council of the People’s Republic of China.

0

10

20

30

40

50

60

70

80

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Excess capacity Production performance


(%)(mil. pcs) (Television)

(year)

78

Table I-1-2-1-6 Average capacity utilization rate in China

(%)

2012 2013 2014 2015

Average capacity utilization rate 72.7 72.0 72.2 67.8

Note: 1. Inquiry survey conducted on Chinese entrepreneurs.

2. As for 2015, the survey was conducted in August–October 2015. 2526 eligible replies.

Source: The Daily NNA China Edition. Original source: China Entrepreneurs Survey.

As the Chinese government has been instructing companies to dispose of old facilities with poor

production efficiency and has been curbing new investments, mainly in sectors with excess capacity, the

growth rate of fixed asset investments has continued to decline (Figure I-1-2-1-7). However, the disposal

of facilities did not necessarily proceed quickly because of its significant impact on local economies and

employment. As a result, the state of excess production capacity continued, and producer prices

(shipment prices) have recorded year-on-year drops for almost four years, although there have recently

been signs of a moderate price recovery (Figure I-1-2-1-8). The trend of price decline has been observed

mainly in the steel and coal industries but is also spreading to a broad range of products, including

chemical materials, ceramics, stone, and clay products, and automobiles (Figure I-1-2-1-9).

Figure I-1-2-1-7 The growth rate of fixed asset investments (accumulated amount from the

beginning of the year, ratio to the same period of the previous year)

Note: Fixed asset investments are published as the accumulated amount from January.


-20

-10

0

10

20

30

40

50

60

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013 2014 2015 2016

Overall Steel (right axis)

(%) (%)

(year/month)

79

Figure I-1-2-1-8 Growth rate of producer prices (ratio to the same month of the previous year)


Figure I-1-2-1-9 Producer prices of major items in China (January to April 2016, compared

with that of the same period in the previous year)


-30

-20

-10

0

10

20

30

40

2008 2009 2010 2011 2012 2013 2014 2015 2016

Overall Chemical materials Steel Automobiles(year/month)

Negative values continue in ratio to the previous year

-20

-15

-10

-5

0

Coal

Ste

el

Nonm

etal

min

eral

pro

duct

s

Over

all

Cer

amic

s

Com

pute

r, c

om

munic

atio

neq

uip

men

t

Gen

eral

mac

hin

ery

Auto

mobil

e

(%)

80

Under these circumstances, consumption is not strong enough to make up for curbed investments as

will be explained later, with the result that the economy is slowing down, mainly in the northeastern

region, where there are many sectors with excess production capacity (Figure I-1-2-1-10).

Figure I-1-2-1-10 Real GDP growth rate in respective regions

Note: The map is an approximate map.


It has also been pointed out that the decline in producer prices in China is affecting export prices.

For example, regarding Chinese exports of steel products, the export volume has expanded rapidly since

2014, while the unit export price has continued to decline (Figure I-1-2-1-11).28

28 Here, as a reference, the average price of iron and steel as specified by HS code chapter 72 is indicated.

In reality, iron and steel includes a wide variety of items, so the movements of the average price do not

necessarily match the movements of prices of individual items. Articles of iron and steel as specified by HS

code chapter 73 also include a wide variety of items, such as rails, pipes, bridge sections, window frames,

tanks, cables, bolts and nuts, so the calculation of the average price here includes only items in HS code

chapter 72.

China overall 6.9%

Shanxi province 3.1%

Liaoning province 3.0 %

Beijing 6.9%

Tianjin 9.3%

Shanghai 6.9%

Guangdong province 8.0% Chongqing 11.0%

Sichuan province 7.9%

- 6%

6% - 7%

7% - 8%

8% - 9%

9% -

81

Figure I-1-2-1-11 Changes in China’s exports of steel (HS72)

Note: HS72 category is indicated as steel.

Source: Global Trade Atlas.

0

200

400

600

800

1,000

1,200

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016

Export volume Average unit price (right axis)

(mil.t) ($/t)

(year/month)

82

Column 2 Sectors with robust fixed asset investments

Although fixed asset investments are slowing down, mainly in sectors with excess investments, the

growth rates of such investments in some sectors are accelerating or remaining steady. For example, in

the secondary industry, the growth in fixed asset investments in the mining sector has slowed down

considerably, and the growth in investments in the manufacturing and construction sectors have also

been on a downtrend. On the other hand, the growth in fixed asset investments in the electricity, gas and

water sectors has remained steady (Column Figure 2-1). In the manufacturing industry, the growth in

fixed asset investments in raw materials and resource-related fields such as steel, non-ferrous metals, oil

and coal has slowed down. However, the growth in investments in fields related to daily life, such as

cultural and recreational products, clothing and furniture, and electronics as well, is above the average

in the manufacturing industry. In the tertiary industry, the growth in fixed asset investments has declined

steeply in such sectors as financial services, real estate, and dining and boarding, whereas the growth

has remained steady for information and communication, health and social services, and flood control

and environmental preservation.

Column figure 2-1 Changes in the growth rate of fixed asset investments by industry

0

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013 2014 2015

(Primary/Secondary/Tertiary)

Overall Primary industry Secondary industry Tertiary industry

(%)

83

-20

-10

0

10

20

30

40

50

60

702

00

8

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

08

20

09

20

10

20

11

20

12

20

13

20

14

2015

(Major sectors in secondary industry)

Secondary industry Mining Manufacturing

Electricity, gas and water Construction

(%)

(Sectors remaining steady) (Sectors on a downtrend)

-10

0

10

20

30

40

50

60

70

2008

2009

2010

2011

2012

2013

2014

2015

2008

2009

2010

2011

2012

2013

2014

2015

(Major sectors in tertiary industry)

Tertiary industry Information and communication

Health and social services Flood control and environmental preservation

Financial services Real estate

Dining and boarding

(%)

(Sectors accelerating

or remaining steady)(Sectors on a downtrend)

84

Note: Health and social services, cultural and recreational products and clothing were newly established

in 2012.


To sum up the above observations, fixed asset investment remains steady for public infrastructure

(electricity, gas, water, and flood control and environmental preservation) and products related to daily

life (cultural and recreational products, clothing, and furniture) and is growing in the fields of health and

social services. Such investment also remains steady in IT-related fields (electronics in the

manufacturing sector and information and communication in the services sector).

Until recently, the nominal GDP growth rate has stayed higher than the real GDP growth rate in

China. However, from the end of 2011 through 2012, the gap between the two rates narrowed rapidly,

and in the first quarter of 2015, the real GDP growth rate surpassed the nominal GDP rate (Figure I-1-

2-1-12). By industry, the narrowing of the gap between the nominal and real GDP growth rates is a

phenomenon common to all industries, but in the secondary industry, the real growth rate surpassed the

nominal growth rate as early as in 2012, and this trend has been becoming increasingly prominent

(Figure I-1-2-1-13). The reversal of the two rates means that in the secondary industry, increased

deflationary pressure led to a negative price growth. Among the factors behind this is the fact that

producer prices have been declining on a year-on-year basis since the end of 2011, mainly in the steel

sector, due to excess production capacity in the manufacturing industry as was described earlier (Figure

-30

-20

-10

0

10

20

30

40

50

60

2008

2009

2010

2011

2012

2013

2014

2015

2008

2009

2010

2011

2012

2013

2014

2015

(Major sectors in manufacturing)

Cultural and recreational products Clothing

Wood products Furniture

Electronics Manufacturing

Non-ferrous metals Steel

Oil and coal

(%)

(Sectors remaining steady) (Sectors on a downtrend)

85

I-1-2-1-8, which was shown earlier). In 2015, the growth rate of the secondary industry declined to 0.9%

in nominal terms. In particular, the growth rate of the industrial sector,29 which includes mining and

manufacturing, fell to as low as 0.4% (TableⅠ-1-2-1-14). In place of the secondary industry, the tertiary

industry has become the drivers of economic growth, maintaining relatively high growth rates of 11.7%

in nominal terms and 8.8% in real terms in 2015.30

Figure I-1-2-1-12 Changes in China’s real GDP growth rate and nominal growth rate

Note: GDP deflator is counted backward as shown in the following formula as the Chinese government

has not reported it:

GDP deflator (price volatility) = nominal GDP volatility / real GDP volatility


29 The industrial sector includes mining, manufacturing, electricity, gas and water. 30 However, the sector that has recorded particularly high growth in the tertiary industry is financial

services (nominal growth rate at 23.2% and real growth rate at 15.9% in 2015). It has been pointed out that

the high growth may have been caused by the effects of the increase in fee revenues due to the stock market

rise that continued until the middle of 2015.

-5

0

5

10

15

20

25

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2011 2012 2013 2014 2015 2016

Deflator Nominal growth rate Real growth rate

(%)

Nominal growth rates exceeded real

growth rates. (GDP deflator was negative)

(year/Q)

86

Figure I-1-2-1-13 Changes in China’s GDP growth rate by industry

Note: GDP deflator is counted backward as shown in the following formula as the Chinese government

has not reported it:

GDP deflator (price volatility) = nominal GDP volatility / real GDP volatility


-10

-5

0

5

10

15

20

252

01

1

20

12

20

13

20

14

2015

20

11

20

12

20

13

20

14

20

15

20

11

2012

20

13

20

14

20

15

Deflator Nominal growth rate Real growth rate

(%)

(Primary industry) (Tertiary industry)(Secondary industry)

87

Table I-1-2-1-14 Description of China's GDP growth rates by industry/sector

(%)

Real Nominal

2014 2015 2014 2015

Overall 7.3 6.9 8.1 6.4

Primary industry 4.1 3.9 5.4 4.3

Secondary industry 7.3 6.0 5.8 0.9

Industrial sector 6.9 5.9 5.0 0.4

Construction 9.1 6.8 9.8 3.7

Tertiary industry 7.8 8.3 10.8 11.7

Transport and communication 6.5 4.6 9.4 6.6

Wholesale and retail 9.7 6.1 10.9 6.1

Hotels and Catering Services 5.8 6.2 9.1 9.0

Financial services 9.9 15.9 13.3 23.2

Real estate 2.0 3.8 5.6 8.7

Others 8.5 9.2 12.4 12.7

Note: Industrial sector includes mining, manufacturing and electricity/gas/water sectors.


(C) Expansion of debts

Since the global economic crisis, debts owed by private companies have continued to expand. A

look at changes in the balance of debts by sector in China shows that the amount of debts has rapidly

expanded in the non-financial corporate sector since the beginning of 2009, when the implementation

of the economic package started (Figures I-1-2-1-15 and I-1-2-1-16). The expansion of debts

temporarily subsided around 2010 because of the end of economic package and policy interest rate hikes

intended to curb the inflation due to economic overheating. However, the expansion accelerated again

at around the time when the policy interest rate was reduced in 2012 in response to the economic

slowdown.

88

Figure I-1-2-1-15 Changes in amount of debt in China (ratio to GDP)

Source: BIS website.

Figure I-1-2-1-16 Changes in amount of debt in Japan and China (ratio to GDP)

Source: BIS Website.

Statistically, general government debts have not expanded much, but local government debts have

increased rapidly. Local governments have faced a chronic revenue shortage since an earlier time as

they provide public services directly related to residents’ daily lives, such as education and healthcare.

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015

Nonfinancial sectors total (corporate, household, government)General governmentHouseholdNonfinancial corporateNonfinancial private sector (corporate, household)

(year/Q)

(%)

Lehman Brothers bankruptcy (Sep. 2008)

90

100

110

120

130

140

150

160

170

1985 1990 1995 2000 2005 2010 2015

China Japan

Peak in Japan: 149.2% (1994Q4) China: 166.3% (2015Q3)

89

However, when the 4-trilion-yuan economic package was implemented, they were forced to bear part

of the burden, resulting in a rapid deterioration in their revenue-expenditure balance. But, local

governments are prohibited from borrowing funds and issuing bonds in China, so fund raising through

investment companies (financing vehicles) has increased. A special inspection on local government

debts conducted by the National Audit Office of China (which is equivalent to the Board of Audit of

Japan) revealed that the amount of debts is expanding (Table I -1-2-1-17).

Table I-1-2-1-17 Audit result on nationwide governmental debts issued by National Audit

Office

(Unit: Trillion yuan, %)

Period Government Debt to be

paid

Contingent liabilities Total debt including

contingent liability

Ratio to

GDP Guaranty

obligation

Cancelled

debt

End of 2010 Local

government 6.7 2.3 1.7

10.7 26.6

End of 2012

Central

government 9.4 0.3 2.2 11.9 22.9

Local

government 9.6 2.5 3.8 15.9 30.6

Total 19.1 2.8 5.9 27.8 53.5

End of June

2013

Central

government 9.8 0.3 2.3 12.4 -

Local

government 10.9 2.7 4.3

17.9 -

Total 20.7 2.9 6.7 30.3 -

Note: Ratio to GDP is a ratio of total debts including contingent liabilities to annual GDP amount.

Source: Report by National Audit Office of the People’s Republic of China.

(D) Volatile real estate, stock and exchange markets

In China, domestic real estate assets and stocks tend to attract surplus funds as investment

destinations due to restrictions on overseas investments, so fluctuations in real estate and stock prices

are volatile. For example, in 2013, housing prices, which had been on an uptrend, started to fall at the

beginning of 2014 in an increasing number of cities due to the government’s price restraining policy and

other factors, with the result that a housing slump became a factor behind the economic slowdown

(Figure I-1-2-1-18). Meanwhile, it is said that surplus funds flowed from the real estate market to the

stock market at that time, with the Shanghai Composite Index surging by 2.5-fold between the middle

of 2014 and June 2015 (Figure I-1-2-1-19).

90

Figure I-1-2-1-18 Changes in sales price of newly constructed commercial residential buildings

in 70 cities

Note: 1. Number of cities of 70 major cities in which the price rose or declined (more than 0.1%) in

comparison to last month. The price in the rest of the 70 cities remained unchanged.

2. “Newly constructed commercial residential building” refers to newly built house products excluding

social security housing.


-70

-50

-30

-10

10

30

50

70

2008 2009 2010 2011 2012 2013 2014 2015 2016

Price rise Price decline

(Cities)

(year/month)

Number of cities in which the price rose

Number of cities in which the price went

down

91

Figure I-1-2-1-19 Trends in Shanghai Composite Index

Source: Shanghai Stock Exchange, CEIC database.

However, after peaking in June 2015, stock prices suddenly turned down sharply, falling around

30% in the one-month period to July. As a result of the stock price plunge, it is said that funds flowed

back from the stock market to the real estate market, with housing prices starting to rise in the middle

of 2015. Recently, housing prices have remained weak due to the remaining glut of housing inventories

in provincial cities, whereas in major cities in coastal areas, prices are continuing to rise.

Asset prices, including housing and stock prices, may affect consumption, and in particular, the

housing market may have a significant impact on economic conditions through demand for such

products as construction materials like steel and cement, household electrical products and automobiles.

Therefore, asset price changes could become an instability factor for the economy.

Regarding the exchange rate of the yuan, the Chinese currency appreciated, both relative to the dollar

and on an effective exchange rate basis (relative to a basket of currencies) after a shift to the managed

floating system, and this affected China’s export competitiveness (Figures I-1-2-1-20 and I-1-2-1-21).

On the other hand, in August 2015, the calculation method of the reference exchange rate of the yuan

was changed, resulting in the depreciation of the Chinese currency (Figures I-1-2-1-22 and I-1-2-1-23).

Under these circumstances, China has kept the exchange rate of the yuan steady through exchange

interventions. As a result of such policy interventions, the amount of China’s foreign currency reserves

declined, but it has recently remained flat (Figure I-1-2-1-24).

0

1,000

2,000

3,000

4,000

5,000

6,000

20

14

/01

/02

20

14

/02

/02

20

14

/03

/02

20

14

/04

/02

20

14

/05

/02

20

14

/06

/02

20

14

/07

/02

20

14

/08

/02

20

14

/09

/02

20

14

/10

/02

20

14

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/02

20

14

/12

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20

15

/01

/02

20

15

/02

/02

20

15

/03

/02

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15

/04

/02

20

15

/05

/02

20

15

/06

/02

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15

/07

/02

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15

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/02

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15

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15

/10

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15

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20

16

/01

/02

20

16

/02

/02

20

16

/03

/02

Proposal for strengthening regulation on credit transaction announced

Stock price peaked at 5,166.35 (Jun. 12)

Mutual stock trading starts

between Hong Kong and

Shanghai (Nov. 17)

Decline in housing prices

extends from 35 to 55 cities

(of 70 cities) (Jul. 18)

Monetary

easing starts,

lowering of

interest rates

(Nov. 22)

Support measure for stock

price announced (end Jun. -

begin. Jul.)

Additional easing, lowering of interest

rates (Mar. 1, May 11, Jun. 28, Aug. 26

and Oct. 24)

Decline in housing prices extends further

from 55 to 64 cities (Aug. 18)

Approx. 2.5

fold increase

-32%

3,507.19 (Jul. 8)

92

Figure I-1-2-1-20 Changes in exchange rate of Chinese yuan

Source: China Foreign Exchange Trade System and CEIC database.

Figure I-1-2-1-21 Changes in real effective exchange rate

Source: BIC website.

6.0

7.0

8.0

9.0

10.0

11.0

12.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

20

05/0

1/0

4

20

06/0

1/0

4

20

07/0

1/0

4

20

08/0

1/0

4

20

09/0

1/0

4

20

10/0

1/0

4

20

11

/01

/04

20

12/0

1/0

4

20

13/0

1/0

4

20

14/0

1/0

4

20

15/0

1/0

4

20

16/0

1/0

4

to dollar (left axis) to euro (right axis)

July 2008

Virtual return to the dollar peg system under the global economic crisis

June 2010Chinese yuan has flexibility again

Strong yuan

Weak yuan

July 2005Shift to the managed floating system

August 2015Change of calculation method for the yuan reference rateDevaluation of reference rate for 3 days in a row

(1$=yuan) (1 euro=yuan)

60

70

80

90

100

110

120

130

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

China USA Euro area Japan

(2010=100)

(year/month)

July 2005China shifts to the managed floating system

93

Figure I-1-2-1-22 Exchange rates of Chinese yuan to the dollar in and outside China

Note: Rates of Chinese yuan to the dollar in the Hong Kong Forex Market are calculated based on cross

rates of the Hong Kong dollar to US dollar and Hong Kong dollar to Chinese yuan.

Source: China Foreign Exchange Trade System, Hong Kong Monetary Authority and CEIC database.

Figure I-1-2-1-23 Changes in spot and future prices of Chinese yuan

Note: Future prices are for 1-year prices. Spot prices are reference prices announced by China Foreign

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.65.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

2008 2009 2010 2011 2012 2013 2014 2015 2016

Difference between in and outside China

In China

Outside China (Hong Kong Forex Market)

(1$=yuan)

Strong

yuan

Weak

yuan

Depreciation of the yuan against the

dollar remains in the offshore market

(i.e., Hong Kong), beyond the

regulations of the Chinese government,

rather than in mainland China.

(year/month)

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.25.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

20

09

/01/0

5

20

10

/01

/05

20

11

/01/0

5

20

12

/01/0

5

20

13

/01/0

5

20

14

/01/0

5

20

15

/01/0

5

20

16

/01/0

5

Difference (right axis/spot-future)Future priceSpot price

Strong yuan

Weak yuan

(1$=yuan)

Future price is estimated

to be weaker in one year

within China, too.

94

Exchange Trade System.

Source: China Foreign Exchange Trade System, Bank of China and CEIC database.

Figure I-1-2-1-24 Changes in China's foreign currency reserves

Source: People's Bank of China, CEIC database.

(E) Loss of the demographic bonus and a wage rise

As was shown earlier, the working-age population peaked in 2011 and has been declining since 2012.

According to a population forecast by the United Nations, both the size of the working-age population

and the share of the working-age population in the overall population are expected to decline (Figure I-

1-2-1-25).

End Jun. 2014 Peak in foreign currency reserves 3,993.2 bl. $

End Mar. 2016 Foreign currency reserves 3,212.6 bl.$

(bl. $)

95

Figure I-1-2-1-25 Prediction of China's population composition (estimation by the United

Nations)

Note: 1. Population estimate by the United Nations, which estimates high, middle and low variants of

the population every 5 years. This figure shows middle variants.

2. Working-age is defined as "age of 16-59” taking into account the press release regarding the economy

in 2015 issued by National Bureau of Statistics of the People’s Republic of China.

3. According to the report by National Bureau of Statistics of the People’s Republic of China, the

working-age population already peaked in 2011 and declined in 2012, 2013 and 2014.

Source: World Population Prospects: The 2015 Revision, the United Nations.

In addition, changes have occurred in terms of labor force migration by region and by sector. The

surplus labor in inland rural areas, which was available in abundance in the past, is said to be decreasing,

and in urban areas, the effective ratio of job offers to job seekers has stayed above 1.0 (Column Figure

1-2). As a result, the “cheap labor cost,” which continued to attract foreign companies, has been rising,

surpassing the levels in Thailand and Malaysia (Figure I-1-2-1-26).

* According to the Chinese government, the working-age population already peaked in 2011.

Peak in working-age population

(mil. people)

Aging population (over 60)

Working-age population (15-59 years)

Young population (0-14 years)

Ratio of working-age population

96

(Aforementioned) Column figure 1-2 Changes in ratio of job offers in urban areas in China


Database.

Figure I-1-2-1-26 Basic monthly salary of Japanese companies (manufacturing/worker)

Note: 1. Salary excluding benefits as of October 2015.

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(ratio)

1.Global economic

crisis (2008.9)

Rise in ratio of job offers

Ratio of job offers reached the

levels of approximately 1 (0.98)

Job seekers > job offers

(year/Q)

97

2. Regular employment of a general worker with around 3 years of experience. Contract workers and

workers during a trial period are excluded.

Source: Status Survey on Activities of Japanese Companies Operating in Asia and Oceania (Survey

2015 fiscal year), JETRO.

As shown above, while the Chinese economy has been moderately slowing down, it is facing

structural problems such as excess production capacity. On the other hand, recently, housing prices in

metropolitan areas have been rising and there have been signs of price recovery in such sectors as steel,

so it is necessary to keep a careful watch on the economic situation in China. Meanwhile, in response to

the new structural problems, the Chinese government has advocated the policy of carrying out structural

reforms from various aspects, characterizing the transition from high growth to medium-high growth as

a shift to a “new normal.” For example, the Chinese government is seeking to shift away from an

investment-driven economic growth by resolving excess production capacity, raising productivity

through innovation and research and development, upgrading the manufacturing industry and expanding

the services industry as structural reforms on the supply side and by expanding consumption on the

demand side. Such initiatives by the Chinese government will be examined in detail in “3. Structural

reform initiatives in emerging countries, etc.” of this section

(2) Economic trends in emerging countries following the global economic crisis and the slowdown

of the Chinese economy

As shown in Section 1, since the 2000s, particularly after the economic slowdown of developed

countries that followed the global economic crisis, many emerging countries developed value chains

with and increased their dependence on China. As a result, in line with the slowdown of the world

economy: including the Chinese economy, the economies of emerging countries also faced increased

downward pressure due to a decline in exports. Here, the impact of the slowdown will be examined with

a particular focus on two G20 countries ― the Republic of Korea (ROK), which is at a turning point,

including politically, and Indonesia, which has the fourth largest population in the world.

(A) Republic of Korea (ROK)

(a) Trends of the ROK economy

Since 2011, the ROK’s annual real GDP growth rate has remained in the 2-3% range, lower than

before the global economic crisis. After hitting bottom in 2012, the ROK economy showed a moderate

recovery. However, consumer sentiment declined due to the accident in which the Sewol ferry sank in

April 2014, resulting in a prolonged slump in consumption, and the growth in exports also started to

slow down in the second half of the year. Consequently, the annual economic growth rate in 2014 came

to 3.3%.

As a result of the expansion of the outbreak of infection with the Middle East Respiratory Syndrome

(MERS) starting in May 2015, expenditures on services, including travel, eating out, and leisure,

declined, and the number of foreign tourists fell. In the second half of 2015, private consumption

98

recovered due to the end of the MERS outbreak and the successful results of governmental measures to

invigorate consumption, and domestic demand rebounded due to increased housing construction

investment and expanded public works investment under a supplementary budget.31 However, because

of weak exports due to the effects of the Chinese economy’s slowdown, net exports made negative

contributions to GDP, and the growth rate in 2015 came to 2.6% compared with the previous year, lower

than the government’s target of 3% growth (Figure I-1-2-1-27).

Figure I-1-2-1-27 Changes in ROK’s real GDP growth rate and contributions (by demand

components)

Note: Quarterly data is seasonally adjusted on a quarter-on-quarter basis (annualized rate is not

calculated).

Source: Bank of Korea, CEIC Database.

In 2016, the ROK government set forth the policy of continuing to shore up domestic demand

through such measures as extending the period of reduction of consumption tax on automobiles and a

large-scale sales campaign aimed at foreign tourists. However, the ROK is facing both rising geopolitical

risk in the Korean Peninsula and the instability of the global financial market.

31 In July 2015, the ROK government announced an economic package worth a total of 22 trillion won,

including a supplementary budget of approximately 12 trillion yen (approximately 1.3 trillion yen) in order

to overcome the damage caused by the MERS outbreak and stabilize the people’s daily lives. In August of

the same year, the ROK government lowered the consumption tax on passenger cars and large home

electric appliances as a consumption stimulus measure (a temporary measure that remained in effect until

the end of 2015). Moreover, the ROK government implemented a large-scale sales campaign (the ROK

version of Big Friday) for two weeks from October 1, while the Bank of Korea lowered the policy interest

rate to a record low of 1.50% in June 2015.

0.4

6.5

3.7

2.3

2.9 3.3 2.6

0.7 1.2

-2

0

2

4

6

8

10

I II III IV I II III IV I II III IV

201020112012201320142015 2013 2014 2015

(%)

Net exports Inventory change

Gross capital formation Government consumption

Private consumption GDP

(Yearly base) (Quarter base)

0.8

99

The ROK’s GDP growth rate in 2016 is estimated at 3.1% by the ROK government, at 2.8% by the

Bank of Korea and at 2.7% by the IMF (Table I-1-2-1-28). The Bank of Korea estimates the annual

average potential growth rate for 2015 to 2018 at between 3.0% and 3.2%32 (Table I--1-2-1-29).

Table I-1-2-1-28 Outlook for ROK’s real GDP growth rate

Institution Outlook for 2016 Announcement

ROK government 3.1% December 2015

Bank of Korea 2.8% April 2016

IMF 2.7% April 2016

Source: Announcements by ROK government, Bank of Korea and IMF.

Table I-1-2-1-29 ROK's potential growth rate

Institution Period Potential growth rate Announcement

Bank of Korea 2015-2018 3.0-3.2% December 2015

Source: Announcement by Bank of Korea.

(b) Trends of ROK trade

The export dependency of the ROK, whose domestic market is small and which aims for growth

driven by the manufacturing industry and exports, in 2014 was 40.6%, higher than the levels in

developed countries (Figure I-1-2-1-30), which means that the country is susceptible to the effects of

the trends of the global economy and the economies of other countries.

32 Although the Bank of Korea previously estimated the ROK’s potential growth rate at around 3.5%, it

revised downward the estimated figure in a report titled “Korean Economy’s Growth Rate Estimation

Result.” Among factors behind the downward revision that were cited in the report were changes in the

social structure due to the aging of society, the weakness of investment by companies and sluggish

productivity growth of the services industry.

100

Figure I-1-2-1-30 Comparison of dependence of exports in respective countries (2014)

Note: 2014, dependence on exports = export value / nominal GDP

Source: UN Comtrade and World Economic Outlook database, IMF.

Regarding the ROK’s trade in 2015, both exports and imports declined due to the effects of weak

exports to China and a drop in crude oil prices, but the country recorded its largest-ever trade surplus

because imports decreased more than exports did (Figure I-1-2-1-31).

Figure I-1-2-1-31 Changes in ROK's trade balance (ratio to the world total)

133.1

69.2

55.6

40.6 38.5

22.6 21.7 20.0 19.8 17.4 15.7 15.0 9.3

0

20

40

60

80

100

120

140

Sin

gap

ore

Mal

aysi

a

Thai

land

RO

K

Ger

man

y

Chin

a

Phil

ippin

es

Fra

nce

Indones

ia

UK

India

Japan

US

A

(%)

90.4 bl. $

-20

0

20

40

60

80

100

0

100

200

300

400

500

600

700

20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

20

10

2011

2012

2013

2014

2015

(bl. $)(bl. $)

(year)

Exports Imports Trade balance (right axis)

101

Source: Korea Custom Service and CEIC database.

A look at the value of exports from the ROK by major export destination shows that while exports

to many countries and regions decreased in 2015 compared with the previous year, exports to Vietnam

increased 24.3% compared with the previous year. This is presumably because of a significant increase

in exports of parts and materials related to production of mobile phones to ROK companies’ production

bases in Vietnam (Table I-1-2-1-32 and Figure I-1-2-1-33). Regarding major export items, exports of

integrated circuits and wireless communications equipment (mobile phones) increased compared with

the previous year, but exports of many other items declined. In particular, exports of petroleum products

declined steeply following the drop in crude oil prices, and exports of automobiles and auto parts also

decreased presumably because of the effects of a decline in demand in emerging markets, such as Russia

and Brazil33 (Table I-1-2-1-34 and Figure I-1-2-1-35).

33 JETRO, Trade Publicity (February 1, 2016)

102

Table I-1-2-1-32 ROK's export and import values (by country/region)

Exports (mil. $, %)

2014 2015

Ratio to the

previous year

Asia 323,701 296,885 -8.3

China 145,288 137,140 -5.6

Japan 32,184 25,596 -20.5

Vietnam 22,352 27,773 24.3

Hong Kong 27,256 30,421 11.6

ASEAN 84,577 74,880 -11.5

Europe 71,646 66,245 -7.5

EU 51,658 48,069 -6.9

North America 75,202 74,468 -1.0

USA 70,285 69,845 -0.6

Pacific 21,444 20,565 -4.1

Central and South America 35,898 30,675 -14.5

Middle East 34,786 30,448 -12.5

Africa 9,901 7,576 -23.5

Total 572,665 526,901 -8.0

Imports (mil. $, %)

2014 2015

Ratio to the

previous year

Asia 221,547 204,613 -7.6

China 90,082 90,237 0.2

Japan 53,768 45,854 -14.7

Vietnam 7,990 9,803 22.7

Hong Kong 1,750 1,499 -14.3

ASEAN 53,418 45,037 -15.7

Europe 85,350 75,287 -11.8

EU 62,394 57,178 -8.4

North America 50,726 48,015 -5.3

USA 45,283 44,029 -2.8

Pacific 22,414 18,222 -18.7

Central and South America 18,294 16,016 -12.5

Middle East 119,072 68,502 -42.5

Africa 8,054 5,555 -31.0

Total 525,515 436,548 -16.9

Source: Published material by JETRO and data by Korea International Trade Association.

103

Figure I-1-2-1-33 Changes in growth rate of export value in ROK (by major country)

Source: Korea Custom Service and CEIC database.

-5.6

-20.5

24.3

-17.8

-0.6

-30

-20

-10

0

10

20

30

40

50

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(%)

(year)

China Japan Vietnam Germany USA

104

Table I-1-2-1-34 Changes in ROK's export value of major items (ratio to world total)

(mil. $, %)

Share in total

exports by

item (2015)

2013 2014 2015

Ratio to

the

previous

year (%)

Ratio to

the

previous

year (%)

Ratio to

the

previous

year (%)

Exports total 100.0 559,632 2.1 572,665 2.3 526,901 -8.0

Electric equipment 26.3 135,497 13.8 138,213 2.0 138,365 0.1

Wireless

communication device 9.9 47,118 14.0 51,544 9.4 52,173 1.2

Automobiles and parts 5.7 25,605 22.1 27,667 8.1 29,855 7.9

Automobiles and parts 13.1 72,772 3.9 73,345 0.8 69,059 -5.8

Automobile 7.9 44,283 4.5 44,821 1.2 41,721 -6.9

Parts 4.4 23,840 5.3 24,265 1.8 23,053 -5.0

General machinery 11.8 59,318 0.6 63,040 6.3 62,121 -1.5

Office equipment

parts 1.0 4,441 28.3 5,782 30.2 5,525 -4.4

Vessels 7.3 35,870 -5.2 38,338 6.9 38,434 0.3

Passenger and cargo

ships 4.1 24,366 -20.3 21,836 -10.4 21,570 -1.2

Other vessels than for

navigation 3.1 11,329 57.0 16,330 44.1 16,487 1.0

Mineral fuel 6.3 54,113 -5.9 52,384 -3.2 33,180 -36.7

Petroleum product 5.8 51,003 -6.8 48,818 -4.3 30,622 -37.3

Optical apparatus 6.2 35,943 -4.4 35,901 -0.1 32,522 -9.4

LC device 4.1 25,309 -8.1 24,884 -1.7 21,487 -13.7

Plastic 5.3 31,172 9.8 31,539 1.2 27,988 -11.3

Steel 3.8 22,270 -12.2 23,944 7.5 20,154 -15.8

Note: Major items are indicated from the top according to HS 2-digit classification. Subitems are

classified according to HS 4-digit classification.


105

Figure I-1-2-1-35 Changes in ROK’s export value growth rate of major items (ratio to the

world total)

Note: Major items are indicated from top (export value) according to the HS 2-digit classification.


In the past, the United States, Europe and Japan had by far the largest shares as destinations of

exports from the ROK. In particular, exports to the United States accounted for as much as 40% of

overall exports from the ROK in the peak year of 1986. However, the shares of the United States, Europe

and Japan all gradually declined, while China’s share continued to rise. In particular, between 2002 and

2004, exports to China grew at an annual rate of more than 30% compared with the previous year. In

2003, China replaced the United States as the ROK’s largest export destination, and in 2015, exports to

China made up 26.0% of overall exports from the ROK, a figure almost equal to the combined share of

the United States, Europe and Japan. On the other hand, Japan’s share as an export destination for the

ROK declined to a record low of 4.9% (Figure I-1-2-1-36). In addition, imports from China into the

ROK expanded and exceeded imports from Japan in 2007, making China the largest trading partner for

the ROK in terms of both imports and exports (Figure I-1-2-1-37). The share of intermediate goods,

such as parts and processed products, in ROK exports to China is large, which means that the ROK

economy is prone not only to be directly affected by the weak growth in Chinese domestic demand but

also to be indirectly affected by the slowdown of the world economy through a decline in exports from

China.

2.12.3

-8.0

-40

-30

-20

-10

0

10

20

2013 2014 2015

(%)

(year)

Electric equipment Automobiles and parts General machinery

Vessels Mineral fuel Optical apparatus

Plastic products Steel Total

106

Figure I-1-2-1-36 Changes in ROK’s composition ratio of major export destinations (export

value basis)

Note: Values of *ASEAN are the total of Thailand, Philippines, Indonesia, Malaysia and Singapore

(excluding Vietnam).


Figure I-1-2-1-37 Changes in ROK’s composition ratio of major import destinations (import

value basis)

26.0%

13.3%

4.9%

9.7%

5.3%

8.6%

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China USA Japan Europe Vietnam *ASEAN

(%)

(year)

20.7%

10.5%

10.1%

14.2%

2.2%

7.7%

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China Japan USA Europe Vietnam *ASEAN

(%)

(year)

107

Note: Values of *ASEAN are the total of Thailand, Philippines, Indonesia, Malaysia and Singapore

(excluding Vietnam)


As for changes in ROK trade with China, the ROK has continued to record a trade surplus, and in

2015, the trade surplus with China (46.9 billion dollars) accounted for more than 50% of the ROK’s

overall trade surplus (90.4 billion dollars) (Table I-1-2-1-38).

Figure I-1-2-1-38 Trade relationship between Japan, ROK and China (2015)


However, the export value, which previously continued to grow steadily, decreased for two

consecutive years in 2014 and 2015, indicating changes in the firmness of exports to China that has

continued until recently (Figure I-1-2-1-39). Presumably, this is mainly because of the effects of the

Chinese economy’s slowdown. In 2015, exports of the ROK’s major product items other than electrical

equipment and general machinery, such as optical instruments, organic chemicals, automobiles and auto

parts, plastics and steel, fell across the board (Table I-1-2-1-40 and Figure I-1-2-1-41).

Japan to China

1. Integrated circuits 12.8 bl.$

2. Automobiles 6.9 bl.$

3. LC devices 5.9 bl.$

4. Automobile parts 5.4 bl.$ 5. Semiconductors 4.1 bl.$

142.7 bl. $

Japan to ROK

1. Semiconductor manufacturing

equipment 2.3 bl.$

2. Integrated circuits

2.0 bl.$

3. Cyclic hydrocarbons

1.6 bl.$

4. Plastic boards/sheets

1.6 bl.$

5. Flat rolled steel/unalloyed steel

1.3 bl.$

135.9 bl. $

137.1 bl.$

90.2 bl.$

China

ROK Japan

44.0 bl.$

26.8 bl.$

Trade balance

China to Japan

1. Wireless communication devices 10.6 bl.$

2. Computers 7.1 bl.$

3. Semiconductors 4.5 bl. $

4. Clothing (knit products) 2.8 bl. $

5. Automobile parts 27 bl. $

China to ROK


2. Wireless communication devices

8.5 bl.$

3. Computers 3.1 bl.$

4. LC devices 2.2 bl.$ 5. Optical fiber 2.1 bl.$

ROK to Japan

1. Petroleum products 3.4 bl.$



4. Steel 0.7 bl.$

5. Automobile parts 0.7 bl.$

ROK to China

1. Integrated Circuits 24.3 bl.$

2. LC devices 15.3 bl.$

3. Cyclic hydrocarbons 6.4 bl.$


5. Automobile parts 5.4 bl.$

46.9 bl.$

-6.8 bl.$

17.2 bl.$

108

Figure I-1-2-1-39 Changes in ROK’s trade balance (to China)

Source: Global Trade Atlas

45.9 bl.$

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(bl. $)

Exports Imports Trade balance

109

Table I-1-2-1-40 Changes in ROK’s export value of major items (ratio to China) (mil. $, %)

Share in

total

exports to

China by

item

(2015)

2013

2014

2015

Ratio to

the

previou

s year

(%)

Ratio to

the

previou

s year

(%)

Ratio to

the

previou

s year

(%)

Exports total 100.0 145,869 8.6 145,288 -0.4 137,140 -5.6

Electric equipment 38.4 48,095 22.1 51,182 6.4 52,666 2.9

Integrated circuits 17.7 17,802 29.0 22,064 23.9 24,270 10.0

Wireless communication

devices 4.5 4,544 31.8 5,809 27.8 6,231 7.3

Optical apparatus 14.0 21,756 -8.5 20,351 -6.5 19,258 -5.4

LC devices 11.2 17,636 -10.9 16,282 -7.7 15,308 -6.0

General machinery 11.0 14,275 11.2 14,758 3.4 15,128 2.5

Semiconductor

manufacturing equipment 2.0 1,944 175.4 2,096 7.8 2,756 31.5

Computers 1.5 1,560 17.5 1,907 22.2 2,099 10.1

Organic Chemistry 7.3 15,004 11.6 13,440 -10.4 10,079 -25.0

Cyclic hydrocarbons 4.6 7,390 35.5 7,588 2.7 6,355 -16.2

Plastic 6.6 10,761 11.2 10,314 -4.2 9,064 -12.1

Ethylene polymer 1.3 3,640 0.1 2,139 -41.2 1,822 -14.8

Automobiles and parts 4.6 6,935 22.7 7,435 7.2 6,353 -14.6

Automobile parts 3.9 5,177 25.9 5,633 8.8 5,410 -4.0

Mineral fuel 3.6 8,912 -15.9 7,799 -12.5 4,893 -37.3

Petroleum products 2.4 7,101 -20.9 5,513 -22.4 3,311 -39.9

Steel 2.2 3,640 0.1 3,907 7.3 3,078 -21.2

Flat-rolled products 0.7 1,021 11.1 1,144 12.0 908 -20.6

Note: Major items are indicated from the top according to HS 2-digit classification. Subitems are

classified according to HS 4-digit classification.


110

Figure I-1-2-1-41 Changes in ROK’s import value growth rate of major items (ratio to China)

Note: Major items are indicated from the top according to HS 2-digit classification.


(c) Recent trends of export and investment destinations for the ROK

In the ROK, there have recently been moves to diversify export and investment destinations and

disperse production bases. Specifically, Vietnam’s presence has grown in this respect. An increase in

investments in Vietnam and expansion of production there by ROK companies led to exports of

production and capital goods from the ROK, thereby invigorating the two countries’ economic

relationship. As a major ROK electronics company has positioned Vietnam as its main smartphone

production base, related companies have been expanding into Vietnam one after another. As a result,

exports from the ROK to Vietnam have grown steadily, and in 2015, Vietnam became the fourth-largest

export destination for the ROK, after China, the United States and Hong Kong. In addition, while foreign

direct investments in China from the ROK have been declining, investments in Vietnam have remained

stable (Figures I-1-2-1-42 and I-1-2-1-43).

8.6

-0.4

-5.6

-40

-30

-20

-10

0

10

20

30

2013 2014 2015

(%)

(year)

Electric equipment Optical apparatus General machinery

Organic chemistry Plastic Automobiles and parts

Mineral fuel Steel Total

111

Figure I-1-2-1-42 Changes in ROK’s import value (by major country)


Figure I-1-2-1-43 Changes in ROK’s outward direct investment value (by major country)


A survey report by the Korea Trade-Investment Promotion Agency (KORTA) 34 observed that

34 The Korea Trade-Investment Promotion Agency (KORTA) is a government-affiliated organization under

the Ministry of Knowledge Economy. It was established in 1962 for trade investment promotion. On behalf

of ROK companies, KORTA provides support for the cultivation of and expansion into foreign markets,

gathers and disseminates information concerning foreign markets and companies, invites investments from

foreign investors, fosters specialist personnel concerning trade and investment and accepts foreign

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(bl. $)

China USA Hong Kong Vietnam Japan

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

(mil.$)

USA China Hong Kong Japan Vietnam

112

“many companies cited Vietnam as a candidate site for relocation for ROK companies operating in

China. Among the reasons for the increase in investments in Vietnam is the country’s attractiveness as

a production base due to its low labor cost compared with China and its attractiveness as a market with

a certain population size.”35,36

personnel with advanced skills, among other activities. Currently, KORTA has 122 overseas offices in 84

countries. 35 The population in 2014: approximately 92.5 million people (estimate by the United Nations Population

Fund) 36 Mukoyama, H., “KANKOKU NI TOTTE SONZAIKAN WO MASU BETONAMU” (February 2016).

113

Column 3 Progress in the ROK-U.S. Free Trade Agreement (FTA)

The United States is the second-largest trading partner for the ROK after China in terms of the trade

value (Column Figure 3-1). Although the value of trade between the ROK and the United States

continued to grow until 2014 after the ROK-U.S. FTA entered into force in 2012, it remained flat in

2015 (Column Figure 3-2).

Column Figure 3-1 Changes in ROK’s trade value (by major country)

Note: Countries with a larger trade value are indicated from the top.

Source: Korea Custom Service and Global Trade Atlas.

0

50

100

150

200

250

China USA Japan Vietnam Hong Kong Saudi Arabia

(bl. $)

2009 2010 2011 2012 2013 2014 2015

114

Column Figure 3-2 Changes in ROK and USA’s trade value


According to The Assessment of 4-Year Korea-U.S. FTA and Implications, a report published in

March 2016 by the Korea International Trade Association’s Institute for International Trade, products

exported from the ROK had a share of 3.2%, the largest in 15 years, of the U.S. import market in 2015

despite a serious slump in exports last year. The report also offered the analysis that the tariffs on “FTA-

benefiting products” for which tariffs have been lowered or eliminated, such as electric and electronics

products, machinery, rubber and agricultural products, led the rise in the share in the United States.

Regarding passenger cars, which account for around a quarter37 of the value of exports to the United

States, expansion of exports is expected because after 2016, the fifth year38 from the entry-into-force of

the FTA, the 2.5% tariff will be eliminated39 (Colum Figures 3-3 and 3-4).

37 The share rose from 17.6% in 2012 to 25.1% in 2015 (HS8703, passenger cars). 38 Regarding the counting of the number of years of tariff concessions, the second year of tariff

concessions starts on January 1 of the year that follows the year of the entry-into-force, and January 1 is

treated as the starting point of counting for later years as well. 39 Regarding passenger cars, it was prescribed that the United States should maintain the import tariff rate

(2.5%) for four years after the entry-into-force and eliminate the tariff in the fifth year and that the ROK

should reduce the import tariff rate (8%) to 4% on the date of the entry-into-force and eliminate the tariff

in the fifth year after keeping the rate at 4% for four years (prescribed in Paragraph A of the official notes

exchanged on February 10, 2011).

0

20

40

60

80

100

120

140

2009 2010 2011(1 year beforeeffectuation)

2012(1st year of

effectuation)

2013(2nd year ofeffectuation)

2014(3rd year ofeffectuation)

2015(4th year ofeffectuation)

(bl. $)

Export value Import value Trade value

(year)

115

Column Figure 3-3 Changes in ROK’s export value to USA (by major item)

Note: HS2-digit classification.


Column Figure 3-4 Changes in ROK’s import value from USA (by major item)

Note: HS 2-digit classification.


The ROK has been actively promoting FTAs with major countries around the world since the

beginning of the 2000s. On December 20, 2015, FTAs signed with China, Vietnam and New Zealand

0

5

10

15

20

25

30

Auto

mobil

es a

nd p

arts

Ele

ctri

c eq

uip

men

t

Gen

eral

mac

hin

ery

Min

eral

fuel

Ste

el p

roduct

s

Ste

el

Pla

stic

Rubber

Opti

cal

appar

atus

Org

anic

chem

istr

y

Air

craf

t

Ves

sels

87 85 84 27 73 72 39 40 90 29 88 89

(bl. $)

2009

2010

2011

2012

2013

2014

2015

0

5

10

15

20

25

Gen

eral

mac

hin

ery

Ele

ctri

c eq

uip

men

t

Opti

cal

app

arat

us

Min

eral

fu

el

Gra

ins

Pla

stic

Org

anic

ch

emis

try

Chem

ical

pro

duct

s

Au

tom

obil

es a

nd

par

ts

Mea

t

Air

craf

t

Phar

mac

euti

cal

pro

du

cts

84 85 90 27 10 39 29 38 87 02 88 30

(bl. $)

2009

2010

2011

2012

2013

2014

2015

116

entered into force, with tariffs reduced or eliminated immediately thereafter, and on January 1, 2016, the

second-year tariff reductions were implemented.

According to an estimate of the economic effects following the entry-into-force of the above three

FTAs that was announced by the ROK government,40 the effects will raise the ROK’s real GDP growth

rate by 1.0% and will create around 55,000 jobs over the 10 years following the entry-into-force.

(B) Indonesia

(a) Growth after the global economic crisis and the recent slowdown

Indonesia achieved a recovery from the global economic crisis earlier than any other ASEAN

country and maintained a growth rate of between 6% and 7% for three consecutive years from 2010.

This robust economic performance, coupled with the stability of the government of President Susilo

Bambang Yudhoyono, drew the world's attention to Indonesia’s growth potential.41 In 2008, after the

outbreak of the global economic crisis, Indonesia joined the G20 Summit, which was the first such

summit meeting attended by emerging countries, becoming the only ASEAN country to do so, a fact

that indicates the high expectations for its growth potential. However, since 2010, Indonesia’s growth

rate has been slowing down year after year, and in 2015, the growth rate came to 4.8% (Figure I -1-2-1-

44).

40 The press release reference materials published by the ROK Ministry of Trade, Industry and Energy

(December 20, 2015), Trade Publicity (January 6, 2016) (JETRO) 41 In 2009, a securities market participant emphasized the promising potential of China, India and

Indonesia, which were rising as emerging economies, by coining the word “Chindonesia.” In addition, a

report titled “Indonesia, adding another I to the BRIC story?” was issued.

117

Figure I-1-2-1-44 Changes in real GDP growth rates in ASEAN countries

Source: IMF WEO, April 2016.

Looking at changes in the contributions of demand components to the growth rate in the five years

between 2011 and 2015, when the real GDP growth rate continued to decline, the following trends attract

attention: (i) although the contribution of private consumption was always large, it declined year after

year; (ii) the contribution of gross fixed capital formation, which was at a similar level to the contribution

of private consumption in 2011 and 2012, fell steeply in 2013 and thereafter;42 (iii) the contributions of

both imports and exports declined year after year, and in 2015, the contributions of both items were

negative (as imports declined more than exports did, the contribution of net exports was positive) (Figure

I-1-2-1-45 and Table I-1-2-1-46).

42 From 2010 to 2012, there was a boom in foreign direct investments in Indonesia. As for the decline in

the second half of 2015, the failure to smoothly implement the budget under a new government is

presumably a contributing factor.

-15

-10

-5

0

5

10

15

201

995

19

96

19

97

19

98

19

99

20

00

2001

20

02

20

03

20

04

20

05

2006

20

07

20

08

20

09

20

10

2011

20

12

20

13

20

14

20

15

Indonesia Singapore Thailand Philippines Brunei

Vietnam Malaysia Myanmar Cambodia Laos

(%)

(year)

Asian currency crisis Global economic crisis

118

Figure I-1-2-1-45 Changes in Indonesia’s real GDP growth rate and contributions by demand

components

(Ratio to the previous year, ratio to the same quarter of the previous year, %, percentage point)

Source: Statistics Indonesia, CEIC Database.

Table I-1-2-1-46 Changes in Indonesia’s real GDP and contributions by demand components

(numerical scheme of Figure I-1-2-1-45)


Regarding the average of the shares of individual GDP demand components in the five years between

Real GDP

growth

rate

Private

consumption

Government

consumption

Gross

capital

formation

Inventory

changeExports Imports Net exports Error

2011 6.2 2.8 0.5 2.7 -0.2 3.6 3.4 0.2 0.0

2012 6.0 3.1 0.4 2.9 0.8 0.4 1.9 -1.5 0.4

2013 5.6 3.0 0.6 1.6 -0.6 1.0 0.5 0.6 0.3

2014 5.0 2.9 0.1 1.5 0.4 0.2 0.5 -0.3 0.4

2015 4.8 2.7 0.5 1.6 -0.5 -0.5 -1.4 0.9 -0.4

119

2011 and 2015, the share was 56% for private consumption, 32% for gross fixed capital formation, 9%

for government consumption and 0% for net exports (24% for both exports and imports), indicating that

the growth was led mainly by domestic demand and investment.

A look at changes in the contribution to the growth rate by industry shows the following trends: (i)

the contribution of the mining sector decreased year after year and became negative in 2015; (ii) the

contributions of the manufacturing and wholesale/retail/boarding/dining sectors declined; (iii) the

contribution of agriculture/forestry/fisheries, construction, and various services sectors, including

information and communication remained stable (Figure I-1-2-1-47 and Table I-1-2-1-48).

Figure I-1-2-1-47 Changes in Indonesia's real GDP and contributions by industry

(Ratio to the previous year, ratio to the same quarter of the previous year, %, % point)


Figure I-1-2-1-48 Changes in Indonesia’s real GDP growth rate and contributions by industry



-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

20

11

20

12

20

13

20

14

20

15

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2011 2012 2013 2014 2015

Net indirect taxes

Other services

Finance andinsurance

Informationcommunication

Transport andwarehousing

Wholesale, retail,boarding and dining

Construction

Electricity, gas andwater

Manufacturing

Mining

Agriculture, forestryand fisheries

GDP(Year/Q)

(Yearly base) (Quarterly base)

(Year)

Real GDP

growth

rate

Agriculture,

forestry and

fisheries

Mining Manufacturing

Electricity,

gas and

water

Construction

Wholesale,

retail, boarding

and dining

Transport and

warehousing

Information

communication

Finance

and

insurance

Other

servicesNet taxes

2011 6.2 0.5 0.4 1.4 0.1 0.8 1.5 0.3 0.4 0.2 1.0 -0.5

2012 6.0 0.6 0.3 1.2 0.1 0.6 0.9 0.3 0.5 0.3 0.8 0.3

2013 5.6 0.6 0.3 1.0 0.1 0.6 0.9 0.3 0.4 0.3 0.8 0.5

2014 5.0 0.6 0.1 1.0 0.1 0.7 0.9 0.3 0.4 0.2 0.8 0.1

2015 4.8 0.5 -0.5 0.9 0.0 0.6 0.5 0.3 0.5 0.3 0.9 0.8

120

Regarding inward foreign direct investments, investments increased from 2009 onwards but

remained flat for three consecutive years from 2013 to 2015.43 Major investor countries/regions are

Singapore, Japan and other Asian countries, Europe and the Americas 44 (Figure I-1-2-1-49). By

investment sector, the value of investments in the secondary industry continued to rise from 2010 to

2013 but declined in 2014 and 2015. On the other hand, the value of investments in the tertiary industry

grew from 2013 onwards and reached almost the same level as the value of investments in the secondary

industry in 2015. Although the value of investments in the primary industry increased from 2008

onwards, the level was relatively low compared with the values of investments in the other industries,

and in 2015, it declined (Figure I-1-2-1-50).

Figure I-1-2-1-49 Changes in Indonesia’s inward direct investment (investing countries and

regions)

Note: Performance base.

Source: Indonesia Investment Coordinating Board, CEIC Database.

43 It was Japan that led the boom in foreign direct investments in Indonesia from 2010 to 2012, with

investments made not only in the resource sector but also in other sectors such as machinery (automobiles,

motorcycles and parts), daily consumer goods and services. 44 The major investor countries/regions, arranged in descending order in terms of the share in overall

investments (actual results in 2015), are Singapore (20.2%), Malaysia (10.5%), Japan (9.8%), Europe

(7.9%), the Americas (6.1%), the ROK (4.1%), Hong Kong (3.2%) and China (2.1%). Asia as a whole has a

share of around 51%.

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014 2015

Japan SingaporeROK Other AsiaUSA Europe

(bl. $)

(year)

International

cooperationAfrica Australia and

OceaniaROK

USA Other Asia Europe Japan

Malaysia Singapore Total

121

Figure I-1-2-1-50 Changes in Indonesia’s inward direct investment (investment target)

Note: Performance base.

Source: Statistics Indonesia and CEIC Database.

As for the trade trends, Indonesia’s trade surplus expanded after the Asian currency crisis because

of declines in imports of input materials, such as parts and raw materials, and capital goods. In addition,

growth in exports due to a rise in prices of primary goods and an increase in demand for resources also

expanded the surplus. Due to the effects of the global economic crisis, the trade surplus temporarily

shrank, but the trade balance later improved due to the booming demand for natural resources. However,

while exports decreased in line with the global recession around 2012, imports increased against the

backdrop of robust domestic demand, resulting in the deterioration of the trade balance, and Indonesia

recorded a trade deficit, albeit a small one, for three consecutive years from 2012 to 2014. In 2015, the

trade balance improved and registered a slight surplus, but the reason for the improvement was a larger

decline in imports than in exports (Figure I-1-2-1-51).

-100

-50

0

50

100

150

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014 2015

Primary industry Secondary industry

Tertiary industry Total

Total, ratio to the previous year (right axis)

(bl. $) (Ratio to the previous year, %)

(Year)

122

Figure I-1-2-1-51 Changes in Indonesia’s trade balance

Note: Imports are indicated as minuses.


Regarding exports (compared with the previous year), a look at changes in the top five export

destinations (in terms of contribution) shows that except during the time of the global economic crisis,

exports, mainly to Japan, China, Singapore, the United States and India, grew from 2002 onwards, but

in 2012 and thereafter, exports generally declined. In particular, exports to China made a negative

contribution in 2014 (Figure I-1-2-1-52).

Figure I-1-2-1-52 Changes in Indonesia’s exports (ratio to the previous year) (contributions of

top 5 countries)


-200

-150

-100

-50

0

50

100

150

200

250

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Exports Imports Trade balance

(bl. $)

Asian currency crisis Global economic

crisis

(year)

-20

-10

0

10

20

30

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Japan China Singapore USA

(%)

(year)

123

Looking at changes in the top five export items (in terms of contribution), exports of mineral fuels

increased from 2003 onwards except during the global economic crisis but made a negative contribution

in 2012 and afterwards (Figure I-1-2-1-53).

Figure I-1-2-1-53 Changes in Indonesia’s exports (ratio to the previous year) (contributions of

top 5 items)


It is notable that the combined share of mineral fuels and animal and plant fat and oil, two of the top

export items, in overall exports, which was only 28.1% in 2000, rose to 44.6% in 2012 (Figure I-1-2-1-

54).

-20

-10

0

10

20

30

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mineral fuel Animal and vegetable oil and fatElectric machinery Rubber and rubber productsGeneral machinery OthersAll items

(%)

(year)

124

Figure I-1-2-1-54 Changes in Indonesia’s exports (share of top 5 items and natural resources)


Over the 15-year period from 2000 to 2014, the value of overall exports from Indonesia grew by a

factor of 2.8, with exports to China expanding by a factor of 6.4 and exports to India increasing by a

factor of 10.6 (Table I-1-2-1-55).

Table I-1-2-1-55 Changes in Indonesia’s imports (comparison of 2000 and 2004)

Mil. $ (2000 and 2014)

World Japan China Singapore USA India Others

2000 62,124 14,415 2,768 6,562 8,475 1,151 28,753

2014 176,292 23,166 17,606 16,807 16,530 12,249 89,934

Times 2.8 1.6 6.4 2.6 2.0 10.6 3.1


As for changes in the shares of export destination countries in overall exports from Indonesia,

Japan’s share declined from 23.2% to 13.1%, whereas China’s share increased from 4.5% to 10% and

India’s share grew from 1.9% to 6.9% (Table I-1-2-1-56).

28.1

44.6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mineral fuel Animal and vegetable oil and fatElectric machinery Rubber and rubber productsGeneral machinery OthersShare of natural resources

(year)

125

Table I-1-2-1-56 Changes in ratio of exports in Indonesia (comparison of 2000 and 2014)

%

World Japan China Singapore USA India Others

2000 100 23.2 4.5 10.6 13.6 1.9 46.3

2014 100 13.1 10.0 9.5 9.4 6.9 51.0

Increase

or

decrease

of ratio

↓ ↑ ↓ ↓ ↑ ↑


Looking at changes in Indonesia’s export dependency,45 the export dependency rose from 20.5% to

42.4% in 1998, immediately after the Asian currency crisis. Although the export dependency fluctuated

slightly afterwards, it was generally on a downtrend (Figure I-1-2-1-57). In 2014, Indonesia’s export

dependency, at 20%, was the lowest among the ASEAN countries (Figure I-1-2-1-58).

Figure I-1-2-1-57 Changes in dependence of exports in ASEAN countries

Note: Dependence of exports is calculated as exports of goods / real GDP.

Source: DOT and WEO, April 2016, IMF and CEIC Database.

45 The export dependency as referred to here is the value of trade in goods divided by the value of nominal

GDP.

0

20

40

60

80

100

120

140

160

180

200

19

94

1995

1996

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

2007

2008

20

09

20

10

20

11

20

12

20

13

20

14

Indonesia Singapore Thailand Philippines Brunei

Vietnam Malaysia Myanmar Cambodia Laos

(%)

(Year)


126

Figure I-1-2-1-58 Dependence of imports in ASEAN countries

Note: Share of exports to China in total export value on performance basis in 2014.

Source: DOT, IMF and CEIC Database.

(b) Effects of the Chinese economy’s slowdown

Below, whether or not the Chinese economy’s recent slowdown is affecting Indonesia will be

examined. First, Indonesia’s dependency on exports to China tripled over the 20-year period from 1994

to 2014, with China-bound exports accounting for 10% of overall exports (Figure I-1-2-1-59).46 Among

the ASEAN countries, Indonesia had the third-lowest dependency on exports to China (Figure I-1-2-1-

60). Indonesia’s dependency on exports to the rest of the world is the lowest among the ASEAN

countries in the first place, so China’s economic conditions are presumed to have relatively small direct

effects on Indonesia. Even so, it is presumed, for the following reasons, that the indirect effects of

China’s economic conditions on Indonesia are not small: in 2014, the dependency on exports to China

was higher than 10% for eight of the 10 ASEAN countries, meaning that the economic growth of the

ASEAN countries in general is prone to be affected by China’s economic conditions,47 and trade within

the ASEAN region has become more active in recent years.

46 It is notable that Indonesia’s dependency on exports to China peaked at 12.4% in 2013 and abruptly

started to decline in 2014. 47 Here, only exports to mainland China are included in the calculation, so if exports to Hong Kong are

added, the dependency would be higher.

20 22

3440

55 5664

6977

134

57

0

20

40

60

80

100

120

140

Indones

ia

Phil

ippin

es

Myan

mar

Lao

s

Bru

nei

Thai

land

Cam

bodia

Mal

aysi

a

Vie

tnam

Sin

gap

ore

AS

EA

N a

ver

age

(%)

127

Figure I-1-2-1-59 Changes in ratio of exports to China in exports in ASEAN countries

Note: Share of exports to China in total export value excluding Myanmar and Laos.


Figure I-1-2-1-60 Share of exports to China in exports in ASEAN countries.

Note: Share of exports to China in total export value on a performance basis in 2014.


0

2

4

6

8

10

12

14

161

99

0

19

91

19

92

19

93

19

94

19

95

19

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19

97

19

98

19

99

20

00

20

01

20

02

20

03

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04

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20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Brunei Cambodia Indonesia Malaysia

Philippines Singapore Thailand Vietnam

(%)

(Year)


24

10 10 11 12 13 13

34

63

17

0

10

20

30

40

50

60

70

Bru

nei

Cam

bod

ia

Indones

ia

Vie

tnam

Thai

land

Mal

aysi

a

Sin

gap

ore

Ph

ilip

pin

es

Lao

s

Myan

mar

AS

EA

N a

ver

age

(%)

128

As for Indonesia’s trade balance with China, the deficit expanded from 2012 onwards, but the deficit

in 2015 remained flat compared with 2014. Except in 2009, immediately after the outbreak of the global

economic crisis, the value of trade between the two countries continued to expand, but exports to China

started to decline in 2013 (Figure I-1-2-1-61).

Figure I-1-2-1-61 Changes in Indonesia’s trade balance (to China)

Note: Imports are indicated as minuses.


Regarding product items exported to China (on a four-digit HS code basis), the following trends are

notable: (i) after the global economic crisis, exports of coal, lignite and palm oil grew due to increased

demand from China but declined after peaking in 2012; (ii) the value of exports of coal fell from the

peak of around 6.4 billion dollars in 2011 to around a fourth, or around 1.6 billion dollars, in 2015

(Figure I-1-2-1-62 and Table I-1-2-1-63).

-40

-30

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20

30

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Exports to China Imports from China Trade balance

(bl. $)

(Year)

Global economic crisis

129

Figure I-1-2-1-62 Changes in Indonesia’s exports to China (top 10 items) (HS 4-digit base)


Table I-1-2-1-63 Changes in Indonesia’s exports to China (top 10 items) (HS 4-digit base)


$1,000,000

All items Palm oil Lignite Coal Petroleum

gas

Chemica

l wooden

pulp

Bitumino

us

mixture

Coconut

oil

Oil

(crude

oil)

Other

wood

products

Activate

d carbon Others

2000 4,402 148 0 8 89 535 0 22 966 12 47 2,575

2001 3,888 94 0 31 58 410 0 44 516 1 37 2,697

2002 4,501 190 8 68 78 450 0 43 584 0 36 3,044

2003 5,754 375 2 27 79 504 0 65 735 1 50 3,916

2004 7,212 557 6 54 51 600 0 120 959 3 56 4,806

2005 8,430 560 0 100 69 644 0 174 1,590 1 49 5,243

2006 9,610 713 4 230 67 639 0 197 969 2 56 6,733

2007 12,380 997 22 743 79 623 0 296 1,182 2 73 8,363

2008 14,377 1,646 173 986 37 797 0 430 1,142 2 102 9,062

2009 13,538 1,606 276 2,046 149 540 0 308 1,425 1 79 7,108

2010 20,760 1,874 971 4,452 395 697 0 480 814 1 144 10,932

2011 31,323 2,337 2,661 6,410 418 909 0 595 520 3 352 17,118

2012 32,033 2,943 3,145 6,247 544 910 672 603 490 112 544 15,823

2013 31,478 1,991 2,970 5,291 530 1,227 679 385 567 349 534 16,955

2014 24,589 2,015 3,016 3,316 858 1,210 406 523 275 538 721 11,711

2015 19,815 2,143 1,840 1,553 1,251 1,217 806 620 574 542 516 8,753


0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Palm oil Lignite Coal

Petroleum gas Chemical wooden pulp Bituminous mixture

Coconut oil Oil (crude oil) Other wood products

Activated carbon Others All items

(bl. $)

(Year)

Global economic crisis

130

From the above, it is presumed that while the expansion of exports of primary goods to China after

the global economic crisis made significant contributions to Indonesia’s growth, the reaction to the

recent steep drop in demand resulted in the current slowdown of the growth.48

(c) Challenges to be overcome in order to maintain stable growth

Despite the growing expectations for the government of President Jokowi, which was inaugurated

following a change of government at the end of 2014, Indonesia’s economic growth has recently slowed

down. In Indonesia, the manufacturing industry has not grown sufficiently to lead the economic growth.

Although it is a net importer of oil, Indonesia has not yet fully shifted away from an economic structure

dependent on exports of resources, so it is often swayed by the trends of the world economy.

Among other presumed factors behind the slowdown of Indonesia’s growth are the withdrawal of

risk money around the world, which reduced investments and consumption, and the monetary policy

tightening by the Bank Indonesia, the central bank, since the middle of 2013 due to concerns over the

current account deficit.

The government of President Jokowi has set the target of the real GDP growth rate during his term

of office at a high level, 7% on average. In order to realize such high economic growth and keep the

growth sustainable, there are many challenges to be overcome. One is upgrading the export structure.

Because of its rich reserves of natural resources, Indonesia has a high dependency on coal, palm oil and

other natural resources, and its economic conditions are prone to be significantly affected by movements

of prices of such resources. Presumably, the economic growth achieved by the previous government of

President Yudhoyono was not one led by the manufacturing sector but was one dependent on exports of

resources to meet demand from emerging countries. (Figure I-1-2-1-64) In order to create enough jobs

for the working-age population that is expected to continue growing, fostering domestic companies and

establishing a system that enables production and exports of products with high value added is a

challenge (Figure I-1-2-1-65). To cope with this challenge, it will be important for Indonesia to

implement economic measures that the government of President Jokowi is advocating, promote

peripheral industries and small and medium-size enterprises by improving the business and investment

environments, make progress in the development of infrastructure that constitutes the foundation of

regional development and the promotion of investments and exports, and deepen networks with other

countries by actively involving itself in and leading the initiatives for regional economic integration and

economic cooperation.

48 According to Sato (2015), the main reason why the double-digit growth in the value of exports from

Indonesia that continued from 2004 to 2011 (except in 2009, when exports were affected by the global

economic crisis) abruptly declined in 2012 and has remained on a downtrend since then is the end of the

commodity boom that was triggered by increased demand from China.

131

Figure I-1-2-1-64 Changes in industrial structure of Indonesia

Note: Secondary industry includes mining, construction, electricity, water and gas.

Source: WID, World Bank.

Figure I-1-2-1-65 Forecast of Indonesia’s population composition (estimation by the United

Nations)

Note: Population estimate by the United Nations which estimates high, middle and low variants of

0

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(%)

(Year)


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Total/young population (0-14 years)

Estimation

(100 mil. people)

Prospect of

increase of

(Year)

132

population every 5 years. Figure shows middle variants.


(3) Excess production capacity and an increase in trade restrictive measures taken around the

world

By causing an expansion of exports from producing countries and by lowering export prices, excess

production capacity around the world, coupled with the slowdown of the world economy, is prompting

countries to take trade remedial measures, such as anti-dumping (AD) measures and safeguard (SG)

measures. In this section, an overview of the current status of excess production capacity and countries’

response will be provided with respect to the steel industry, where this trend is prominent.

(A) Status of excess capacity in the steel industry

Global steel demand declined steeply in 2009 in response to the global economic crisis but has been

recovering since 2010 predominantly due to the economic package implemented in China, among other

factors. However, as crude steel production capacity has increased at a pace higher than that of demand,

the supply-demand gap expanded in the global steel market, resulting in a state of excess supply.

According to a forecast by the OECD, 49 in 2015, annual apparent consumption 50 volume is

approximately 1.65 billion tons while the global crude steel production capacity is estimated at

approximately 2.3 billion tons. It means that there is annual excess capacity of approximately 0.65

billion tons. The gap between production capacity and consumption volume has been expanding every

year, with the result that the capacity utilization rate (a value obtained by dividing crude steel production

volume with steel production capacity) plunged sharply from 84% in 2005 to 70% in 2015 (Figure I-1-

2-1-66).

49 OECD Directorate for Science, Technology and Innovation, Steel Committee (2015), Excess Capacity in

the Global Steel Industry: The Current Situation and Ways Forward, DSTI/SU/SC (2014) 15/FINAL,

March 2015 50 Generally speaking, apparent consumption refers to the sum of the volume of production in and the

volume of imports into a relevant country/region minus the volume of exports from the country/region.

133

Figure I-1-2-1-66 Gap between production capacity and actual production volume in the global

steel market

Source: Statistical data of OECD Steel Committee and Bureau of Resources and Energy Economics of

Australia.

In China, while production capacity increased 3.4% in 2014 compared with the previous year,

apparent consumption volume of steel materials dropped 3.8% compared with the previous year. Due to

this domestic situation, the volume of exports from China increased around 50%, whereas export prices

of hot-rolled steel, a representative type of steel material, fell by around 20% in February 2016 compared

with the same month of the previous year (Figure I-1-2-1-67).

Figure I-1-2-1-67 Changes in export price from China (average of all steel)

Global total

to USA

to ASEAN

134

The ROK and other many Asian countries, along with China, have plans to construct new steel plants

or expand existing plants. Factors behind the higher pace of increase in production capacity than the

pace of growth in demand include governmental interventions and other market-distorting practices, in

addition to a slowdown in the demand itself.51 Theoretically, if the state of excess production lasts over

an extended period of time, producers cut back on their production capacity. However, in reality, the

production capacity remains the same and the state of excess capacity continues over an extended period

of time. The reasons for that include the malfunction of market mechanism in producing countries along

with the high cost of withdrawal, such as the costs of disposal of facilities and employment adjustments,

the excessive market expectations for the future, and governments’ intention to maintain employment

and increase steel self-sufficiency.52 Indeed, despite the state of excess capacity, since the projects for

the construction of new steel plants are progressing, it is estimated that global crude steel production

capacity will continue to increase significantly (Table I -1-2-1-68).

Table I-1-2-1-68 Successive construction of large steel plants in Asia

Source: News reports.

(B) Increase in the initiation of trade remedial measures

Surplus steel materials relative to demand are traded at low prices in domestic and export markets,

resulting in a decline in the profitability of the steel industry as a whole. In addition, due to inflows of

51 OECD Directorate for Science, Technology and Innovation, Steel Committee (2015) 52 As steel is a raw material that constitutes the foundation of many industries, it is widely used in such

products as automobiles and household electrical products, transportation infrastructure, including railways

and expressways, resource infrastructure such as oil field facilities and pipelines, and buildings. Therefore,

each country seeks to ensure stable domestic supply of steel. In Japan, too, the government-operated Yahata

Steel Works started operation more than a century ago, specifically, in 1901.

Baosteel Group (Zhanjiang, Guangdong province, China) 8.93 mil.t (operation scheduled September 2015)

Buhan Iron and Steel (Fangchenggang, China) 9.2 mil.t (operation scheduled 2016)

POSCO (Odisha, India)

12 mil.t (plan)

Tata Steel Limited (Hà Tĩnh, Vietnam)

4.5 mil.t (plan)

Shougang Group (Terengganu, Malaysia)

0.7 mil.t (1st phase, operation 2015)

Shandong Iron and Steel Group (Rizhao, Shangdon province, China) 8.1 mil. t (operation scheduled 2016)

Hyundai Steel (Dangjin, ROK)

4.0 mil. t (1st phase, operation 2010) 4.0 mil. t (2nd phase, operation 2010)

4.0 mil. t (3rd phase, operation 2013)

China Steel (Kaohsiung, Taiwan)

2.5 mil.t (operation 2010)

Formosa Plastics (Hà Tĩnh, Vietnam) 22.5 mil. t (total of 2 phases by 2020) (plan)

(operation of 1st phase with 7.1 mil. t is scheduled 2016)

POSCO (Cilegon, Banten, Indonesia)

3.0 mil.t (1st phase, operation 2003) 3.0 mil.t (2nd phase) (plan)

135

large volumes of low-price steel materials into importing countries, there has been an increase in the

initiation of trade remedial measures around the world, as described above above. The number of anti-

dumping (AD) measures targeted at base metal products increased rapidly, from 21 in 2011 to 61 in

2014, while the number of SG measures has also been on an uptrend. AD and SG measures related to

base metal products accounted for around 39% and 36%, respectively, of the total number of AD and

SG measures initiated around the world. Thus, for the case of AD, the number of AD measures, which

was on a downtrend from the beginning of the 2000s, is increasing again (Figures I-1-2-1-69 and I-1-2-

1-70).

Figure I-1-2-1-69 Changes in the number of anti-dumping measures in the world by sector

Note: Cases classified as Base metals and articles and Products of the chemical and allied industries.

Source: WTO Anti-Dumping Database.

61

31

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136

Figure I-1-2-1-70 Changes in the number of safeguard measures in the world by sector

Source: WTO Statistics on safeguard measures.

2．Increase in volatility due to movements of resource prices and expansion of debts

(1) Current status of and challenges for resource-producing countries

(A) Impact of a drop in resource prices

Resource-producing economies recorded accelerated growth due to the expansion of demand for

resources in emerging countries, but they are experiencing an economic slowdown possibly because of

a steep fall in resource prices caused by an increase in supply due to such factors as the global economic

slowdown and the shale revolution (Figure I-1-2-2-1). However, the intensity of the impact of the drop

in resource prices differs from country to country. Russia and Brazil experienced a slowdown in their

real GDP growth rate in tandem with the drop in resource prices, and they recorded negative growth in

2015 (Figures I-1-2-2-2 and I-1-2-2-3). The exchange rates of these countries’ currencies fell, and at the

same time, credit default swaps (CDS) related to their government bonds rose (Figure I-1-2-2-4).

0

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Base metal Chemistry Resin Machinery Textiles Others

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5

(Year)

137

Figure I-1-2-2-1 Changes in major commodity prices

Source: Thomson Reuters EIKON.

Figure I-1-2-2-2 Changes in real GDP growth rate and crude oil price in resource-rich

countries

Note: * indicates estimated values.

Source: IMF WEO, October 2015.

0

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2010 2011 2012 2013 2014 2015 2016

Crude oil Coal Ores

(Index 1.1.2010=100)

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Indonesia Malaysia WTI (right axis)

(%) Global economic crisis (2008) Shell gas revolution (2013)

Low price of crude oil

(2014)

($/barrel)

138

Figure I-1-2-2-3 Real GDP growth rates of Russia and Brazil

Note: Simple moving average during respective terms. Values for 2016 are estimates by IMF.

Source: IMF World Economic Outlook Database.

Figure I-1-2-2-4 Changes in exchange and crude price WTI in major resource-rich countries


On the other hand, in Indonesia and Malaysia, which are also resource-producing countries, an

economic downturn as serious as the ones in Russia and Brazil, has not been observed up till now. In

-10

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2010/1/1 2011/1/1 2012/1/1 2013/1/1 2014/1/1 2015/1/1 2016/1/1

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Currency appreciation (weak dollar)

(January 2010=100)

Currency depreciation

(strong

dollar)

139

Saudi Arabia, the currency exchange rate has not changed because the country is adopting a fixed

exchange rate system, but CDS has risen since the end of August 2015 (Figure I-1-2-2-5).

Figure I-1-2-2-5 Changes in five-year CDS spread in resource-rich countries

Source: Thomson Reuters EIKON

Such differences are presumably due to the effects of improvement in some countries’ risk resilience

in terms of finance since the Asian currency crisis. However, another presumed background factor is

whether the countries have increased or reduced their dependence on resources during the commodity

boom that started in 2000. Below, we will examine the background of the increase in dependence on

resources during the commodity boom while comparing the records of growth in these resource-

producing countries.

(B) Challenges for resource-producing countries

Major resource-producing countries’ dependency on resources, in terms of the share of resources in

their exports of goods, declined markedly in Indonesia, Malaysia and Mexico from the 1980s onwards.

Although the dependency has slightly increased since 2000, it has generally stayed low (Figure I -1-2-

2-6).

Brazil

Russia

MalaysiaSaudi Arabia

Indonesia

0

100

200

300

400

500

600

700

Brazil Russia Malaysia Saudi Arabia Indonesia

(BP)

140

Figure I-1-2-2-6 Changes in share of resources in trade goods

Note: Resources are total value of “Oil and Coal” and “Iron and steel, Nonferrous metals.”

Source: RIETI-TID2014 database.

Presumably, one factor behind this is the expansion of the global value chain mainly in the

manufacturing industry, which was mentioned in Chapter 1. In other words, Japanese and other foreign

companies increased direct investments in Indonesia and Malaysia due to the ASEAN integration and

changes in industrial policies, leading to the countries’ integration into the global value chain. The

increase in the shares of processed goods and parts in trade of goods in the 1980s through the 1990s is

probably evidence of that (Figures I-1-2-2-7 and I-1-2-2-8).

0

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Malaysia Indonesia Mexico

(%)

141

Figure I-1-2-2-7 Changes in trade by goods in Malaysia


Figure I-1-2-2-8 Changes in trade by goods in Indonesia


In Mexico, investments by companies from developed countries, mainly the United States, also

0

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198019821984198619881990199219941996199820002002200420062008201020122014

Materials Processed goods Parts

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increased against the backdrop of the economic integration due to the North American Free Trade

Agreement (NAFTA) and the manufacturing industry grew.

Meanwhile, in Saudi Arabia, the share of resources in exports of goods has remained large, and

Brazil and Russia, which had been considered to be industrialized countries, have increased their

dependency on resources (Figures I -1-2-2-9, I-1-2-2-10 and I-1-2-2-11).

Figure I-1-2-2-9 Changes in trade by goods in Saudi Arabia


Figure I-1-2-2-10 Changes in trade by goods in Brazil


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Figure I-1-2-2-11 Changes in trade by goods in Russia


Possible common factors behind the lag in the diversification of the industrial structure in some

resource-producing countries include delays in these countries’ integration into the global value chain

compared with the economic integration of ASEAN, for example, as well as challenges particular to

individual countries.

In Brazil, for example, the presence of the so-called Brazil cost, which refers to costs related to the

complicated tax system, labor, employment and social security costs and logistics costs in Brazil, has

been pointed out since an earlier time. Brazil may be failing to maintain its competitiveness except in a

limited range of sectors, such as aircraft manufacturing.

In order to promote the diversification of the industrial structure and shed the economic dependency

on resources, it is necessary to seek the opportunity of concluding FTAs and other economic partnerships

and appropriately deal with challenges particular to individual countries.

(2) Expansion of debts in emerging countries

Since the global economic crisis, debts owed by non-financial private companies have continued to

expand in many emerging countries. In 2008, countries in developed countries held more debts as a

proportion of GDP than emerging countries, but in 2013, this situation was reversed. In the third quarter

of 2015, the amount of debts owed by non-financial private companies in emerging countries as a

proportion of GDP came to 100.7%, much higher than the 85.7% for their equivalents in developed

countries. While the increase in the amount of debts is significant in China, Turkey, Russia and Brazil,

the debt-service ratio, which indicates the repayment burden, including household debts, is high in Brazil,

0

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60

198019821984198619881990199219941996199820002002200420062008201020122014



(Year)

(%)

144

the ROK53 and China, with the rise in the ratio particularly steep in Brazil and China (Figures I-1-2-2-

12, I-1-2-2-13, I-1-2-2-14 and I-1-2-2-15).

Figure I-1-2-2-12 Ratio of the outstanding obligation to GDP in nonfinancial private corporate

sector (%)

Source: BIS total credit statistics.

53 Regarding the ROK’s heavy dependence on foreign capital, it has been pointed out that if foreign capital

is withdrawn, the supply of funds in the country may shrink, obstructing the smooth conduct of economic

activities. Looking at the ROK’s balance of net external assets, the country became a net asset holder in the

third quarter of 2014 for the first time since the preparation of the statistics started in 1994, with its assets

exceeding debts, and has remained a net asset holder since then. Meanwhile, a look at the composition of

the balances of the ROK’s external assets and debts (as of the end of 2014) shows that securities

investments and “other investments” (e.g. loans), which are relatively easy to withdraw, account for a larger

portion of the debts than direct investments, which are difficult to withdraw. The ratio of foreign currency

reserves to the balance of short-term debts that come due within the current year has stayed above the

benchmark level of 1.0.

100.7

85.7

40

50

60

70

80

90

100

110

120

2008 2009 2010 2011 2012 2013 2014 2015

Emerging countries Developed countries

(%)

(Year/Q)

145

Figure I-1-2-2-13 Changes in the ratio of the outstanding obligation to GDP in major emerging

countries (2008Q3-2015Q3, percentage point)

Note: Changes from 2008Q3 to 2015Q3.


Figure I-1-2-2-14 Debt repayment burden of nonfinancial and household sectors in major

emerging countries

Source: BIS debt service ratios statistics.

-20

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hin

a

Turk

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(pp)

21.620.1 20.0

13.5 13.5 13.1

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146

Figure I-1-2-2-15 Debt repayment burden of nonfinancial and household sectors in Brazil,

ROK and China


The leverage, which represents the debt-to-capital ratio, is also increasing. The increase is

remarkable in China and Latin America by country/region and in construction and oil/natural gas by

sector. However, it is notable that even in China and Latin America, the leverage has not increased

markedly in other sectors and that it has not increased in the construction and oil/natural gas sectors in

other regions (Figures I-1-2-2-16 and I-1-2-2-17).

Figure I-1-2-2-16 Rise in leverage of listed companies in emerging countries (2007-2013)

Source: IMF World Economic Outlook October 2015

21.6

20.1

20.0

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16

18

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24

2008 2009 2010 2011 2012 2013 2014 2015

Deb

t se

rvic

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Brazil ROK China(Year/Q)

(%)

4.7%

18.6%

9.4%

22.5%

0%

5%

10%

15%

20%

25%

Asia (China within

Asia)

Europe, Middle

East and Africa

Central and South

America

147

Figure I-1-2-2-17 Rise in leverage of listed companies in major emerging countries (2007-2014)

Source: IMF World Economic Outlook October 2015

In the first place, the leverage of non-financial private companies may be affected by factors at the

company, country and global levels. However, according to an analysis by the IMF, the importance of

factors at the company and country levels54 has declined in relative terms, while global factors, such as

the interest rate level in the United States and – although this has smaller effects – the crude oil price,

have become more important.55 As a result, it is presumed necessary for emerging countries to prepare

for the impact of the tightening of the global financial environment. In Brazil, for example, private-

sector debts expanded substantially in the phase of interest rate decline since the global economic crisis,

and this may be related to the global trend of lower interest rates (Figure I-1-2-2-18).

54 For example, the expansion of China’s debts is presumed to be closely related to the economic package

implemented after the global economic crisis, the economic development that is dependent on capital

investments, and excess production capacity. As for the excess production capacity in China, see Part I,

Chapter 1, Section 2 (1), and regarding the actual state of the expansion of debts, see the White Paper on International Economy and Trade 2014. 55 Diana Ayala, Milan Nedeljkovic & Christian Saborowski (July 2015) “What Slice of the Pie? The

Corporate Bond Market Boom in Emerging Economies (IMF Working Paper WP/15/148)”

109.4 97.7

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d n

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l gas

Cen

tral

and S

outh

Am

eric

a/C

onst

ruct

ion

Chin

a/C

onst

ruct

ion

Asi

a/C

onst

ruct

ion

Cen

tral

and S

outh

Am

eric

a/M

anufa

cturi

ng

Chin

a/M

inin

g

Euro

pe

and o

ther

s/C

onst

ruct

ion

Euro

pe

and o

ther

s/M

anufa

cturi

ng

Ch

ina/

Man

ufa

cturi

ng

Asi

a/O

il a

nd n

atura

l gas

Asi

a/M

inin

g

Asi

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anufa

cturi

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Euro

pe

and o

ther

s/M

inin

g

Euro

pe

and o

ther

s/O

il a

nd n

atura

lg

as Cen

tral

and S

outh

Am

eric

a/M

inin

g

(%)

148

Figure I-1-2-2-18 Corporate bond issues and project finance tranches by Brazilian companies

(100 mil. $)

Note: Total amount of total corporate bond issues with maturities of 10 years or longer that are registered

to Thomson Reuters as of 3.29.2006 and for which issuersthe issuing bodies are located in Brazil and

tranches that are registered to Thomson Reuter

Source: Thomson Reuters

Moreover, exposure to foreign currency debts is expanding, mainly in Latin America, and attention

also needs to be paid to this point.56 In Brazil, dollar-denominated private-sector debts have large shares

in corporate bonds in the mining sector (97.2%) and project finance (77.5%), which are sectors where

cash flow in dollar terms can generally be expected, but it should be kept in mind that dollar-

denominated debts also have a certain share in corporate bonds in the financial sector (Figure I-1-2-2-

19).

56 Global Financial Stability Report October 2015 (IMF)

0

50

100

150

200

250

300

350

400

450

500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Corporate bonds (others) Project finance

Corporate bonds (mining sector) Corporate bonds (financial sector)

(100 mil. $)

149

Figure I-1-2-2-19 Ratio of private-sector debts in Brazil that are dollar denominated

Note: Total amount of total corporate bond issues with maturities of 10 years or longer that are registered

to Thomson Reuters as of 3.29.2006 and issuing bodies are located in Brazil and tranches that are

registered to Thomson Reuters as of 3.24.2016 and

Source: Thomson Reuters

Household debts have grown mainly in Southeast Asian countries, such as Thailand, Malaysia and

Singapore, reaching a level similar to the level in developed countries57 (Figures I-2-2-20 and I-1-2-2-

21). Among the factors behind the growth in household debts are presumably an increased consumption

appetite associated with a rise in the income level and progress in the development of institutions and

legal systems 58 concerning credit information due to assistance from Japan. 59 For example, the

coverage rate of credit information concerning the adult population has risen rapidly, to 70.8% in

Thailand, to 70.4% in Malaysia and to 60.8% in Singapore, contributing to the expansion of

consumption (Figure I-1-2-2-22). On the other hand, there are moves to introduce regulation on personal

loans in some countries in order to prevent the rapid increase in household debts from becoming an

instability factor in terms of finance.

57 Generally speaking, legal systems necessary for the accumulation of household debts, such as housing

loans, are well developed in developed countries, so the amount of household debts there is large compared

with the amount in emerging countries. In the third quarter of 2015, the ratio of household debts to GDP

was 74.8% in developed countries, compared with 32.3% in emerging and developed countries (according

to BIS total credit statistics). 58 Ease of raising funds is an element of the “Doing Business” business environment indicator of the World

Bank, and the coverage ratio of credit information and the development of legal systems are used as

benchmarks. 59 For example, as part of the APEC’s structural reform initiative (EoDB: Ease of Doing Business), Japan

provided support for the development of institutional systems in the APEC member countries/regions in the

area of fund-raising.

97.2

77.5

50.2

36.0 26.5

0

20

40

60

80

100

Corp

ora

te b

onds

(min

ing

sect

or)

Pro

ject

fin

ance

Corp

ora

te b

onds

(oth

er

sect

ors

)

Corp

ora

te b

onds

(all

sect

ors

)

Corp

ora

te b

onds

(fin

anci

al s

ecto

r)

(%)

150

Figure I-1-2-2-20 Changes in household debts in major emerging countries (2008Q3-2015Q3,

percentage point)

Note: Changes from 2008Q3 to 2015Q3.


Figure I-1-2-2-21 Changes in the ratio of households' debt balance to GDP in ASEAN countries


26.7

21.820.3 20.3

15.0

10.89.9

8.26.0

4.7 4.5

2.2 1.8

0

5

10

15

20

25

30

Thai

land

Mal

aysi

a

Sin

gap

ore

Chin

a

Hong K

ong

Bra

zil

Pola

nd

Turk

ey

Russ

ia

Indones

ia

Sau

di

Ara

bia

Arg

enti

na

Mex

ico

74.8

70.4

60.8

70.8

0

10

20

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012 2013 2014 2015

Developed countries average IndonesiaMalaysia SingaporeThailand

151

Figure I-1-2-2-22 Coverage rate of credit information concerning the adult population

Source: World Bank Doing Business Database 2016.

It should be kept in mind that many emerging countries other than China and resource-producing

countries60 are recording current account deficits. Countries recording current account deficits need to

cover the deficits by raising funds from abroad, a situation which will lead to an increase in net external

debts. While the United States61 and southern European countries reduced their current account deficits

following the global economic crisis and the euro crisis, the proportion of emerging countries among

the countries recording current account deficits is increasing. Although the total sum of current account

surpluses around the world, namely the size of the global imbalance, has been declining since the global

economic crisis, such surpluses have continued to be concentrated in countries like China and Germany,

with many emerging countries slipping into current account deficit (Figures I-1-2-2-23 and I-1-2-2-24

and Table I-1-2-2-25).

60 According to the World Economic Outlook Database October 2015 (IMF), many resource-producing

countries are forecast to fall into current account deficit in 2015. 61 As demand for the U.S. dollar as a currency of settlement in international transactions continues to exist

under the dollar reserve currency system, the United States can afford to let the current account deficit

grow and to accumulate net external debts (Ogawa, E. (ed.), GUROBARU INBARANSU TO KOKUSAI TSUKA TAISEI), but the situation is different for emerging countries.

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Malaysia Thailand Singapore(Year)

152

Figure I-1-2-2-23 Ratio of global imbalance to nominal GDP

Note: Values that represent the total of current account surpluses of all current account surplus countries

and regions are divided by global nominal GDP.

Source: IMF World Economic Outlook Database October 2015.

Figure I-1-2-2-24 Changes in current balance in major countries in the world

Note: South Europe includes Spain, Portugal, Italy and Greece.


-1,500

0

1,500

19

80

19

81

19

82

19

83

19

84

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14

Cu

rren

t b

ala

nce

Other developing countries Other developed countriesCentral, East and North Africa GermanyJapan ChinaUK South EuropeUSA

(Bl. US$)

Expansion of imbalance

Decline in imbalance

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Figure I-1-2-2-25 Changes in scale of global imbalance


Ratio of global imbalance to nominal GDP is a value that represents the total of current account surpluses

of all current account surplus countries and regions divided by global nominal GDP.

Ratios of current balance to nominal GDP in respective countries and regions are classified in five levels

in the maps. (>-5.0%, -5.0%to -2.5%, -2.5% to ±0.0%, ±0.0% to +2.5%, +2.5% -)

3. Structural reform initiatives in emerging countries

This paragraph describes structural reform initiatives in three emerging countries—China, which is

shifting to a new normal; India, which has the world’s second-largest population and high economic

growth rate; and the ROK, which is at a turning point in the political area— and in resource-producing

countries which are being affected by the recent drop in resource prices.

(1) Shift to a new normal in China

China is facing various structural challenges, including overcoming excess production capacity and

shifting away from an investment-driven growth model. Thus the Chinese government is making policy

changes accordingly. Here, an overview of the Chinese government’s initiatives will be provided with a

particular focus on the important policies for 2016 that were announced at the 2016 National People’s

Congress (equivalent to the Diet in Japan) and the 13th Five-Year Plan.

(A) Chinese government’s basic policy

The Chinese government explained its policy for activities in 2016 to the session of the National

People’s Congress in March 2016 and also presented a draft of the 13th Five-Year Plan for the next five

years for deliberation.

As for target figures for 2016, as part of its shift to a “new normal,” which refers to transition from

high growth to medium high growth, the Chinese government lowered growth rate targets concerning

such items as GDP, investment and consumption but maintained the same level of targets concerning

employment-related items as the targets for 2015 (Table I-1-2-3-1). In response to the economic

slowdown, the Chinese government has shown readiness to support the economy in order to ensure

macroeconomic stability by implementing tax reduction that entails an expansion of the budget deficit,

increasing the money supply growth rate and keeping the fundamental stability of the currency exchange

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rate.

Table I-1-2-3-1 Major targets for 2016 (e.g. Report on Government Activity, National People’s

Congress)

2016 Target 2015 Target Result

GDP growth rate 6.5%-7.0% Approx. 7% 6.9%

Consumer price Around 3% Around 3% 1.4%

Fixed assets investment

(nominal) Around 10.5% 15% 10.0%

Total amount of retail

sales of social consumer

goods (nominal)

Around 11% 13% 10.7%

Imports and exports

(nominal) No target is set Around 6% ▲8%

Level of fiscal deficit

(ratio to GDP) 3.0% 2.3% 3..5%

Money supply (ratio to

the previous year) Around 13% Around 12%

13.3% (December),

12.3% (annual average)

Number of newly

employed persons in

urban areas

Over 10 million Over 10 million 13.12 million

Registered

unemployment rate in

urban areas

Within 4.5% Within 4.5% 4.05% (Q4),

4.05% (average)

Infrastructure investment

Railway: over 800 bl.

yuan

Road: over 1,650 bl.

yuan

Central budget frame:

500 bl. yuan

Railway: over 800 bl.

yuan

Water utilization: over

800 bl. yuan

Central budget frame:

477.6 bl. Yuan

Railway: 773 bl. yuan

Water utilization: 724.9

bl. yuan

Road: 2,861.1 bl. yuan

*Results of fixed assets

investment

Note: Annual averages of money supply and registered unemployment rate in urban areas are simple

averages of monthly and quarterly data.

Source: Report on Government Activity, National People’s Congress, National Bureau of Statistics of

the People’s Republic of China and CEIC database.

As for the policies concerning structural challenges that were mentioned earlier, the Chinese

government cited such supply-side structural reform measures as resolving excess production capacity,

reforming state-owned enterprises, upgrading industries, and fostering a modern services industry (Table

I-1-2-3-2). In addition, in order to expand domestic demand and reform the demand structure, it

announced plans to expand consumption, shift to sophisticated consumption, promote investments for

upgrading infrastructure and industries, promote urbanization measures, including reform of the family

register system, and reduce estate inventories through the reform of the housing-related tax system.

Among other measures announced by the government are promoting external economic relationships,

strengthening environmental measures, and implementing public welfare-related measures such as

abolishing the one-child policy (allowing married couples to have a second child) and improving

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medical insurance and pension systems in response to the aging of society.

Table I-1-2-3-2 Priority measures for 2016 (Report on Government Activity, National People’s

Congress)

1. Stabilization and enhancement of macroeconomic policy

- Aggressive financial policy

Reducing burdens on companies by expanding deficits and applying them to tax reduction.

- Moderate monetary policy

Supports for real economy by reducing funding costs. Continuous development of exchange

rate market formation mechanism for yuan. Fundamental stabilization of exchange rate should

be maintained at reasonable equilibrium level.

2. Structural reform of supply side

- Simplification of administration, delegation of authority

Reduction of administrative review and approval matters

- Promotion of entrepreneurship and innovation

Supports for corporate R&D and entrepreneurship

- Resolving excess production capacity

Resolving excess production capacity in the sectors with business crises such as steel and coal.

Maintaining principles such as 'survival of the fittest' by market effect, corporate-driven,

arrangement by local institutions and central support.

Coping with zombie companies by measures such as mergers, reorganization, restructuring or

bankruptcy liquidation.

Central financial administration contributes a 100 billion yuan fund for special

incentive/allowance to be applied to supports for reallocation or reemployment of employees

of those companies which commit to resolving excess production capacity.

- Improvement of supply of the goods and services

Improvement of quality of consumer goods. Promotion of upgrading manufacturing such as

Made in China 2025 and Internet Plus. Accelerating the development of the contemporary

service sector.

- Reform of state-owned enterprises

2-year intensive commitment this year and the next. In particular promoting structural

adjustment of central enterprises.

Promotion of conversion from state-owned to stock companies. Encouraging expansion of

investment by private companies to the sectors such as electrical, electric communication, oil

and natural gas and participation in state-owned enterprises reform.

3. Expansion of domestic demands and reform of demand structure

- Sophistication and expansion of consumption

Supporting development of service consumption such as elderly life, health care, home

economics, education/training, culture and sports.

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- Investment toward stable growth and structural adjustment

Investment toward innovation and enhancement of industries in infrastructure and household

sectors. Launch of the important projects for the 13th five-year plan (e.g. railway, road and

water utilization project)

- Promotion of new type urbanization

Implementing the reform of the family register system to mitigate the requirement for

movement from rural to urban areas. Ensuring the permanent population in urban areas basic

public services such as compulsory education, employment, health care. Implementing

security-type housing projects in urban areas. Developing housing-related taxation to reduce

real estate inventories.

4. Modernization of agriculture

Commitment to the three agricultural problems. Deepen rural reform, expand routes for

employment of farmer and increase in income and enhance competitiveness of agriculture.

5. Promoting openness, establishing the reciprocal relationship

- Steady promotion of building Belt and Road

Building a land economic corridor and marine cooperation base and promoting

interconnectedness of infrastructure, economic trade cooperation and human and cultural

exchanges.

- Enhancement of utilization level of foreign capital

Concentrating on attracting foreign capital by mitigating entry requirements for investment,

expanding openness of the service sector and general manufacturing and simplifying

procedures. Inducement of investment particularly to central and western regions. Expansion

of trial in free trade test area.

- Acceleration of FTA strategy

Promotion of the settlement of Regional Comprehensive Economic Partnership (RCEP)

negotiation, acceleration of the negotiation for the China–Japan-South Korea Free Trade

Agreement (FTA), enhancement of joint researches in Free Trade Area of the Asia-Pacific

(FTAAP)

6. Enhancement of environmental measures

- Enhancement of environmental measures

Further enhancement of measures against air and water pollutions. Support for spreading

advanced technology and facilities for energy saving and environmental protection.

7. Improvement of public welfare

- Enhancement of employment and entrepreneurship

Encouragement of job creation by entrepreneurship. Support for reentry of temporarily laid-

off workers. Provision of vocational training to farmer mechanics.

- Health care

Raising the criteria for fiscal supports by integrating basic medical insurance system in urban

and rural areas. Development of relevant policy which grants each married couple the right to

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give birth to a second child.

- Establish of the social security safety net

Raising the payment criteria of the basic old-age pension for retirees

8. Development of administrative capability and services

Note: Extract of the major contents with a focus on measures for structural problems. See the original

text for detail as the descriptions are simplified.

Source: Report on Government Activity, National People’s Congress.

At the National People’s Congress session, a draft of the 13th Five-Year Plan was also submitted.

To maintain medium-high economic growth and promote the upgrading of industries to medium and

high levels, the plan sets forth goals and priority areas that are in accordance with the principles of

“innovative,” “coordinated,” “green,” “open,” and “shared” development (Tables I-1-2-3-3 and I-1-2-3-

4). This underscores the policy of maintaining growth through innovation and industrial upgrading amid

the decline in the working-age population. The plan also sets the direction of promoting harmonious

development and environmental preservation in order to deal with challenges that have come with

growth, such as inequality and environmental problems. Furthermore, it calls for measures to deal with

poverty, develop the social security and education systems and improve the system of income

distribution in order to enable the sharing of the benefits of development while deepening the reform

and opening-up initiatives.

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Figure I-1-2-3-3 Targets for the 13th five-year plan

Target

Economic development

GDP growth rate (real) Over 6.5%

Per-capita income in urban and rural areas Twice as much as 2010

All labor productivity (GDP per worker) 120,000 yuan

Innovation

Ratio of R&D to GDP 2.5%

Urbanization, harmonious development of regions

Urbanization rate (nighttime population base) 60%

Urbanization rate (family register base) 45%

Operating distance of high-speed railway 30,000 km

New construction or renovation of high-speed railway 30,000 km

Environmental conservation

Use of water per unit GDP Reduction by 23%

Energy consumption per unit GDP Reduction by 15%

Co2 emission per unit GDP Reduction by 18%

Proportion of forest area 23.04%

Public welfare

Average years of schooling 10.8 years

Number of newly employed persons in urban areas Over 50 million people

Renovation of barrack district housing in urban areas 20 million houses

Average life span Extension of 1 year

Source: Report on Government Activity, National People’s Congress

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Figure I-1-2-3-4 Overview of the 13th five-year plan

1. Maintaining medium-high growth of the economy and promoting middle to high

dimensionality of industries

Achievement of a comprehensive “moderately prosperous society”. Annual average of

economic growth rates is maintained at more than 6.5% to double the income per capita in urban

and rural areas by 2020 compared to 2010 level.

2. Promotion of development by innovation (innovation)

Realizing innovation-driven development. Launch of the science technology program,

development of the national science center and fostering innovative leading companies.

Increase of the ratio of R&D costs to GDP by 2.5%.

3. New type urbanization, promotion of agricultural modernization and promotion of harmonious

growth between urban and rural areas and regions (harmonization)

Transfer of approximately 100 million people to the urban household registration.

Agricultural modernization. Development of essential infrastructure such as high-speed

railways and roads.

4. Greenness of production methods and lifestyle, improvement of ecological environment

(green)

Implementation of measures for air, water and soil pollution. Reduction of use of water, energy

consumption and Co2 emission per GDP.

5. Deepening reform and openness to build new system of growth (openness)

Establishment of modern property ownership regime, building a law-abiding country, crucial

role of the market in the distribution of resources as well as fulfillment of government's function.

Progress of Belt and Road, higher quality of trade, expansion of share of the service trade.

Pre -establishment national treatment, full implementation of negative list management,

building NTA network.

6. Sustainable promotion of welfare and sharing the fruits of growth among the people (sharing)

Reinforcing basic welfare and security and poverty alleviation. Establishment of a fairer and

more sustainable social security system.

Standardization of compulsory education, spreading upper secondary education, development

of world top universities, improvement of the income distribution system, development of the

housing security system.

For the above, it is necessary to get the following three points:

1. Commitment to the most important task of growth

Growth is the absolute principle and the key to solve every problem.

2. Thorough promotion of structural reform

Structural adjustment must be promoted as it stands out among the coexisting scale problem

and structural problem.

3. Replacing and converting the old driving force of growth to the new

Promotion of growth of new technology, new industry and business. Fostering high-tech and

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modern service industries. Production and management model reform making the most of the

information network, reconstruction of supply chain.

Source: Report on Government Activity, National People’s Congress.

(B) Excess production capacity and excess investment

A close look at specific challenges such as excess production capacity indicates that excess

investments have been apparently made in a broad range of industries, including steel, coal and cement,

following the 4-trillion-yuan economic package. China’s central government has been announcing

countermeasures almost every year and giving instructions for the disposal of old facilities with poor

production efficiency and it has also been curbing new investments (Table I-1-2-3-5).

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Table I-1-2-3-5 Efforts of Chinese government to resolve the excess production capacity

a. Guiding Opinions of State Council on Resolving the Serious Excess Production Capacity

(October 2013)

- Five industries including steel, cement, aluminum, sheet glass and vessels were specified and

principles such as prohibition of new production increases, selection of outdated production

facilities, promotion of industry reorganization, expansion of exports and raising the level of

technical capabilities were stated.

- Reduction of 80 million tons was set for steel production capacity.

b. Production capacity replacement method for some industries with serious production capacity

excess problems, Ministry of Industry and Information Technology (July 2014)

- Adding new production capacity was prohibited in the industries with excess production

capacity such as steel, cement, aluminum and sheet glass.

c. Central Economic Work Conference (December 2015)

- Resolving the excess production capacity was listed at the top of five major tasks for economic

policy for 2016.

- Increase in production capacity should be controlled strictly to prevent new excess production

capacity.

- For this purpose, policies including taxation financial supports, disposal of non-performing

loans, reemployment of the unemployed and social security programs are to be implemented

for consolidation of companies in the capital market.

d. Implementation document on resolving the excess production capacity in steel and coal

industries, National Development and Reform Commission (February 2016)

(Steel industry)

- Production capacity of crude steel is to be reduced by 100 to 150 million tons for the five years

after 2016.

- In practice, the following measures are implemented: prohibition of establishment of new

production capacity, withdrawal by law (production stop below standard), subjective

withdrawal (e.g. reduction of production capacity based on encouragement measures, M&A),

disposal of relevant equipment and promotion of upgrading industries.

- Implementation of the following policy measures: supplementary fund to encourage structural

adjustment of industrial companies (subsidies for those who quit work granted by local

governments), tax revenue policy (reform of ad valorem tax of resource tax on iron ore),

financial supports (e.g. M&A support, disposal of non-performing loans) and measures for the

unemployed.

(Coal industry)

- Reduction of production capacity by 1 billion tons for 3 to 5 years after 2016 (500 million tons

by consolidating enterprises and coal mines, 500 million tons by reorganizing)

- In practice, the following measures are implemented: prohibition of establishment of new

production capacity, selection of outdated facilities and capabilities inconsistent with policy,

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withdrawal by law (production stop below standard), enterprise reform and restructuring,

rigorous management of dangerous production and illegal construction, strict limitation on use

of poor quality coal.

- Implementation of the following policy measures: supplementary encouragement fund for

structural adjustment of industrial companies, financial supports, measures for labor, use of land

resources, encouragement of technical modification (automatization, man saving).

e. Report on Government Activity by Premier Li Keqiang at the National People’s Congress

(March 2016)

- Targets for 2016: resolving excess production capacity in the sectors with business crises such

as steel and coal. Maintaining principles such as 'survival of the fittest' by market effect,

corporate-driven, arrangement by local institutions and central support.

- Coping with zombie companies by measures such as mergers, reorganization, restructuring or

bankruptcy liquidation.

- Central financial administration contributes a 100 billion yuan fund for special

incentive/allowance to be applied to support for reallocation or reemployment of employees of

those companies which commit to resolving excess production capacity.

f. The 13th five-year plan (announced March 2016)

- Excess production capacity in steel and coal industries was mentioned focusing on supply-side

structural reform.

Source: Materials published by Chinese government.

As for recent developments, in February 2016, the National Development and Reform Commission

prescribed the rules on the prohibition of building new industrial capacity and the disposal of facilities

that are problematic in terms of aging, poor efficiency and environmental preservation and designated

steel and coal as industries subject to the rules. It also required companies to strictly implement safety

management and environmental measures and announced the policy of encouraging companies failing

to meet the standards to discontinue production and exit the market. As for specific capacity reduction

targets, the commission called for reduction of between 100 and 150 million tons in crude steel

production capacity over a period of five years and reduction of 1,000 million tons in coal production

(reduction of 500 million tons through consolidation of companies and mines and another 500 million

tons through industrial reorganization) over a period of three to five years. As policy measures to

promote the reduction, subsidies (for retired workers) and financial support (for mergers and acquisitions

and disposal of non-performing loans) will be provided.

In addition, the government work report, delivered by Premier Li Keqiang at the National People’s

Congress session in March, cited, as a policy for 2016, the resolution of excess production capacity in

industries facing management problems, such as the steel and coal industries. The report stated that

under the principle of market forces, the issue of “zombie enterprises” will be addressed through such

measures as mergers and reorganizations based on the division of roles between enterprises, which

should take proactive actions, and the central government, which should provide necessary support. The

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report expresses a plan to allocate funds totaling 100 billion yuan for reemployment support for workers,

among other measures.

Up till now, even though the central government announced policies for reducing excess facilities,

the reduction did not necessarily proceed quickly in practice because of the huge impact that the disposal

of facilities would have on local economies and jobs. How to deal with the impact on local economies,

particularly job losses, will likely have significant effects on whether structural reforms can be realized.

In February 2016, the Chinese government revealed a forecast that in the process of resolving excess

production capacity in the coal and steel industries, 1.8 million workers (1.3 million workers in the coal

industry and 0.5 million workers in the steel industry) will become redundant. The central government

has decided to provide funds totaling 100 billion yuan to support reemployment, among other measures.

As for the treatment of such redundant workers, it is required that first, companies reassign workers and

next, when workers seek to switch jobs or start new businesses, the government should implement

measures such as vocational training and employment mediation. Regarding workers with less than five

years left until retirement age, there is the option of early retirement based on their consent. Furthermore,

the government will introduce public interest jobs to workers facing difficulty finding new jobs.62 It

was announced that there would be 13 million new employees in urban areas in China over the three

years to 2015, so it is necessary to keep a careful watch on issues such as the resolution of employment

mismatches.

(C) Change in the economic growth pattern

As the Chinese government is promoting a shift from investment to consumption, the share of

investment in GDP declined moderately in 2015 while the share of consumption grew moderately.

Regarding the policies for expanding consumption that were announced at the 2016 National People’s

Congress, first of all, the goal of achieving a rate of growth in residents’ income similar to the economic

growth rate (between 6.5% and 7.0%) has been set. The government is also advocating the policy of

improving the consumption environment in line with the sophistication of consumption by removing

impediments in terms of policy. Specifically, the government will support the development of the

consumption of services, including services in the fields of elderly care, healthcare, housekeeping,

education, training, culture and sports and will also promote the development of new forms of

consumption, including Internet information and fashion consumption. The government is also calling

for the promotion of the development of consumer loans and enhancement of tourism facilities.

The government is planning to expand the budget deficit (ratio of the budget deficit to GDP on a

budget basis: 2.3% in 2015 → 3.0% in 2016) to finance tax reduction on the fiscal side and to increase

the money supply volume (M2: growth of around 12% in 2015 compared with the previous year →

growth of around 13% in 2016) on the monetary side. Moreover, regarding infrastructure investments,

the government will start important projects under the 13th Five-Year Plan which involve investments

62 See articles carried by the Nikkei newspaper (March 1, 2016), The Daily NNA (March 2, 2016), and

China Internet Information Center (http://news.china.com.cn/2016-02/29/content_37896781.htm)

(February 29, 2016).

http://news.china.com.cn/2016-02/29/content_37896781.htm

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of more than 800 billion yuan in railways and of 1,650 billion yuan in roads. Among other goals is

increasing the amount of investments within the central budget framework to 500 billion yuan (477.6

billion yuan in 2015).

(D) Change in population policy

As the working-age population has peaked, China has decided to abolish the one-child policy. This

white paper will examine the future demographics in China based on the World Population Prospect

prepared by the United Nations, in which the assumptions: including the fertility rate, are made public.

The United Nations made its future population estimate based on five fertility rate scenarios (Figure I-

1-2-3-6). First, the United Nations estimates the total fertility rate in China in 2010-2015 at 1.55. The

first scenario, or the medium-variant case, assumes a moderate rise in the total fertility rate toward 1.8

in 2100. The second scenario, the high-variant case, assumes a rise in the total fertility rate to 1.8 in

2015-2020 and a rise past 2.0 in 2020-2025. In contrast, the low-variant case assumes a decline in the

total fertility rate to 1.23 in 2020-2025. The other scenarios are a case in which the current total fertility

rate will remain unchanged in the future and a case in which the total population will remain stable (a

case in which births immediately compensate for deaths.

Figure I-1-2-3-6 5 scenarios of the birth rate in China (population estimate by the United

Nations)

Note: Birth rate = number of children per woman

Source: World Population Prospects: The 2015 Revision, United Nations.

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This white paper will examine the future working-age population based on these scenarios.

Regarding the working-age population, there are no differences in the forecast for the next 15 years

between the fertility rate scenarios. Although the forecast of the working-age population for the

subsequent period varies depending on the scenario, this population (people aged 15 to 59) will continue

to decline at least until around the middle of this century in all scenarios, according to the estimate by

the United Nations. (Figure I-1-2-3-7) In the second half of this century, the working-age population

will start to increase in the high-variant case but will continue to decline in the medium-variant and low-

variant cases.

Figure I-1-2-3-7 Working-age population in China (population estimate by the United Nations)

Note: 1.Working-age population is defined as 15-59 years old in calculation.

2. Data until 2015 is estimation results. Population estimate has begun from 2020 according to each

scenario, and scenarios have no difference until 2030, when the first birth child reaches the working-age

of 15.


The total population is estimated to increase moderately toward 1.5 billion people in the high-variant

case and remain stable around that level afterwards, while it is estimated to decline in the medium-

variant and low-variant cases (Figure I-1-2-3-8).

166

Figure I-1-2-3-8 Total population of China (population estimate by the United Nations)

Note: Data until 2015 is estimation results. Population estimate has begun from 2020 according to each

scenario.


China has now abolished the one-child policy, allowing all married couples to have two children but

no more than that. Moreover, according to the estimate by the United Nations, even in the high-variant

case (in which the total fertility rate will surpass 2.0), the working-age population is forecast to decline

by approximately 200 million people from the current level of slightly more than 900 million people to

slightly more than 700 million people by the middle of this century. Thus, despite the abolition of the

one-child policy, the working-age population will likely decline considerably.

Among population estimates prepared by organizations other than the United Nations, a report

announced by the World Bank in December 2015 included data showing that the working-age population

in China is estimated to decline by 10% (approximately 90 million) over the 30-year period between

2010 and 2040 (Table I-1-2-3-9).

Table I-1-2-3-9 Changes in working-age population in China (2010-2040)

(Mil. people, %)

Variant Population change Growth rate

World bank ▲90 ▲10.0

United Nations

Middle variant ▲131 ▲13.1

High variant ▲102 ▲10.2

Low variant ▲160 ▲16.1

Constant-fertility ▲138 ▲13.8

Instant-replacement ▲78 ▲7.9

167

Note: UN data is calculated taking into account the definition by the National Bureau of Statistics of the

People’s Republic of China that defines the working-age population as 16-59 years old. Meanwhile, the

World Bank has defined the working-age population as 15-64 years old.

Source: “World Population Prospects: The 2015 Revision”, the United Nations and “Live Long and

Prosper – Aging in East Asia and Pacific” (2015.12), World Bank

(E) Initiatives to upgrade the manufacturing industry and promote innovation

At a time when the working-age population has started to decline as shown above and the growth

led by the input of labor and other resources is gradually reaching its limits, the Chinese government

has announced the policy of aiming to achieve sustainable growth by improving productivity through

the upgrading of manufacturing and other industries and innovations. One initiative under this policy is

the Made in China 2025 strategy, in which the government is advocating the policies of promoting

innovation, integrating information technology into the manufacturing industry, improving quality, and

branding, with a view to placing China in the leading position in the global manufacturing industry in

2049, the centenary of China’s national foundation (Table I-1-2-3-10).

Table I-1-2-3-10 Made in China 2025

- “Three-step” strategy

Pushing forward the strong manufacturing country by 2025 in the first step. Rising to the

medium level of the world’s strong manufacturing countries by 2035 in the second step. Leading

the world’s strong manufacturing countries on the 100th anniversary of establishment of new

China (2049) in the third step.

- Nine strategic tasks

Development of innovative capacity of manufacturing, high grade integration of informatization

and industrialization, enhancement of basic capabilities of industries, enhancement of quality

and brand, promotion of green (environmental preservation type) manufacturing, development

of key areas (described later), Structural adjustment of manufacturing, promotion of service

manufacturing, promotion of globalization of manufacturing

- 10 key areas

Next generation information technology, high-grade digitally controlled machine tools/robots,

aerospace facilities, marine engineering and high-tech vessels, advanced rail transport facilities,

energy-saving and new energy vehicles, electric facilities, agricultural machinery, new

materials, biological medicine and high-performance medical equipment.

Source: Think tanks reports.

As is mentioned in the Made in China 2025, the Chinese government is advocating the promotion of

innovation as a major policy. According to the rankings of innovation as an element of the international

competitiveness indicators that have been published by various organizations, China is placed around

the 30th position among the 140 or so countries covered in terms of the current level of innovation,

168

lagging behind Japan and the United States but staying abreast of some developed countries like Italy

and Portugal (Table I-1-2-3-11).

Table I-1-2-3-11 Innovation-related international rankings

World Economic Forum Cornell University, INSEAD,

WIPO

Switzerland 1 1

USA 4 5

Japan 5 19

Germany 6 12

UK 12 2

France 18 21

China 31 29

(reference)

Countries ranked close to China

30th Indonesia

32nd Italy

28th Slovenia

30th Portugal

Note: Global Competitiveness Index published by World Economic Forum consists of 12 pillars, one of

which is innovation.

Source: The Global Competitiveness Report 2015-2016, World Economic Forum and the Global

Innovation Index 2015, Cornell University, INSEAD and World Intellectual Property Organization

(WIPO).

Although it is difficult to objectively evaluate innovation activity and its effects, China’s ratio of

research and development expenditures to GDP has risen rapidly and surpassed the ratios of some

developed countries, including the United Kingdom (Figure I-1-2-3-12). The 13th Five-Year Plan has

set the goal of raising this ratio to 2.5%.

169

Figure I-1-2-3-12 Changes in R&D expenses in China

Note: Data for China is according to National Bureau of Statistics of the People’s Republic of China and

data for other countries is according to OECD for 2014 (2013 for USA).

Source: National Bureau of Statistics of the People’s Republic of China, CEIC database, Main Science

and Technology Indicators, OECD.

In terms of the number of international patent applications, China has overtaken Germany to become

No. 3, after the United States and Japan (Figure I-1-2-3-13). At the company level, some Chinese

companies are more actively filing patent applications than companies in developed countries (Table I-

1-2-3-14).

170

Figure I-1-2-1-13 Top 10 countries for international patent applications (2015)

Note: Top 10 countries for international applications according to the Patent Cooperation Treaty.

Source: World Intellectual Property Organization (WIPO) website.

Table I-1-2-3-14 Nationalities of top 10 companies for international patent applications (2015)

Nationality Number of companies Sector

China 2 Electrical and electronic (1st, 3rd)

USA 2 Electrical and electronic (2nd, 10th)

ROK 2 Electrical and electronic (4th, 7th)

Japan 2 Electrical and electronic (5th, 8th)

Sweden 1 Electrical and electronic (6th)

Netherlands 1 Electrical and electronic (9th)

Note: Top 10 companies for international applications according to the Patent Cooperation Treaty.

Source: WIPO website.

As shown above, although challenges such as the protection of intellectual property are still pointed

out in the case of China, the country is trying to make a quick change of course toward promoting

innovation in order to catch up with developed countries.

171

(2) Growing expectations for India’s structural reform

The Chinese economy is slowing down and some other countries are experiencing an economic

downturn as they are being significantly affected by resource price movements and global flows of funds,

whereas India has maintained steady growth63 (Figure I-1-2-3-15).

Figure I-1-2-3-15 Changes in real GDP growth rate in emerging countries

Note: Values for India are since 2005Q1.

Source: Statistic data from respective countries and CEIC Database.

Around two years have passed since the inauguration in May 2014 of the government of Prime

Minister Narendra Modi of the Bharatiya Janata Party, which won a majority of seats in the lower house

of the parliament, becoming the first party to do so single-handedly in 30 years. Prime Minister Modi

himself remains popular and expectations for India’s growth both at home and abroad continue to grow,

while the Modi government’s structural reform (so-called Modinomics) is facing a stalemate due to the

strength of the opposition forces in the parliament. Here, this white paper will examine the current status

of the Indian economy based on major economic indicators and provide an overview of the Indian

government’s structural reform initiative.

(A) Indian economy maintaining high growth

(a) Higher real GDP growth rate than China’s growth rate

63 IMF Managing Director Christine Lagarde remarked in October 2015 that India remains a “bright sport”

in a slowing global economy.

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China India Brazil South Africa Russia

(%)

(Year/Q)

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A look at the composition of nominal GDP by demand items (actual results in FY201464) shows that

the share in GDP was 58% for private consumption, 31% for gross fixed capital formation and 11% for

government consumption. In other words, private consumption, which accounts for around 60% of

nominal GDP is the main engine of growth.

On an annual basis, the real GDP growth rate (new standard), 65 accelerated, coming to 5.6% in

FY2012, 6.6% in FY2013 and 7.2% in FY2014. On a quarterly basis, the real GDP growth rate stayed

high between 7% and 8% for three consecutive quarters from the first quarter to the third quarter of

2015. Robust private consumption is leading the high growth, and public investment is also a

contributing factor of the growth (Figure I-1-2-3-16).

Figure I-1-2-3-16 Changes in India’s real GDP growth rate and contributions by demand

Note: Fiscal year is based on financial year (April to March).

Source: Census of India and CEIC Database.

Regarding the composition of nominal GVA (gross value added)66 by industry, the share in nominal

64 In India, the fiscal year starts in April and ends in March in the following year. 65 In January 2015, the Central Statistics Office of India announced changes in the preparation method of

statistics, including revisions of the base year for the System of National Accounts (SNA). As a result, the

base year for GDP has been changed from 2004-05 to 2011-12 and the calculation method was changed

from a factor cost basis to a market price basis. As there are inconsistencies between growth rates in new

and old statistics, it should be kept in mind that growth rates in new statistics are relatively high compared

with growth rates in old statistics. 66 GVA is gross value added estimated from the production side. GDP represents GVA plus Net Indirect

Taxes (NIT: indirect taxes minus subsidies). As GVA is regarded as an indicator that moves in closer

alignment with the movements of monthly economic indicators than GDP, which is affected by changes in

NIT, it is often used to look at real growth rates from the supply side.

5.6 6.6 7.25.0

7.6 7.7 7.3

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

201220132014 2012 2013 2014 2015

Private consumption Government consumptionGross fixed capital formation Inventory changeValuable goods ExportsImports Net exportsError Real GDP growth rate

(Ratio to the same quarter of the previous year, %, % point)

(Fiscal year) (Fiscal year/Q)

173

GVA was 17% for the primary industry, 30% for the secondary industry and 53% for the tertiary industry.

In other words, the tertiary industry, which accounts for around 50% of nominal GVA, is the main engine

of growth.

On an annual basis, real GVA (actual results in FY2014) grew 5.4% in FY2012 compared with the

previous year, 6.3% in FY2013 and 7.1% in FY2014. By industry, the services industry67 in particular

recorded high growth rates of 4.0% in FY2012 and 3.9% in FY2013 and 5.3% in FY2014, contributing

significantly to the growth of GVA (Figures I-1-2-3-17 and I-1-2-3-18).

Figure I-1-2-3-17 Changes in India’s real GVA growth rate and contributions by industry



67 The services industry includes finance/insurance/real estate/professional services, commerce/

hotels/transportation/communication/broadcasting, and administration/defense and other services.

5.4

6.3

7.1

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7.27.5

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-1

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11


201220132014 2012 2013 2014 2015

Administration, defense and other servicesFinance, insurance, real estate and special servicesCommerce, hotel, transport, communication and broadcastingConstructionElectricity, gas and waterManufacturingMiningAgriculture, forestry and fisheriesReal GVA

(Ratio to the previous year, Ratio to the same quarter of the previous year, %, % point)

(Fiscal year/Q)(Fiscal year)

174

Figure I-1-2-3-18 India’s growth rates by industry



The real GDP growth rate came to 7.3% for the whole of 2015 (calendar year), surpassing China’s

growth rate of 6.9%. As mentioned above, it should be kept in mind that India changed the method of

preparing statistics, but the growth rate of more than 7% in GVA as well is also evidence of India’s

growth momentum.

On the other hand, the nominal GDP growth rate has been slowing down, so it should be kept in

mind that the real GDP growth is partly due to general price drops (Figure I-1-2-3-19). The GDP deflator

continued to decline from the third quarter of 2013 onwards and turned negative in the second quarter

of 2015. Therefore, it is presumed that despite its high rate of real GDP growth, India is not feeling such

strength of growth as is suggested by these figures (Figure I-1-2-3-20).

1.7

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(Ratio versus the same quarter of the previous year, %, % point)

(Fiscal year)

Serv

ice sector

4.0

3.9 5.3

175

Figure I-1-2-3-19 India’s nominal GDP growth rates



Figure I-1-2-3-20 India’s GDP (nominal growth rates, real growth rates and deflators)

Note: Deflator is calculated by dividing nominal GDP growth rate by real GDP growth rate.


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2012 2013 2014 2015

Final private consumption Final government consumption

Gross fixed capital formation Inventory change

Valuable goods Net exports

Errors and omissions Nominal GDP

(Fiscal year/Q)

(Ratio versus the same quarter of the previous year, %, % point)

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2012 2013 2014 2015

Nominal GDP Real GDP Deflator

(%)

(Fiscal year/Q)

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(b) Current account balance: although there is a chronic deficit, the deficit has recently been

shrinking

India’s current account balance has been chronically in deficit due to its large trade deficit. It is

notable that while the balance of trade in goods and the primary income balance, which includes

investment income and other items, are in deficit, the balance concerning software and other services

and the secondary income balance, which includes remittances from non-resident Indians (NRIs) to their

home country, have consistently been in surplus. Against the backdrop of the expansion of the deficit in

the balance of trade in goods, India’s current account deficit grew, hitting a record high of 31.9 billion

dollars (6.8% as a proportion of GDP) in the third quarter of FY2012. Afterwards, the current account

deficit trended downward despite some quarterly swings, amounting to 1.2 billion dollars (0.2% as a

proportion of GDP) in the fourth quarter of 2013 and 0.6 billion dollars (0.1% as a proportion of GDP)

in the fourth quarter of 2014 (Figure I -1-2-3-21).

Figure I-1-2-3-21 Changes in India’s current balance


Source: Reserve Bank of India and CEIC Database.

(c) Budget account: recording a chronic deficit; seeking fiscal consolidation while aiming for high

growth

According to the Indian government’s draft budget for FY2016, which was announced on February

29, 2016, the government maintains the policy of promoting high growth and seeking to achieve fiscal

consolidation at the same time. Under the draft budget, the budget deficit in FY2016 will shrink from

3.9% as a proportion of nominal GDP under the budget for FY2015 (estimate) to 3.5%.

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2010 2011 2012 2013 2014 2015

Secondary income balance (e.g. Transfer between individuals)Balance on servicesPrimary income balanceTrade balanceCurrent balanceRatio of current balance to nominal GDP (right axis)

(bl. $)

(Year, Q)

(%)

177

This was the second budget compilation since the inauguration of the Modi government. Under the

budget for FY2015, the first budget for the Modi government, the government announced a long-term

policy vision called “Team India,” which looked forward to 2022, the 75th anniversary of India’s

independence, and budget funds were allocated for initiatives that are in line with this vision, such as

infrastructure development intended to reduce the number of poor families and regions to zero. This

policy direction has been maintained in the current fiscal year. Total government expenditures in

FY2016 expanded by as much as around 11% from FY2015 (estimate).68 In particular, the budget

amount is planned to be increased by 22% for infrastructure development and by 84% for agriculture-

related items. The expenditure growth is planned to be covered by higher taxes, including increases in

the clean environment tax, infrastructure tax and excise tax on a variety of goods, such as tobacco and

jewelry, but it should be kept in mind that the Goods and Services Tax (GST) planned under the draft

budget for FY2015 has not yet been approved by the parliament (Figure I-1-2-3-22 and Table I-1-2-3-

23).

Figure I-1-2-3-22 Changes in India’s fiscal balance

Note: GDP for 2016 (estimation) is a value reported by Ministry of Finance, Government of India

(http://indiabudget.nic.in/glance.asp).

Source: Ministry of Finance, Government of India, Census of India and CEIC Database.

68 The estimate for FY2015 is growth of around 5% compared with the previous year.

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(Tn. INR) (%)

(Fiscal year)

Estimation by government

178

Table I-1-2-3-23 TEAM INDIA (Policy and Vision for 2022)

Item Description

1. One roof for each family (house for

all)

Provision of 20 million houses in urban areas, 40

million in rural areas

2. Provision of basic utilities

Provision of electricity 24 hours a day and 7 days

a week, access to clean drinking water, WC and

roads

3. Employment opportunities (ensuring

livelihood)

Employment opportunity for at least one member

of the family

4. Essential reduction of poverty Focus of all our policies

5. Provision of electricity to every

household (by 2020)

Eliminating 20,000 villages without electricity

(including off-grid solar electricity)

6. Connecting nationwide 178 thousand

villages with all-weather roads

100 thousand km to be newly constructed in

addition to 100 thousand km which is currently

under construction

7. Quality of life, productivity,

necessary health to maintain a family

Provision of health care services to the cities and

villages

8. Education for the youth, measures

for skills development

Lower secondary school located at every 5 km,

upgrading of existing schools

9. Improvement of agricultural

productivity, realization of

appropriate prices of agricultural

products

Expansion of irrigation districts and

improvement of effectivity of existing irrigation

systems, building agro base industries and

increase in income in rural areas

10. Means of communication for all

villages

Resolving the gap in communication between

urban and rural areas

11. Employment creation for youth

Two thirds of the population consists of youth

under 35 years old. Becoming a manufacturing

hub for the world for their job opportunities.

Purpose of programs such as Skill India, Make in

India

12. Encouraging entrepreneurship and

startup support

Conversion from job seeker to employment

creator

13. Development of Northeast India Promoting development of the least developed

region

Source: Government of India website (http://indiabudget.nic.in/budget2015-2016/ub2015-16/bs/bs.pdf)

(d) Exchange rate and stock prices: effects of external factors

A look at exchange rate movements shows that since the second half of 2011, the Indian currency

179

has been depreciating. One likely reason for this is the effects of the European debt crisis.69 It has been

pointed out that the currency depreciation resulted from the fact that India, like Greece, was suffering

from the “twin deficits” – the current account and budget deficits at the time of the European debt crisis.

Afterwards, concerns grew over a possible outflow of investment funds amid increased expectations for

the scaling back of the quantitative easing (QE) in the United States (the so-called Bernanke shock),

leading to further depreciation of the Indian currency, the rupee, between around May and August.

While India, like other emerging countries, depends on investments from abroad for its economic

growth, its currency tends to come under downward pressure because of its chronic current account

deficit. As a result of policy interest rate hikes and the shrinkage of the current account deficit, the

currency ceased to depreciate temporarily and continued to strengthen until May 2014. However, since

then, the currency has remained weak due to the effects on the Indian market of external shocks such as

the China’s economic slowdown and a steep drop in Chinese stock prices (Figure I-1-2-3-24).

Figure I-1-2-3-24 Changes in India’s exchange rate

Note: Currencies named the Fragile Five by stock market players are picked up for reference.


As for stock price movements, the SENSEX,70 the representative price indicator of the Indian stock

69 In October 2009, the revelation of Greece’s window-dressing of its budget deficit fueled fears over a

possible default of the country. An economic crisis spread beyond Greece because of the awareness of

sovereign risks concerning other euro-zone and European countries, and this came to be known as the

European debt crisis. 70 A stock price indicator based on the free-float market capitalization weighted average of 30 issues listed

on the Bombay Stock Exchange.

0

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80

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140

2010 2011 2012 2013 2014 2015 2016

India Brazil Indonesia South Africa Turkey

Currency

appreciation

(weak dollar)

Currency

depreciation

(strong dollar)

(Index as of Jan. 2010=100)

(Year/month)

Bernanke

shockDevaluation of

Chinese yuan

European debt crisis

180

market, trended upward from 2012 onwards, and after Prime Minister Modi took office in May 2014,

the stock price rise accelerated further. Although the Indian stock price index, like the Indian currency’s

exchange rate, has recently been trending downward due to external factors such as China’s economic

slowdown, it still stays at a high level (Figure I-1-2-3-25).

Figure I-1-2-3-25 Trends of stock prices in India

Source: Bombay Stock Exchange (SENSEX) and CEIC Database.

(e) Prices: prices prone to be significantly affected by weather factors

In India, one major factor that strengthens inflationary pressure is a decline in production of foods,

which account for 50% of the consumer price index, particularly a drop in production of vegetables and

crops due to weather factors. Although India is striving to introduce and improve irrigation facilities,

the effort has not made sufficient progress. The Reserve Bank of India, the central bank, positioned

curbing inflation as the top priority and announced the goal of pushing down the inflation rate below

8% by 2015 and below 6% by 2016 and keeping it at 4% with a tolerance of ±2% thereafter. There are

expectations for a governmental initiative to curb inflation in the medium to long term by enhancing the

supply capacity through the development of infrastructure, including cold chains, in addition to

restraining the inflation for non-food products that can be controlled on the demand side through

monetary policy.

In the first half of 2014, the rise in the consumer price index slowed down compared with the

accelerating inflation in the second half of 2013, but the price growth rate remained high at around 8%

compared with the same month of the previous year as a result of the continued high prices of foods and

higher import prices due to the rupee’s weakness. In the second half of 2014, the rise in the consumer

price index continuously decelerated due to a slowdown in the price growth for fuels and electricity

caused by a fall in crude oil prices, falling to 3.3% in November of the same year. Subsequently, because

90

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2010 2011 2012 2013 2014 2015 2016

(Jan.2010=100)

(Year/month)

Inauguration of Modi

administration

Shanghai

stock

market

crash

181

of price hikes for gasoline and diesel fuels and the government’s measure to curb food prices, there have

been some ups and downs in prices but the fluctuations have been smaller than before, and the growth

rate of consumer prices has remained low. In the future, attention should be paid to whether price

stability will be maintained as it becomes difficult to push down inflation through lower resource prices

(Figure I-1-2-3-26).

Figure I-1-2-3-26 Trend in consumer price index in India

Source: Census of India, Reserve Bank of India and CEIC Database.

(B) Structural reform initiative and challenges

Although India is recording high economic growth, it faces many challenges as mentioned above,

including the tendency of its exchange rate and stock prices to be swayed by external factors and large

fluctuations in the inflation rate due to weather factors (particularly the rainfall amount in the monsoon

season). The Indian government is striving to carry out structural reforms in order to build a resilient

economy that is not significantly affected by external factors and promote economic growth.

Prime Minister Modi has made clear his government’s goal of achieving economic growth by

inviting more foreign manufacturers to India under the Make in India campaign, which is intended to

promote the manufacturing industry. As mentioned earlier, in recent years, the growth of the services

industry made significant contributions to India’s economic growth in recent years. On the other hand,

the manufacturing industry’s international competitiveness has been weak. In order to achieve further

economic growth and create more jobs, India aims to become a global manufacturing base by devoting

efforts to strengthening the manufacturing industry as well.

The government designated the following 25 areas as eligible for the initiative to promote the

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10

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3

2014 2015 2016

Food (excluding vegetables) Food (vegetables)Clothing HousingFuel and electric OthersConsumer price index Policy interest rate

(Year/month)

(Ratio versus the same month of the previous year, %, % point)

6.7

(2012=100)

182

manufacturing industry: (i) automobiles, (ii) automobile components, (iii) aviation, (iv) biotechnology,

(v) chemicals, (vi) construction, (vii) defense, (viii) electrical machinery, (ix) electronics systems, (x)

food processing, (xi) IT and business process management, (xii) leather, (xiii) media and entertainment,

(xiv) mining, (xv) oil and gas, (xvi) pharmaceuticals, (xvii) ports and shipping, (xviii) railways, (xix)

renewable energy, (xx) road and highways, (xxi) space, (xxii) textiles and garments, (xxiii) thermal

power, (xxiv) tourism and hospitality, and (xxv) wellness and announced that it will establish inquiry

counters dedicated to investments. The government also announced a series of structural reform plans

as follows in order to further improve the investment environment and achieve fiscal consolidation,

among other objectives.

(a) Tax system reform

Particularly notable is the tax system reform, which will achieve the long-standing challenge of

introducing the Goods and Services Tax (GST) under the 2015 budget. As it was explicitly stipulated

that the GST would enter into force on April 1, 2016, this attracted attention both at home and abroad

by raising expectations for the simplification of the complicated indirect tax system. However, in August

2015, the parliamentary deliberation on the GST was shelved, with the result that the GST did not enter

into force as scheduled. Meanwhile, it is notable that at the state level, some states are implementing tax

system reform early. For example, the state of Rajasthan has introduced tax reduction and exemption

with respect to the Central Sales Tax (CST) from the viewpoint of inviting companies.

(b) Land system reform

As well as the introduction of the GST, the land system reform is attracting intense attention. Based

on the land appropriation law that was enacted in 2013, the appropriation of land involving private

companies, including public-private partnerships, required agreement from 70-80% of the land rights

owners and the implementation of a survey and a public hearing concerning the social and economic

impacts on residents who may be affected by the appropriation of the relevant land. However, the Modi

government submitted a bill to revise this law in order to streamline the procedures and issued a

presidential directive to the same effect. But in September 2015, the government announced its intention

not to renew the presidential directive due to concerns that voters in rural areas would be left behind and

also because of a protest movement. In the parliamentary deliberation on the budget that started at the

end of February, the bill concerning the appropriation of land was withdrawn and removed off the

deliberation agenda.

(c) Relaxation of restriction on foreign investment71

71 Regulation of inward foreign direct investment is a matter to be determined by the government, so

parliamentary approval is unnecessary. When the government changes the regulation, the Ministry of

Commerce and Industry’s Department of Industrial Policy & Promotion (DIPP) announces the contents of

the change as a Press Note. In consideration of convenience for investors, the Consolidated FDI Policy,

which summarizes the contents of regulations, is published annually

(http://dipp.gov.in/English/acts_rules/Press_Notes.aspx).

183

Immediately after its inauguration, the Modi government relaxed the restriction on foreign

investments related to insurance, defense and railway infrastructure and also announced a succession of

deregulation measures on a sector-by-sector basis.

In November 2015, the government actively adopted such measures as lowering or abolishing the

upper limit on the foreign investment ratio and simplifying procedures (e.g., a shift from a government

approval system to an automatic approval system) with respect to major sectors, including agriculture,

defense, broadcasting, construction, retailing and banking (Table I-1-2-3-27).

Table I-1-2-3-27 Eliminating restrictions on foreign investment in India

Description of major elimination of restrictions

Limited liability

partnership (LLP)

Conventional government approval shifts to automatic approval in those

industries where 100% investment in LPPs is allowed.

Investment by non-

resident Indians

(NRIs)

Investments by the companies owned and governed by NRIs are handled as

domestic investments unless they repatriate the profits (expansion of the

scope from specific industries to all industries)

Plantation

In addition to black tea, a good that has been admitted since previous times,

investment in coffee, rubber, cardamom, palm and olive oils plantations:

that were to be prohibited, are allowed without upper limits (automatic

approval)

Defense

- 49% upper limit on investment remains unchanged but conventional

government approval shifts to automatic approval.

- Conventional 24% upper limit on investment in venture capital

investment shifts to 49% (automatic approval).

- Over 49% investment has been admitted if modern and advanced

technology may be brought to the state, and the examination body

changes from the Cabinet Committee on Security (CCS) to the

Foreign Investment Promotion Board (FIPB).

Broadcasting

- Conventional 74% upper limit on investment in cable TV and satellite

broadcasting shifts to 100% (49% and under for automatic approval,

government approval for over 49%)

- Conventional 26% upper limit on investment in FM radio and

uplinking news shifts to 49% (government approval)

Civil aviation

- Conventional 74% upper limit on investment in irregular air transport

services shifts to 100% (automatic approval).

- In addition to regular air transport services and domestic regular

passenger services that have been admitted since previous times,

upper limits on investment in local air transport services are set to

49% (automatic approval)

184

Construction

Upper limit on investment has been 100% and remains unchanged. Some of

the conditions are eliminated as follows:

- Conditions on minimum floor area and minimum capital are removed

- Investment can be discontinued or repatriated after the 3 year of lock

up period.

Wholesale/cash and

carry - Wholesalers are allowed to retail (single brand).

Manufacturing

- Conventional 100% upper limit on investment remains unchanged.

Additionally, manufacturers are allowed to sell their products

manufactured in India via wholesale, retail or e-commerce.

Single brand

retail/duty-free shop

(Single brand retail)

Upper limit on investment has been 100% and remains unchanged. Some of

the conditions are eliminated as follows:

- E-commerce is admitted (government approval is required)

- Conventionally over 30% of the fund-raising amount is bound to

finance within India (if possible, by small-sized companies and those

in rural areas). Conditions can be eliminated if modern and advanced

technology may be brought to the state and fund-raising within India

is not possible.

(Duty-free shop)

- Added as 100% upper limit on investment (automatic approval).

Private bank

Upper limit on investment is 74% for overall foreign funding (automatic

approval for 49% and under, government approval for over 49%) and

remains unchanged. Some conditions are eliminated as follows:

Total holdings of foreign institutional investors (FIIs), foreign portfolio

investors (FPIs) and qualified foreign investors (QFIs) can be raised from

24% to 74% according to the resolution of the board of directors and the

extraordinary resolution of general meeting of stockholders.

Others

Upper limit on investment in land operation handling service business by

private airports, satellite facility installation and operation business and

credit information companies is raised from 74% to 100% (automatic

approval excluding satellite facility installation and operation business).

Source: Various materials from the Government of India, etc.

(d) Financial sector reform

Non-performing loans are expanding, mainly at publicly-operated banks. In order to promote the

disposal of non-performing loans, the government has expressed its intention to inject public funds into

public-operated banks. In addition, the government has announced other options, such as having the

Bank Board Bureau implement the roadmap for the reorganization of publicly-operated banks, including

185

mergers, and lowering the ratio of governmental investment in banks below 50%.

(e) Labor law reform72

The scope of small enterprises that are exempted from the application of labor regulation concerning

job reduction in the state of Rajasthan has been expanded (this measure was implemented after passage

through the state parliament and approval by the central government in July 2014).

(f) Abolition of subsidies

In order to reduce the budget deficit, the subsidy for diesel fuel was abolished in October 2014 and

the excise tax on sales of gasoline and diesel fuel was raised.

In India, structural reforms have been continuously implemented since before the inauguration of

the Modi government. The structural reform that gave a particularly strong boost to India was the new

economic policy of 1991. Through the new economic policy, the license system concerning private

companies was abolished except for some cases, and subsequently, the areas to which exceptional

treatment was applied decreased and monopoly by the public sector disappeared in many areas.

Regarding foreign investment, the upper limit of 40% on the foreign ownership ratio was abolished and

foreign direct investments were automatically permitted in cases where the foreign ownership ratio was

below 51%. Later, foreign investment in India was further liberalized, and from the time before the

inauguration of the Modi government, investments resulting in 100% foreign ownership have been

automatically approved. Regarding trade, import volume restrictions have been abolished, tariff rates

have been lowered and the number of items subject to export restriction has been drastically reduced.

The structural reforms in the 1990s laid the foundation of the Indian economy, leading to the current

high economic growth rate.

Currently, business and household sentiment is improving amid high expectations for the Modi

government’s structural reform,73 and the Reserve Bank of India’s interest rate policy and the expansion

of foreign investments through deregulation are expected to provide momentum to India’s growth. The

potential of India, whose working-age population is forecast to continue to increase for the next 40 years

or so, is huge, so the country will probably continue to attract close attention from around the world as

a huge production base and consumer market (Figure I-1-2-3-28).

72 Administration in the labor field is a matter under the joint jurisdiction of the federal and state

governments. While federal laws govern the matter in principle, special legislation may be enacted under

state laws. As the state of Rajasthan is actively inviting companies, it has implemented the reform of labor-

related laws that is intended to make corporate management easier in advance of other states. 73 In addition to the “Make in India” campaign, the Modi government has announced a series of other

campaigns, including “Skill India,” which promotes the skill improvement of workers, “Digital India,”

which promotes electronic administrative procedures, and “Smart India,” which promotes the

modernization of 100 cities.

186

Figure I-1-2-3-28 Future prediction of India’s population composition (estimation by the

United Nations)

Note: Population estimate by the United Nations, which estimates high, middle and low variants of

population every 5 years. Figure shows middle variants.


As for the future growth rate of the Indian economy, the IMF forecasts growth of 7.5% in each of

2016 and 2017. The World Bank and the Asian Development Bank (ADB) also forecast high growth

rates: the World Bank’s growth forecast is 7.8% for 2016 and 7.9% in 2017, while the ADB’s growth

forecast is 7.4% for 2016 and 7.8% for 2017 (Table I-1-2-3-29).

Table I-1-2-3-29 Outlook for India’s real GDP growth rate

2015 2016 2017

International Monetary Fund (IMF) 7.3 7.5 7.5

World Bank 7.3 7.8 7.9

Asian Development Bank (ADB) 7.6 7.4 7.8

Note: IMF data is compiled based on World Economic Outlook (WEO) April, 2016. World Bank data

is compiled based on Global Economic Prospects January 2016. Asian Development Bank (ADB) data

is compiled based on Asian Development Outlook 2016.

However, India’s share in the global GDP is still only 2.6%, so the country cannot be expected to

replace China (with a share of 13.4% in the global GDP) as the growth driver of the world economy in

the short term (Figure I-1-2-3-30).

0

2

4

6

8

10

12

14

16

18

20

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Total/aging population (over 60)

Total/working-age population (15-59 years)

Total/young population (0-14 years)

Estimation

(100 mil. people)

187

Figure I-1-2-3-30 Ratio of India’s GDP to the World

Source: United Nations.

In order to implement Prime Minister Modi’s initiative to invite manufacturers (Make in India), it

is essential to resolve challenges faced by companies expanding into India, such as those related to the

acquisition of land, infrastructure, licensing, and the tax system, so attention is focusing on the

government’s initiatives in these areas. As it has recently been pointed out both at home and abroad that

the progress in the Modi government’s structural reform is slow, the speed of India’s reform is seen as a

problem. However, it can also be said that it is a sound process necessary for achieving sustainable

growth over the long term.

If the government’s structural reform initiative intended to achieve fiscal consolidation and

economic growth brings clear actual results, rather than ending up as an empty slogan, India is expected

to act as a growth driver of the world economy in the long term.

13.4

5.9

2.6

0

2

4

6

8

10

12

14

16

18

201970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

China (reference) Japan (reference) India

(%)

(Year)

188

Column 4 India’s exports of goods and services

This column takes a look at changes in the value of exports of goods and services from India and

the share of the value of exports in GDP in the 10-year period between 2005 and 2014. The value of

exports of goods increased by a factor of 3.2 from 102.4 billion dollars in 2005 to 330.0 billion dollars

in 2014, while the value of exports of services expanded by a factor of 3.0 from 52.2 billion dollars in

2005 to 156.2 billion dollars in 2014. In 2014, the share of the value of exports in GDP was around15.9%

and the share of the value of exports of services was around 7.6% (Column Figure 4-1).

Column Figure 4-1 Changes in India’s exports of goods and services (ratio to GDP)

Source: WDI, World Bank.

Next, looking at the breakdown of net exports of services, it is notable that while the surplus in the

communication, computer, information service and financial service sectors is steadily increasing, the

deficit in the transportation sector is growing (Column Figure 4-2). Communication, computer and

information services are India’s growth industries that take advantage of the country’s human resources

and are making considerable contributions to the acquisition of foreign currency funds. As for the

breakdown of the balance of trade in the communication, computer and information sectors, which are

leading the export of services, the computer services sector accounts for most of the total.

0

100

200

300

400

500

600

0

2

4

6

8

10

12

14

16

18

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Export value of services (right axis)Export value of goods (right axis)Exports of goods (ratio to GDP)Exports of services (ratio to GDP)

(%) (Bl. US$)

(Year)

189

Column Figure 4-2 Changes in India’s net exports of services (breakdown)

Source: WTO Database.

Looking at changes in sales in India’s IT industry as a reference, IT services have registered the

largest sales, followed by business process outsourcing (BPO), software/engineering, and hardware in

that order (Column Figure 4-3). The share of exports in sales was 78% for IT services, 85% for BPO

and 78% for software/engineering on average between 2005 and 2014. On the other hand, regarding

hardware, the share of domestic sales was 96%.

-80

-60

-40

-20

0

20

40

60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Public servicesIndividual, cultural and leisure servicesOther business servicesCommunication, computer and information servicesRoyaltiesFinancial servicesInsurance and pension servicesConstructionTravelingTransportMaintenance and repair servicesManufacturing servicesService balance

(Year)

(bl. $)

190

Column Figure 4-3 Changes in sales of IT industry in India

Source: NASSCOM (National Association of software and Service Companies)

By export destination (estimate for FY2015), exports to the United States and Europe accounted for

62% and 28%, for a total of around 90%, of the total (Column Figure 4-4).

Column Figure 4-4 Destinations for IT-BPM74

exports in India

Note: Estimation for fiscal year 2015.

Source: NASSCOM website (http://nasscom.in/india-itbpm-exports).

74 BPM is a short for business process management. It generally refers to identifying and analyzing

processes in order to consider how to make continuous improvements in terms of efficient and effective

execution of jobs.

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012 2013 2014

Hardware Software and engineering BPO IT services

(bl. $)

(Fiscal year)

USA

62%

UK

17%

European

continent

11%APAC

8%

Others

2%

191

According to a survey concerning IT personnel75 conducted by the Ministry of Economy, Trade and

Industry, working in the IT industry is a job that inspires dreams and pride for Indian IT engineers and

such engineers feel a very high level of satisfaction compared with their counterparts in other countries.

In addition, the survey indicates that Indian IT engineers are eager to work abroad and start new

businesses, indicating that communication, computers and information services are likely to continue to

be growth sectors in the future.

Column 5 Changes in India’s trade (with China)

A look at changes in India’s trade with China makes clear the following notable points.

India has consistently been recording an import excess, or trade deficit, in its trade with China, with

the deficit continuing to grow from 2010 to 2015 (Column Figure 5-1).

Column Figure 5-1 Changes in India’s trade to China

Note: Values reported by China. Imports are indicated as minuses.


As for changes in product items exported from India to China, the value of exports of iron ores, slugs

and ash (most are iron ores in the HS2601 category) declined rapidly year after year, falling to as low

as 670 million dollars in 2015, and the value of exports of cotton and cotton fabrics also decreased year

after year from 2013 onwards. In 2015, in addition to the value of exports of the above items, the value

of exports of precious stones, precious metals, copper and copper products also dropped (Column

Figures 5-2 and 5-3).

75 “Questionnaire Survey on Foreign Personnel” conducted under an FY 2015 commissioned project called

“Survey concerning IT Personnel” (undertaken by the Mizuho Information and Research Institute).

-60

-50

-40

-30

-20

-10

0

10

20

30

2010 2011 2012 2013 2014 2015

Exports Imports Balance

(Bl. US$)

(Year)

192

Column Figure 5-2 Changes in India’s export items to China (contributions)


Column Figure 5-3 Composition of India’s export items to China (comparison of 2010 and

2015)


-30

-20

-10

0

10

20

30

2011 2012 2013 2014 2015

Cotton and cotton fabrics Jewelry and precious metalCopper and copper products Organic chemistrySalt, sulfur, lime and cement Ore, slug and ashGeneral machinery Mineral fuelPlastic and plastic products Electric machineryOthers All items

(%)

(Year)

Cotton and cotton fabrics

10%Jewelry and precious

metal

4%

Copper and copper

products

4%

Organic chemistry

3%

Salt, sulfur, lime

and cement

2%

Ore, slug and ash

57%

General

machinery

2%

Mineral fuel

2%

Plastic and plastic

products

2%

Electric machinery

2%

Others

12%

2010

Export value

20.9bl. $

193


Meanwhile, a look at changes in items imported to India from China shows that although the overall

value of imports declined in 2012 mainly because of a decline in imports of general and electrical

machinery, it grew in 2013 and 2014. In particular, imports of steel increased as much as 132% in 2014

compared with the previous year and imports of electrical machinery grew 22% in 2015 (Column

Figures 5-4 and 5-5).

Cotton and cotton

fabrics

17%

Jewelry and precious

metal

15%

Copper and copper

products

12%

Organic chemistry

8%Salt, sulfur, lime and cement

6%

Ore, slug and ash

5%

General machinery

4%

Mineral fuel

3%

Plastic and plastic

products

3%

Electric machinery

3%Others

24%

2015

Export value

13.4bl. $

194

Column Figure 5-4 Changes in India’s import items from China (contributions)


Column Figure 5-5 Composition of India’s import items from China (comparison of 2010 and

2015)


-10

-5

0

5

10

15

20

25

30

2011 2012 2013 2014 2015

Others

Vehicles (excluding forrailway)

Steel products

Optical apparatus

Furniture

Plastic and plastic products

Steel

Fertilizer

Organic compound

General machinery

Electric equipment

All items

(%)

(Year)

Electric

machinery

24%

General

machinery

24%

Organic

compound

10%Fertilizer

5%

Steel

5%

Plastic and plastic

products

2%

Furniture

1%

Optical apparatus

2%

Steel products

3%

Vehicles (excluding for

railway)

2%Others

22%

2010

Import value

40.9bl. $

195


The value of exports of iron ore from India fell steeply because both export price and volume

declined due to China’s economic slowdown. On the other hand, low-price steel products were exported

to India and other countries from China due to an excess supply there. The value of imports of steel from

China to India did not change between 2010 and 2015 as much as the value of exports did because the

effects of the steep price drop were offset by the resulting rise in the volume of steel imports.

(3) Structural reform initiative in the ROK

In February 2014, the ROK formulated the Three-Year Plan for Economic Innovation. In the plan,

the government pointed out the ROK’s structural problems such as inefficiency in the public sector, an

environment of limited competition, shrinkage of the working-age population, a decline in

entrepreneurship, delay in productivity improvement, inequality between large enterprises and small

and medium-size ones, the lag of the services industry, and growth excessively dependent on exports,

and set three pillars of the plan: (i) an economy with a solid foundation (correcting abnormalities:

public sector reform, and budget and tax system reform), (ii) strong growth achieved through innovation

(creative economy: deregulation and industrial fusion achieved through projects, and support for

business startups, and (iii) an economy well-balanced between exports and domestic demand (expansion

of the foundation of domestic demand: promotion of investment, expansion of consumption, promotion

of employment, support for small and medium-size enterprises, etc.). This plan seeks to realize the “era

of the people’s happiness” through the innovation and reinvigoration of the ROK economy as its

numerical target, aiming to raise the potential growth rate to 4%, the employment rate to 70% and per-

capita national income to 40,000 dollars three years later, or in 2017 (Table I-1-2-3-31).

Electric machinery

23%

General machinery

18%

Organic

compound

10%

Fertilizer

6%

Steel

4%Plastic and plastic products

4%

Furniture

3%

Optical apparatus

3%

Steel products

2%

Vehicles (excluding for

railway)

2%

Others

25%

2015

Import value

58.3bl. $

196

Figure I-1-2-3-31 Overview of ROK's Three-Year Plan for Economic Innovation

Source: Materials of Ministry of Strategy and Finance.

Specifically, regarding an economy with a solid foundation, the plan promotes the management

reform through consolidation and deregulation with respect to public corporations with growing debts.

As for creative economy, the plan provides fiscal support to industries that are expected to grow and

promotes the development of venture companies through collaboration between local governments,

large companies, research institutions and other organizations, with centers to support creative economy

established in 17 major cities across the country as bases of the initiative. Regarding an economy well-

balanced between exports and domestic demand, the government has designated health and medical care,

education, tourism, finance and software as priority service sectors for growth promotion and aims to

shift away from an export-oriented economic structure dependent on large companies.

As a result of China and other emerging countries catching up in terms of technological and

production capabilities, the ROK’s international competitiveness is declining in its major areas of

strength, so there are hopes for fostering industries that can act as new growth engines.

The government has cited five items, cosmetics, clothing, daily life and baby goods, agricultural and

197

fishery products, and pharmaceuticals, as consumer goods sectors that are performing well amid the

recent sluggishness of exports and intends to make intensive efforts to foster them as sectors with

promising export potential while maintaining the competitiveness of existing major export products.

Among promising growth sectors in the ROK are next-generation displays, biopharmaceuticals and

cosmetics. Regarding next-generation displays, ROK companies are ahead of others in the global market

with respect to mass production of organic electronic luminescence (EL) panels, which are superior to

liquid crystal displays in terms of thinness, lightness, electricity conservation, and clear picture quality,

and they are manufacturing and selling such panels for use in smartphones and television sets. Regarding

biopharmaceuticals, not only conglomerates (chaebols) but also non-conglomerate companies are

vigorously engaging in production outsourced by major foreign pharmaceutical companies and

development of biosimilars, which are the biopharmaceutical version of generic drugs. With respect to

cosmetics, such products as premium cosmetics containing Chinese medicine treatments have become

popular among young women on the tailwind of the boom of ROK TV dramas and movies, and

companies making such cosmetics are planning to expand into the Middle East and Latin American

markets in addition to China and Southeast Asia, which are the main markets.

In 2014, the ROK services industry (tertiary industry) accounted for around 70% of the total number

of employees in the ROK, while the share of value added created by this industry in GDP was about

60%, smaller than the share in Japan, the United State and Europe. According to statistics prepared by

the OECD, the level of productivity in the ROK’s services industry in 2014 was around 45% of the level

in the manufacturing industry, much lower than the average of 90% among the OECD member

countries.76 This reflects the fact that while progress has not been made in fostering service sectors with

high value added, there is a concentration of employees in services sectors with low productivity,

including self-employed workers (Figure I-1-2-3-32 and Table I-1-2-3-33).77

76 Overview of the OECD Economic Surveys Korea, May 2016 77 The share of the tertiary industry in nominal GDP in Figure 65 and the share of the services industry in

nominal GDP in Figure 66 do not match with each other because the sources of data used in the calculation

of the shares are different.

198

Figure I-1-2-3-32 Percentages of employed persons in ROK by industry and ratio of added

value to nominal GDP (2014)

Source: The data from International Labor Organization and Bank of Korea.

Table I-1-2-3-33 Ratio of added value in service sector to nominal GDP in major countries

(2014)

(%)

France USA UK Netherlands Japan Germany ROK

78.9 78.4 78.4 77.0 72.0 69.0 59.4

Source: Statistics of the United Nations.

The OECD presumes that this situation has been created by the concentration of resources, including

capital and human resources, in the manufacturing industry that was caused by the ROK’s

manufacturing-oriented economic development and points out that the services industry’s low level of

competitiveness is affecting the income inequality and growth rate in the ROK. Based on this assessment,

the OECD observes that the services sector’s competitiveness should be strengthened through the

abolition of barriers to entry into the sector, promotion of regulatory reforms and liberalization of trade

and foreign investment, among other measures.78

In a statement concerning the Three-Year Plan for Economic Innovation (February 2014), President

Park emphasized the government’s intention to lay the foundation of dramatic development of the

services industry by actively increasing its fiscal, R&D and financial support: which has been mainly

provided to the manufacturing industry, to a level similar to the support for the manufacturing industry

in order to ensure that investments in the services industry can expand and high-quality jobs can be

78 Overview of the OECD Economic Surveys Korea, June 2014

2.4%

6.1%

36.5%

24.4%

61.1%

69.5%

0% 20% 40% 60% 80% 100%

Ratio to

nominal GDP

Number of

employed

persons

Primary industry Secondary industry Tertiary industry

199

created.79

It is said that the ROK will shift to an aged society80 in 2018, and pressure for fiscal expenditures

is strengthening in order to secure the financial sources necessary for policy measures related to pension

and welfare. Therefore, it is an urgent task to strengthen the initiative to achieve sustainable growth by

carrying out structural reforms based on the Three-Year Plan for Economic Innovation.

By achieving innovations and creating new industries, the ROK needs to create domestic jobs and

demand through a change of course from the existing growth model led by the manufacturing industry,

exports and large companies to a new approach that takes into consideration promotion of domestic

demand and the services industry while expanding further into the fiercely competitive global market.

(4) Structural reform initiatives in resource-producing countries

(A) Russia: promotion of import substitution and improvement of the business environment

After 2000, when President Vladimir Putin took office, the Russian economy consistently grew

except during the global economic crisis in 2008 thanks to crude oil price rises. Against the backdrop of

the continued economic growth, in 2004, President Putin established the Stabilization Fund,81 into

which a certain percentage of oil and gas revenues was put into as reserves. The reserves were used to

complement expenditures, cover the pension fund deficit, repay external debts and make investments in

and provide loans for domestic infrastructure projects, thereby supporting stable economic growth.

Currently, Russia is heavily dependent on the oil and gas industry, which accounts for around 50% of

the budget revenue and more than 50% of exports (Figure I-1-2-3-34).

79 Cited from Momomoto K. (2015), KANKOKU KEIZAI NO KISO CHISHIKI (October 2015), JETRO. 80 The number of years necessary for the share of the population of people aged 65 to double from 7%

(aging society) to 14% (aged society) is known as “doubling time” and is used as an indicator of the pace of

the aging of society in countries. Japan shifted from an aging society to an aged society over the period of

24 years from 1970 to 1994, the fastest pace that has ever been observed around the world. However, the

ROK is forecast to make this shift at a faster pace, over the period of 18 years from 2000 to 2018. 81 In 2008, this was divided into the Reserve Fund and the National Wealth Fund. The Reserve Fund is

used to complement expenditures and make premature repayment of external debts, while the National

Wealth Fund is used to cover pension fund deficits and to supplement voluntary pension reserves. In

November 2013, it became possible to use the National Wealth Fund to make investments in and provide

loans for domestic infrastructure development projects.

200

Figure I-1-2-3-34 Changes in share of values of exports and resource exports in nominal GDP

Source: WDI, World Bank.

The budget for FY2016, which was enacted on December 15, 2015, was compiled based on the

assumed crude oil price of 50 dollars per barrel and the assumed exchange rate of 63.3 rubles to the

dollar. The budget deficit amounted to 2.4 trillion rubles, equivalent to 3% of the GDP. While the budget

deficit is covered mainly by reserve funds, the deficit may expand further if the crude oil price trends

even lower.

Although the monetary policy’s main emphasis is placed on curbing the inflation due to the ruble’s

weakness, the ruble weakened further, leading to a rise in the policy interest rate to 17% at the end of

2014. Although the policy interest rate has been gradually lowered since then, it remains high at 11%.

In light of the current economic conditions, it is necessary to reduce the policy interest rate, but the rate

has been kept high out of concern over a possible inflation rise.

Under these circumstances, President Putin advocated the goal of shedding the dependence on

resources82 in his annual speech at the Federal Assembly on December 3, 2015. On March 1, 2016, as

a specific initiative to achieve the goal, the Russian government announced the Action Plan of the

Government of the Russian Federation to Provide Stable Social and Economic Development of the

Russian Federation in 2016 (Anti-Crisis Plan).83 This plan calls for federal budget expenditures totaling

around 470 billion rubles, of which the largest portion, or 310 billion rubles, is allocated to fiscal loans

to regions (Table I-1-2-3-35). The plan places emphasis on the improvement of the environment for

achieving economic diversification and medium-term economic stability and provides support mainly

82 “Competitive manufacturing is still concentrated mostly in the commodities and mining sector. We’ll

only be able to achieve our ambitious goals in security and social development, to create modern jobs and

improve the living standards of millions of our people, if we change the structure of our economy.” 83 The Russian government (http://government.ru/news/22017/). As of April 8.

0

5,000

10,000

15,000

20,000

25,000

1997 2005 2013

(100 mil. $)

Nominal GDP Export value Resource export value

(Year)

http://government.ru/news/22017/

201

to such fields as the automobile industry, housing construction, light industries and agriculture.84

84 Trade Publicity (March 30, 2016) (JETRO)

202

Table I-1-2-3-35 Major expenditure items in Russia’s anti-crisis plan for 2016

Item Institution in charge

Expenditure by

funding source

(100 mil. ruble)

Federatio

n budget Others

Financing for federal organs Ministry of Finance, administrative

divisions of federal subjects 3,100 -

Subsidies for federal organs for

social security payments to the

unemployed

Ministry of Finance, Ministry of

Labor and Social Protection 55 -

Maintaining the provision of

rehabilitation techniques for the

physically disabled (supports taking

into account the rise in price)


Labor and Social Protection,

Ministry of Economic Development

298 -

Supports for automobile industry

Ministry of Industry and Trade,

Ministry of Economic

Development, Ministry of Finance

885.9 491

Supports for agricultural machinery

Ministry of Agriculture, Ministry of

Industry and Trade, Ministry of

Finance

- 100

Procurement of traction vehicles in

Russian Railways investment project

(2016)

Ministry of Transport, Ministry of

Economic Development, Ministry

of Finance, Ministry of Industry and

Trade, Russian Railways

-

398

(National

Welfare

Fund)

Modernization of public

infrastructure by expanding the

government supports

Ministry of Construction, Housing

and Utilities, Ministry of Finance 34 -

Additional capital input in Industrial

Development Fund (FRP)

Ministry of Industry and Trade,

Ministry of Finance - 200

Improvement of conditions for

supports for non-resource exports Ministry of Finance 81 -

Establishment of new SMEs and

employment creation

Ministry of Economic

Development, Ministry of Finance 111 -

Expansion of grants for innovative

companies


Economic Development 44.3 -

Source: The Russian Government

(http://government.ru/media/files/X6NrVuOjjj1ALG5ZoCbVm5G3lQ0lCkh.pdf) and Trade publicity,

JETRO.

203

Measures to support industries include the promotion of import substitution and the expansion of

exports in non-resource sectors, which are intended to diversify the economic structure, and the

improvement of the business environment and deregulation, with the aim of fostering non-resource

sectors in order to shed the dependence on resources.

(B) Brazil: fiscal consolidation and response to private debts

As Brazil faces a decline in total demand, it is in a state of demand shortage, in which real GDP is

smaller than potential GDP. Brazil’s fiscal position is particularly unfavorable among Latin American

countries, so it is not easy to implement fiscal pump-priming. In this situation, the Inter-American

Development Bank (IDB) has proposed that Brazil should promote fiscal consolidation through

efficiency improvement of government expenditures and targeting of expenditure items and that while

doing that, the country should maintain social benefits by improving efficiency in such areas as health,

education, training and poverty reduction. The IDB has also observed that appropriate action must be

taken regarding the expansion of private-sector debts because while it is necessary to deal with this

problem, which may destabilize the financial sector, the room for monetary policy measures is limited

given the need to respond to the capital outflow85 (Figure I-1-2-3-36).

Figure I-1-2-3-36 Output gap (horizontal axis) and structural fiscal balance (vertical axis) in

Central and South American countries

85 Banco Interamericano de Desarrollo (2015), El laberinto: Como America Latina y el Caribe puede

navegar la economia global, Informe macroeconomico de America Latina y el Caribe de 2015, March

2015, Banco Interamericano de Desarrollo

204

Source: Extracts from Banco Interamericano de Desarrollo (2015), El laberinto: Cómo América Latina

y el Caribe puede navegar la economía global, Informe macroeconómico de América Latina y el Caribe

de 2015, March 2015, Banco Interamericano de Desarrollo.

In relation to the above, Brazil is implementing the pension reform. For example, the government

has expressed its intention to raise the starting age of pension benefits payout for women, which is

currently 60 years old, to 65 years old, the same as the starting age for men. 86The possibility of

implementing revenue reform, such as introducing the financial transaction tax (Contribuição Provisória

sobre Movimentação Financeira (CPMF)) 87 and imposing tax on dividends, was also suggested.88

In addition, Michel Temer, a vice president who took office as interim president in May 2016, has

indicated his intention to promote fiscal reform and other initiatives, and it has been pointed out that

expectations for such reform are growing in the market.

(C) Argentina: reform focusing on market functions

In Argentina, the new government of President Mauricio Macri89 was inaugurated in December

2015, marking the start of a reform focusing on market functions in order to achieve economic recovery.

The IMF estimates Argentina’s real GDP growth rate at 1.2% in 2015 and forecasts a growth rate of

minus 1.0% in 2016 (Figure I-1-2-3-37).90 Although the Argentine government forecasts a growth rate

of 3.0% in 2016,91 the country’s economy is facing the risk of stagflation, in which inflation rises during

recession, so it is necessary to keep a close watch on future developments (Figure I-1-2-3-38).

86 A comment made by Minister of Finance Nelson Barbosa on December 18, 2015. 87 This is a tax imposed on all financial transactions, including withdrawals of bank deposits and use of

credit cards. 88 A comment made by Minister of Finance Barbosa. 89 On December 10, 2015, Mauricio Macri took office as new president (a four-year term), representing a change from the leftist government that lasted 12 years to a right-of-center government. The new

government has expressed its intention to rebuild the economy by improving the investment

environment through the relaxation of the control of foreign currency and trade transactions. 90 However, a turnaround to a positive growth rate of 2.8% is forecast for 2017. 91 According to the draft national budget for 2016.

205

Figure I-1-2-3-37 Changes in Argentina's real GDP growth rate

Source: IMF World Economic Outlook, April 2016.

Figure I-1-2-3-38 Changes in the increase rate of consumer prices (CPI) in Argentina

Source: IMF World Economic Outlook, April 2016.

Based on his election campaign promises, President Macri announced plans to devalue the Argentine

currency, the peso, in order to unify the currency’s multiple exchange rates against the dollar and move

the rate closer to the actual situation; to abolish export tariffs on major export grain; to redress the fiscal

deficit; and to implement measures to restore the level of foreign currency reserves. He has also

2.9

0.5

1.2

-1.0

2.8

-15

-10

-5

0

5

10

15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

(%)

(Year)

Estimated values for 2014 and later

41.0

10.9

23.9 25.0

20.0

15.0

10.0

5.0

-5

0

5

10

15

20

25

30

35

40

45

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

(End-of-period

value: %)

(Year)

No data for 2015

Estimated values for 2016 and later

206

expressed his intention to phase out foreign currency control. Immediately after its inauguration, the

government already implemented a shift to a floating exchange rate system92 and announced a series of

measures, including relaxation of foreign currency controls, reduction or waiver of export tariffs on

major agricultural products, reduction or waiver of the domestic tax on automobiles and other products,

abolition of export tariffs on industrial products, and abolition of the Declaración Jurada Anticipada de

Importación (DJAI)93 (Figures I-1-2-3-39 and I-1-2-3-40).

Figure I-1-2-3-39 Changes in Argentina’s international balance of payments

Source: National Institute of Statistics and Censuses and CEIC Database.

92 As the revision of the exchange system was the top priority issue for the government of President Macri,

Minister of Finance Alfonso Prat-Gay announced the abolition of Argentina’s four-year-old exchange

control on December 16, 2015, and a shift to a floating exchange system was implemented at the opening

of trading on December 17. 93 At the same time as the abolition of this system, a new import control system called the Import

Monitoring System was announced. Under the new system, nearly 1,400 out of all import items (including

automobiles, auto parts, information equipment and textiles) were designated as sensitive items and were

subject to permission for non-automatic import, which made it necessary to file application for import. The

WTO was unable to determine that Argentina had implemented a corrective measure concerning its import

restrictions by introducing the new system, so consultations between the complainants (Japan, the United

States and Europe) are ongoing.

-20

0

20

40

60

80

100

2000 2002 2004 2006 2008 2010 2012 2014

(bl. $)

(Year)

Exports of goods Imports of goodsExports of services Imports of servicesCurrent balance Trade (goods and services) balance

207

Figure I-1-2-3-40 Changes in exchange rate of Argentine peso


As there are concerns that in the future, inflation will grow due to the Argentine currency’s

depreciation caused by the relaxation of exchange control, a recession may be expected in the short term.

However, it is inevitable that reforms necessary for economic rebuilding involve pain, and if the results

of Argentina’s reforms start to appear, expectations for an increase in investments in such areas as

electricity and other infrastructure, agriculture, construction and energy will grow. On the diplomatic

and trade fronts, it is expected that progress will be made in the negotiations concerning a free trade

agreement (FTA) between the EU and the Common Market of the South (Mercosur) (Mercado Común

del Sur) and that exports to The Pacific Alliance, Alianza del Pacífico (Mexico, Colombia, Peru and

Chile)94 will expand.

(D) Saudi Arabia: privatization of state-owned enterprises

The main determinant factor of Saudi Arabia’s economic conditions is the oil sector, which accounts

for around 50% of GDP. With almost all exports attributable to the oil sector, Saudi Arabia depends on

oil for 80% of government revenues. As a result, Saudi Arabia’s economic stability is closely related to

the oil price. Because of the recent decline in the oil price, Saudi Arabia’s fiscal positon has deteriorated,

with its budget deficit equivalent to around 15% of its economic size in 2015 (Figure I-Ⅰ-1-2-3-41).

94 Trade Publicity (January 6, 2016) (JETRO)

0

2

4

6

8

10

12

14

16

18

2015/9

/1

20

15/1

0/1

20

15/1

1/1

20

15/1

2/1

2016/1

/1

2016/2

/1

2016/3

/1

2016/4

/1

Strong peso

(weak dollar)

Shift to the floating exchange rate system

Dec. 17 2015

(Exchange rate per $)

Weak peso

(strong dollar)

208

Figure I-1-2-3-41 Ratio of fiscal balance to GDP in oil-producing countries in Middle East

Source: IMF WEO, April 2016.

In order to shed the dependence on oil, on April 25, 2016, the Saudi government announced Saudi

Arabia’s Vision 2030, which summarizes the goals that should be achieved over the next 15 years until

2030 and the policy agenda for their achievement. Deputy Crown Prince Mohammad bin Salman Al

Saud remarked that the government will turn Saudi Arabia into an economy not dependent on oil by

2020. This vision is comprised of three pillars, which are (i) positioning Saudi Arabia as the heart of the

Arab and Islamic worlds, (ii) turning the country into an investment powerhouse, and (iii) making the

country a strategic location, and the major items in the economic field cited in the vision are as follows:

(1) Implement the initial public offering of shares in Saudi Aramco (less than 5%)

(2) Transfer the proceeds from the sale of shares in Saudi Aramco to the sovereign wealth fund (SWF)

to create the world’s largest SWF.

(3) Privatize government organizations and promote participation of private capital, mainly in the fields

of healthcare and education.

(4) Create a local military industry (with a view to reducing military expenditures and creating jobs, for

example).

(5) Develop renewable energy (initial capacity target set at 9.5GW).

Saudi Aramco is the largest state-run oil company in the world, and even a mere 5% of all shares in

the company is worth 125 billion dollars. The company’s market capitalization is expected to surpass

that of major resource majors such as Total and BP.

-30

-20

-10

0

10

20

30

40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Egypt Iran Saudi Arabia UAE Oman Qatar Bahrain

(%)

https://www.google.co.jp/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi48Ky77YPQAhWKHZQKHfn_AXMQFgglMAE&url=https%3A%2F%2Fen.wikipedia.org%2Fwiki%2FMohammad_bin_Salman_Al_Saud&usg=AFQjCNFI-WboT2567JmuNkdMN-clm1SZyw

https://www.google.co.jp/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi48Ky77YPQAhWKHZQKHfn_AXMQFgglMAE&url=https%3A%2F%2Fen.wikipedia.org%2Fwiki%2FMohammad_bin_Salman_Al_Saud&usg=AFQjCNFI-WboT2567JmuNkdMN-clm1SZyw

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