The Rise of China and the Impact on the Dutch Economy

Transcription

1 2012 Bachelor Thesis The Rise of China and the Impact on the Dutch Economy Name: ANR: Joep Waterschoot Program: Premaster Finance Supervisor: A.P. Morales Place: Tilburg, the Netherlands Date: 18th May 2012

2 Contents Chapter 1: Introduction 3 Chapter 2: History of China s financial system 5 Chapter 3: Financial development of China s economy The rise of the Asian economies Gross Domestic Product (GDP) Foreign Trade Foreign Exchange Reserve Foreign Direct Investment Manufacturing Industry Expending Markets 10 Chapter 4: Impact on the Dutch economy Impact on foreign trade Foreign Direct Investment Inflation and interest rates Future expectations 16 Chapter 5: Summary and Conclusion 18 Bibliography 19 Appendix 1: Key Statistics China and the Netherlands 22 Appendix 2: Import and Export share of China 23 Appendix 3: Import and Export share specified by product group 24 Appendix 4: Inflation of Imports from China 26 The Rise of China and the Impact on the Dutch Economy 2

3 Chapter 1: Introduction Background Information The recent spectacular rise of the Asian economies, particularly those of China, with their continued growth, will not only cause surprises among the Western economies, but also make them concern. The centrepiece of the global economy, which has been for decades between the United Sates and Western Europe, appears to shift towards the Asian market. According to them, with the United States ahead, this development will upset the current balance in the global economy with all its consequences. One outcome includes that the supremacy of the high-income countries in the field of trade, investment and other economic aspects will be affected. But there occur simultaneously new and unexpected imbalances in the global economy, which might generate other problems. However, instead to consider the current situation as destabilizing, it seems that the growing importance of the Chinese economy provides opportunities for both wealthy and emerging countries. The rise of the Chinese economy China has captured the world s attention with its tremendous growth for such a big county during the past four decades. Throughout these years of fast growth, China has undergone huge structural changes in its economy and financial system and has become a major destination for trade and foreign investment. Its population of 1.3 billion represents a huge market with endless potential and entry to the World Trade Organization (WTO) has guaranteed China a place on the global financial world (Sinclair, 2010). As a result, The Chinese economy is undergoing a major transformation which will not only affect the domestic economy but also foreign countries like the Netherlands, for which China is the fourth most important supplier of import goods. With an average rate of 9.7%, the Gross Domestic Product (GDP) of China has grown almost three times the world average. In 2007, China was the fourth largest country in the world, behind only the United States, Japan and Germany. However, if the rankings were based on purchasing power, China would already capture second place. If such rapid growth continues, China s GDP will be larger than that of the top three countries in the not-too-distant future (Barth, 2009). The Rise of China and the Impact on the Dutch Economy 3

4 Research Questions From the above described problem, the following research question can be formulated: What has been the impact of the Chinese growth on the Dutch economy? In order to answer this question the following sub questions are composed: 1. What changes has China s financial system undergone? 2. What are the main developments of the Chinese economy during the past decades? 3. What are the consequences of the Chinese growth for the Netherlands? 4. What are the future expectations for the economies of both countries? Thesis Structure The emergence of China as an important player in the global economy has provoked huge debates on the potentially drastic economic consequences for a small open economy such as the Netherlands (Suyker, 2006). This document aims to describe China s recent developments and the impact on the Dutch economy. First we will look at the identification of a range of stylised facts about China s economic reform and its growth performance. It describes for example China s position in the world economy and the relationship with their trading partners in general and the Netherlands in particular. Secondly, the possible impacts of Chinese developments on the Dutch position on global markets are analysed, as well as the impact on unemployment, inflation rates and sectoral restructuring. After that we will look at the future expectations for both countries. This document concludes with a summary and a brief review of the main findings. Methodology This research will focus primarily on a literature review. The list of papers and articles form the bibliography will be used as support to answer the research questions above. Besides these references the literature will be supported by several figures and graphs to underline the text. As indicated, this research will not take place on the basis of a data examination. The only data that has been analysed, comes from the several papers and articles which will be used to draw conclusions. The time period that will be used during this research is This period has been chosen because the transformation of China into a more open market began in 1978 and the year 2006 has been picked so the consequences of the current financial crisis wont effected the outcome of this research. The Rise of China and the Impact on the Dutch Economy 4

5 Chapter 2: History of China s financial system The financial system: from monopoly to a fully open banking sector Throughout the past four decades of fast growth, China has experienced enormous structural changes in its economy and financial system. There has been significant and increasing urbanization, industrialization and integration into the world economy. The financial system has also undergone major changes, with the PBOC (People s Bank of China) ending its monopoly position of the banking sector and being recast as the nation s central bank in At the same time, four state owned commercial banks (SOCB), the so-called Big Four, were established to take over the role of the People s Bank of China in allocating credit throughout the country. In the mid-1990s, three policy development banks were established to relieve the Big Four of the responsibility of making loans to implement the policies of the government, thereby enabling them to operate more fully as true commercial banks (Caprio, 2009). Beginning at the end of the 1990s, still further changes in the financial system took place. The Big Four had accumulated enormous non-performing loans (NPLs) as a result of the earlier policy-directed lending, so the government undertook a series of necessary actions to address this problem. These actions became even more urgent when China became a member of the World Trade Organization (WTO) in December 2001 (Morrison, 2001) and committed to fully opening up its banking sector to foreign firms by December The actions taken over several years sufficiently improved the financial conditions of three of the Big Four for them to go public in 2006, with the last bank doing so being the biggest initial public offering (IPO) in history up to that time (Barth, 2009). Other changes in China s financial system took place as well. In 1990, two stock exchanges were established: one in Shenzhen and the other in Shanghai. Laws were also adjusted establishing three financial regulatory agencies in the early 2000s: one each to oversee the banking, insurance and securities industries. This frees the People s Bank of China of the responsibility to supervise these financial sectors so that it can mainly focus on monetary policy. While still more changes will take place, China has already implemented many reforms to improve the functioning of the overall financial system in an attempt to promote continued and sustained growth in the economy (Tatom, 2009). The Rise of China and the Impact on the Dutch Economy 5

6 Chapter 3: Financial development of China s economy China s reform and open policy for over 30 years contribute to the rapid growing of China s economy. This chapter examines China s evolving financial landscape as we analyze the remarkable performance and the tremendous structural changes of the Chinese economy in economic output, foreign trade, foreign investment and enterprise strength. 3.1 The rise of the Asian economies Emerging Asian economies: China leads the way While Japan has been the largest Asian economy for a few decades, China s economy, measured in purchasing power parity (PPP), is already twice as big. The United States is losing its global dominance to China and signed for 28,7% of the global GDP (Gross Domestic Product) in However, measured in purchasing power it was only 20,8%. Under that standard, The Chinese and Japanese economies together were as large as that of the United States. Of course, the OECD countries still dominate most of the world s GDP, what can be mainly explained by the high income differences (Voorend, 2007). In 2004, the ratio of average income per capita between the United States and China was still 62:2, while in purchasing power it was only 13:2. Nevertheless, it seems the traditional income balances now partly restores, at least if we compares the GDP of the emerging economies with those of the OECD countries. The basis of this shift to a larger Asian share in the world economy is the growth of the Asian continent (with the exception of Japan) which is constantly higher than those in the OECD countries (Spoor, 2007). The GDP of Asia grew with an average of 6.4% per year between 2001 and 2006, while in the United States and Europe it was respectively only 2.7% and 1.8%. 3.2 Gross Domestic Product (GDP) China has captured the attention of the world with its unprecedented growth for such a big country during the past decades (Barth, 2009). Since 1978, China s economy has grown by 9.7% annually, ranking first in gross outputs for the first time. With this percentage of growth China s GDP has grown almost three times the world average. According to the data form the World Bank, China s Gross Domestic Product surpassed that of Britain in 2006, becoming the fourth biggest economy in the world, behind only the United States, Japan and Germany (Zhijun, 2011). At that time China accounted for around 20% of the global economy. In 2010, The Rise of China and the Impact on the Dutch Economy 6

7 because of the difference on economic growth rate for many years, China s economic output (measured in Gross Domestic Product) surpassed that of Japan, becoming the global second biggest economy and the biggest of the Asian continent. If such rapid growth continues, China s GDP will be larger than that of the of the United States in the not-too-distant future. Moreover, according to the prediction of multi-country s economist and Goldman Sachs, in the coming 20 years, China s annual economic growth rate will maintain about 7% (Jing, 2011). By around 2030, China s economic output will surpass the United States, leaping to the world leader (Global Sherpa, 2010). 3.3 Foreign Trade China s trading position: from liberalization to export promotion The patterns of world trade are changed dramatically in a very short period of time. In 1973, Europe and North America had respectively 50.3% and 19.1% participation in the total world trade. This remained virtually unchanged until At this time, the high-income countries accounted for 75.8% in the global goods exports, but in 2003 this share had fallen to 64.9%, almost entirely explained by the increasing presence of China (Spoor, 2007). While the increase in exports from low and middle income countries is mainly absorbed by countries from the same category, the export to high income countries also grew form 17.0% to 20.9%. This export growth has continued in most recent years, and as the services would be taken into consideration, the change in trade patterns would even be more clearly discernable. The size and steady growth of the Chinese export can be called phenomenal, especially given the fact that China was still very isolated in the late 1960s. While the Asian Tigers like Singapore and South Korea took the first step towards export-led growth, the Chinese growth was still largely endogenous, driven by local investments and household saving (especially after the land reforms in the early eighties). By the beginning of the nineties, foreign investment began to flow into the country, but this was mainly a reaction to and not a cause of the continued strong growth (Suyker, 2007). However, soon the foreign investments became much more important, especially in the technology-intensive manufacturing sectors. Since that time China followed a strategy of export promotion rather than trade liberalization. The export became the engine of the Chinese growth, while import protection gradually declined to prepare China for the WTO membership (Spoor, 2007). The Rise of China and the Impact on the Dutch Economy 7

8 Since the reform and open policy, the Chinese foreign cargo volume of trade has increased from 20,640 million US dollars in 1978 to 2,561,630 million US dollars in Although in 2009, because of the loan crisis influence it dropped to 2,207,270 million US dollars, in 2010 China s foreign trade created a historical new high record (Zhijun, 2011). On March 5, 2011 Premier Wen Jiabao point out in the government work report that in 2010 the total amount of Chinese foreign trade achieved 2,970 billion US dollar (University of Southern California, 2011). With annual growth of 17.4% it became one of the most important factors of rapid economic growth of China. Moreover, in 2009, China surpassed Germany to become the world largest export country. Furthermore, according to many economist, China s gross trade volume, including cargo trade and service trade, will amount about 5,300 billion US dollars by 2020, with about 4,300 billion US dollars on cargo trade and approximately 1,000 billion US dollars on service trade (Xiao, 2010). By that time China s cargo trade export amount will amount to about 2,400 billion US dollars, ranking first in the world. The import amount will be around 1,900 billion US dollars, ranking second in the world. Because of the strong increase in exports and the less strongly increased imports, China therefore has a strong trade surplus on the current accounts (Aizenman, 2012). 3.4 Foreign Exchange Reserve According to the statistical data from the People s Bank of China (PBOC), China s foreign exchange reserve reached to 1,000 billion US dollars at the end of 2006, as 666 times as much as that in 1978, ranking first in the world. By the end of 2011, the foreign exchange reserve had been 3,181 billion US dollars (State Administration of Foreign Investment, 2011), growing by 11.7% compared to the same period. This huge amount of foreign exchange reserve enables China to have the international payments ability, and enhanced China to resist each kind of financial risk like currency risks (exchange rates) and interest risks (loans). Moreover, since the reform and open policy, especially after joining the World Trade Organization (WTO), the Chinese financial industry has successfully broken the unfavorable situation of domestic and foreign problems, opening to the outside world with steady steps. One hand, more foreign financial corporations entered China increasingly. On the other hand, Chinese financial corporations went overseas continuously and rapidly, which indicated that China s financial industry was already more open and vigorous, becoming an important new force in the world financial pattern (Zhijun, 2011). The Rise of China and the Impact on the Dutch Economy 8

9 3.5 Foreign Direct Investment (FDI) Over the past thirty years, China has emerged as one of the largest and fastest growing economies in the world and has become a major destination for foreign direct investment (FDI) (Bilston, 2004). Its population of 1.3 billion represents a huge market with great potential and entry to the World Trade Organization (WTO) has guaranteed a place in the global financial world. As a result, the Chinese economy and financial system is undergoing a major transformation. By addressing many of the historical challenges of entry with deregulation, privatization and economic liberalization, China is turning challenges into opportunities for foreign investment (Sinclair, 2010). As leaders see the value of globalization, China has been actively seeking to attract foreign direct investment (FDI) and technology to promote its modernization efforts and accelerate its export trade capabilities since it opened its doors for foreign countries in 1978 (Xiamen, 2000). The total amount of incoming foreign direct investment increased form almost zero at the end of the 1970s to a high of about 300 billion US dollars in 1993 and 400 billion US dollars in As a result, China has become the third largest recipient of foreign direct investment in the world, and the largest recipient among the emerging countries. The figure below shows the immense increase of foreign direct investment in China. Figure 1: Foreign Direct Investment in China, (Guoqiang, 2005) The Rise of China and the Impact on the Dutch Economy 9

10 Membership of the World Trade Organization has been key in opening up the Chinese market (Bilston, 2004). It has proven to be a good thing for private entities and unifying government regulations, despite concerns that the WTO membership would have a negative impact for foreign companies since it removes tax incentives (Sinclair, 2010). Early forecasts predicted that foreign direct investment into China would decrease due to China s tax rate unification reform granting equal treatment to domestic and foreign companies. However, these negative predictions have not affected foreign investment and China s FDI inflow continues to grow, passing the 500 billion US dollar mark in Manufacturing Industry In China, on the progress to a enterprise-dominant market economy system, the Chinese companies have obtained a fast development in the recent years. China has already entered the era of owning world-class enterprises. For example, in 2010 there were 54 Chinese enterprises among the world Top 500. The direct performance of increasingly strengthened Chinese enterprises is continuous growth of Chinese manufacturing industry output (Zhijun, 2011). China has already surpassed the United States and become number 1 in the world on output of manufacturing industry. In 2010, China s manufacturing output was accounting for 19.8% in the world, slightly higher than that of the United States (19.4%). According to the British Financial Times, this means China not only restored to maintain the first of global biggest commodity producer during half of the 19th century, but also has caught up with the United States, which has kept this position for over 100 years. 3.7 Expending Markets On market expends, since 1982, the Chinese consumable total volume of retail sales annually has grown by almost 15%. According to the China Business Coalition, China s consumable total volume of retail sales in 2010 amounts to 16,000 billion Yuan (2,500 billion US dollars), growing by 18% compared to the year before. When deducting the price factor, the actual speed-up achieves 15%. The total volume of consumable retail sales per capita amounts to eleven thousand Yuan (around two thousand US dollars). Particularly after the loan crisis in 2008, in the export disadvantageous situation, China s automobile, electrical appliances, telecommunication products and so on didn t fall but rose instead (Zhijun, 2011). One hand this indicated that the time of Chinese high consumption has arrived, and on the other hand it also indicated the expense will strengthen the future of China s economy. The Rise of China and the Impact on the Dutch Economy 10

11 Chapter 4: Impact on the Dutch economy China and the Netherlands are worlds apart, not only because of actual distance, but also because of disparities in the relative size of the countries in terms of population and GDP and differences in income per capita. Also other development indicators such as life expectancy, personal necessaries and access to the current communication technologies indicate the huge existing differences in terms of the stage of development. In Table 1 (see Appendix 1) a list of key statistics can be found to underline these differences between the two countries. Despite the rapid development in the recent decades, China is still among a large group of less prosperous countries in the global economy. Nevertheless, China s tremendous economic development in combination with the sheer size of its economy has led to strong interest in the Netherlands among policymakers and the investors. The impressive growth of the Chinese economy turning China into an important player in the global economy has provoked intensive debates on the potentially drastic economic consequences for the world economy at large, but also for a small economy as the Netherlands (Groot, 2006). This chapter considers several aspects of globalisation and the impact of the Chinese growth on the Dutch economy. First we will look at the trade relationship between both countries and which changes it goes trough because of China s emerging economy. Secondly, we will focus on the increasing investments, inflation and interest rates. This chapter concludes with the future expectations. 4.1 Impact on foreign trade China s reform and open policy has caused a steep increase in trade with the Netherlands. Dutch imports form China have risen from 0.5% of total Dutch imports in 1980 to 7.7% in 2005 (Figure 2). This rise was steeper than in any other country and the Netherlands now have the highest China share in imports of all European Union (EU) countries (see Figure 3 in Appendix 2). Unlike for the other EU countries, the strong rise in China s share in imports was not accompanied by a drop in import share of other Asian countries (Suyker, 2006). In 1978 China was only the 44th supplier of import goods for the Netherlands, but recently it has became the fourth biggest supplier. However, most imports from China are not consumed or used in the Netherlands. Two-third of Dutch imports from China are re-exported, making the Netherlands an important European distribution centre for Chinese products (CBS, 2005). Currently, every day some 1000 trucks leave the port of Rotterdam to redistribute Chinese products in Europe. At the same time a similar number of containers are transported by ship. The Rise of China and the Impact on the Dutch Economy 11

12 Figure 2 Dutch Foreign Trade with China, (OECD, 2006) Dutch exports to China have also increased properly, but considerable less steeply than Dutch imports from China. Exports to China provide circa 15,000 jobs in the Netherlands, including import this amount is around 23,000, around ½% of total employment. As a percentage of Gross Domestic Product (GDP), exports to China is as important for the Netherlands as for the European Union as a whole (Figure 4). The result of a lower share of China in Dutch total exports is offset by an increasing openness of the Dutch economy. The lower share of China in Dutch total exports can only partly be explained by the export composition (Suyker, 2006). Countries like Finland and Germany, which have an above-average export to China, are more focussing on producing export products that China is looking for, for instance capital goods. Figure 4 Exports of EU-countries to China as percentage of GDP, 2005 (OECD, 2006) The Rise of China and the Impact on the Dutch Economy 12

13 Limited share of Dutch exports to China At this time China is very strong in conventional low-skilled export products such as textile, clothing, shoes and toys, but also in high-tech products, such as computers, televisions and other consumer electronics. The latter is remarkable given China s current stage of development and is mainly due to its role as an assembler and the abundance of cheap labour. Dutch comparative advantage are especially found in the global markets of several agricultural products, such as flowers and plants, bulbs, dairy and tobacco manufactures. However, the global markets of those goods are relatively small and as a result the share of those products in the total Dutch exports remains limited. Petroleum products, electrical machinery and offices machines have a larger share in Dutch exports, but these are largely reexported highlighting the strength of the Netherlands as a European distribution centre (Suyker, 2006). A list of the export (and import) shares with specific product groups can be found in Appendix 3. Based on an in-depth revealed comparative advantage (RCA) research, it can be concluded that the overlap between Dutch and Chinese export strengths is limited (Yue & Hua, 2002). Hence, the Netherlands is not largely dependent on China in the field of export, so the emerging of China will not lead to drastic sectoral shifts. 4.2 Foreign Direct Investment Outward Direct investment of Dutch enterprises in China China is a one of the leading countries in receiving FDI. While in many countries the FDI inflows peaked in 2000, inflows in China continued to rise and reached a record high of 600 billion dollar (some 3% of the total GDP) in With a third of FDI, Hong Kong is the biggest investor on China, followed by South Korea (10%), Japan (9%) and the United States (6.5%). Investment of Dutch enterprises in China took off in the second half of the 1990s. Before that time, Dutch direct investment in China was very minimal. After the turn of the century, the outflow of Dutch direct investment into China fluctuated around 200 million euro annually (see Figure 5). This is small, compared to Dutch global direct investment flow in 2005 of 96 billion euro. Table 4 shows the sectoral distribution of the FDI from the Netherlands in China. A considerable part of investment in manufacturing regards chemistry and mining, sectors which are expanding capacity in China, while investment in services include banking, commerce and transportation. Dutch firms in for instance the food industry have coped with fierce competition of local suppliers for some years. This has eroded profit margins, leading to partly pulling out of China in the recent years (Suyker, 2006). The Rise of China and the Impact on the Dutch Economy 13

14 Figure 5 Direct Investment of the Netherlands in China (De Nederlandsche Bank, 2006) Table 4 Sectoral distribution of FDI from the Netherlands to China (DNB, 2006) Two conclusions can be drawn from the figures above. First, the total investment amount is small, in many years not exceeding 200 million euro. This is just 0.2% of total Dutch FDI, but its comparable with that of the rest of the Europe. Those low shares for European countries confirm the important role of distance in FDI decisions and the fact that FDI flows are especially between advanced economies. This indicates that there is no relocation of Dutch production on a large scale to China. This is consistent with a more general finding of limited relocation activities (Euroframe, 2005). Second, a considerable part of Dutch investment in China regards chemistry and mining, which are capital-intensive and knowledge-intensive industries. This could indicate that the low cost of labour in China does not play an important part in the decision to settle in China. Judged by several annual reports, announcements and statements of Dutch multinationals and banks, the size of the market and its high growth potential are of overriding importance for establishing in China. However, Dutch FDI in China may increase in the coming years as China will lift its restrictions in services and as the Chinese economy will continue to expand rapidly (Suyker, 2006). The Rise of China and the Impact on the Dutch Economy 14

15 China s foreign direct investment in the Netherlands In a recent report, the Ministry of Commerce of China stated that the investments of China in Europe in 2005 amounted to 257 million dollar, mainly in Germany, Great Britain and Russia. Only three percent of the total investments found its destination in the Netherlands (Brienen, 2011). According to the Netherlands Foreign Investment Agency (NFIA), China developed 11 new investment projects in the Netherlands, totalling up to 5 million euro. Chinese investment projects developed in the Netherlands included the enterprises Huawei and Haier. Huawei, a Chinese telecommunication manufacturer, has been selected by Dutch mobile operator Telfort to deliver and install a nationwide network (Groot, 2006). Till their work is done, Huawei has established an office in Amsterdam for R&D, commerce and services. Haier, one of the biggest appliance companies world wide, opened a European distribution head office in Eindhoven, from which proceedings throughout Europe will be coordinated. 4.3 Inflation and interest rates Dutch households save 300 euro per year The increase of total imports from China have lowered Dutch inflation in recent years. The Organisation for Economic Co-operation and Development (OECD) estimated an dampening impact of 0.19% over the period (see Appendix 4). As a result, the total consumption of an average Dutch households is around 300 euro per year (25 euro per month) cheaper. This is mostly due to the increased import share of low-cost Chinese products (Suyker, 2006). The price level differential between the domestic products and China s import products is estimated at 49% over the last ten years, what can be considered as a very significant difference. Reduced Interest Rates In the recent decades, China s export led-growth caused a enormous surplus on the current account and an huge build-up of international reserves (see Figure 6). According to Hauner & Kumar (2006) the increase in international reserves of China have reduced the global interest rates by almost 1%. A lower interest rate has a noticeable impact on the Dutch economy in the long term. According to simulations with the CPB (Centraal Plan Bureau) macro-economic model SAFFIER, a drop in the Dutch long-term interest rate by 1% increase Dutch GDP (Gross Domestic Product) by 1.2% in the fifth year after the drop and lowers the unemployment rate by 0.6% to 0.8% (Kranendonk & Verbruggen, 2006). The Rise of China and the Impact on the Dutch Economy 15

16 Figure 6 China s current account surplus and International reserves (IMF, 2006) Current account surplus International Reserves 4.4 Future expectations The Chinese economy will continue to expand. In the coming ten years, the Chinese exports are expected to double. Looking at the long-term, Chinese exports to the European Union could increase between 5% and 10% per year, depending on the speed of economic integration. Increasing trade with China will continue to improve Dutch welfare in the upcoming years and will continue to be involved with more competition and restructuring on several markets. Welfare improvements won t develop in an eye-catching way and negative effects, such as the restructuring of specific plants, are likely to be more visible than positive ones such as cheaper products for all Dutch consumers and new export possibilities for Dutch firms (Suyker, 2006). Most of the impacts seen on the Dutch economy in the last years are likely to take place in the medium term. Dutch exports are probable to become more and more important as the role of the Netherlands as a European distribution centre of Chinese products is likely to increase further. Besides that the expanding Chinese market will provide several other opportunities like attractive foreign direct investment possibilities, some downward pressure on the inflation and decreasing interest rates. The imports are also expecting to increase continuously and a shift in Dutch sectoral composition is likely with a very little impact on friction unemployment. But there are also worries among the Dutch policymakers and investors. What if China will dominate the international markets or when the Chinese economy falls back? The Rise of China and the Impact on the Dutch Economy 16

17 There are fears that China will not only have a huge export of low-skilled goods but also will specialize in high-skilled products and therefore no longer needs to import these products form the Netherlands and the rest of the world. However, this fear misses ground. International trade is still like a barter: China won t export if it couldn t import attractive products with its export revenues. If the Chinese could produce everything more cheaply at home, their exporters would find that the euro s and dollars would be worthless (Wolf, 2006). Therefore, China won t dominate all export markets in the near future. However, it has to be added that a stronger performance of China in the production of high-skilled products may change in terms of trade in the way that detrimental for the Netherlands (Groot, 2006). The Dutch economy may have to export more goods to import the same amount of Chinese imports (Eichengreen and Tong, 2006). It is also important to appoint the consequences for the Dutch economy by the increased importance in the Chinese economy. The NiGEM simulations (Gern, 2011) shows that the influence of domestic events in China on the Netherlands are normally quite limited, even with its role as the world s second biggest economy. An increase in Chinese prices would slow down their economy and make it less competitive, but would have its main impact on the rest of the world through lower imports into China. An increase in the risk premium caused by problems in the banking sector would have similar, small effects on the global economy. Dutch economic policy China s increasing influence on the global economy doesn t require a major reorientation of Dutch economic policy. Policies that were carried out before China s emergence, such as for instance labour market flexibility can equally contribute to the abundance of changes stemming from the emergence of China. Furthermore, the Dutch policymakers can play a major role in facilitating trade of China s enterprises with the Netherlands. The NFIA (Netherlands Foreign Investment Agency) can play an important role for Chinese firms getting their European headquarters located on Dutch soil. Besides that, Dutch authorities has to focus on the upcoming Chinese service sector and on the maintenance of international property rights in China. The role of the Netherlands as distribution centre of Chinese goods and the increasing role of China as supplier of goods to Europe is likely to boost transport and this may require a policy reaction (Suyker, 2006). Looking at the rise of global competition, Dutch revealed comparative advantages (RCA) can be improved and expand by means of a continued focus on fostering innovation (Yue & Hua, 2002). The Rise of China and the Impact on the Dutch Economy 17

18 Chapter 5: Summary and Conclusion Imports are great but investments remain behind China s economic performance during the past four decades, which can be called phenomenal, has had a positive impact on the Dutch economy. Dutch trade with China has increased tremendously. Almost 8% of Dutch imports are now coming from China while it was only 0.6% twenty years ago. Imports of cheap Chinese goods have lowered the Dutch inflation. As a result, the total consumption of an average Dutch households is around 300 euro per year (25 euro per month) cheaper. In China, new and expanding markets have emerged for Dutch products. These new and expanding markets also provided Dutch enterprises with attractive investment possibilities. Despite these opportunities, the presence of Dutch enterprises in China is relatively modest, which may be related to concerns regarding intellectual property rights and restrictions on investment that are still present in especially the service sector (Suyker, 2006). According to several Dutch firms, located in China, the huge and rapidly expanding Chinese market is the main reason of investments in China while cheap labour is less important. This is consistent with the evidence of limited relocation of Dutch companies to foreign countries in general and to China in particular (Berenschot, 2004). The export is of great importance for the Netherlands Increasing Chinese exports to Europe have strengthened the role of the Netherlands as a key European distribution centre for Chinese products. Currently, every day some 1000 trucks are leaving the port of Rotterdam to redistribute Chinese products in Europe. Dutch expenditures and output may be enhanced by lower global interest due to strong Chinese demand for foreign investment bonds prompted by its huge current account surplus (Suyker, 2006). The increasing Chinese exports, considerably more than the imports, didn t have a noticeable impact on the pace of sectoral restructuring on the Dutch economy. This development had also no consequences for the Dutch unemployment or did it cause a widening of Dutch income differences. Concerning competition on global markets, Chinese export goods are more complements than substitutes for Dutch export products which can be seen as a good thing. Dutch employment associated with export (including re-export) and import of Chinese goods is estimated at around 23,000 jobs, approximately 0.5% of total employment. So all in all we can conclude that the rise of China has a positive net impact on the Dutch economy. The Rise of China and the Impact on the Dutch Economy 18

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22 Appendix 1: Key Statistics China and the Netherlands Table 1 Key Statistics China and the Netherlands (World Bank, 2006) The Rise of China and the Impact on the Dutch Economy 22

23 Appendix 2: Import and Export share of China, 2005 Figure 3.1 Import share (import from China as a percentage of total imports of goods) Figure 3.2 Export share (export from China as a percentage of total exports of goods) The Rise of China and the Impact on the Dutch Economy 23

24 Appendix 3: Export and Import shares specified by product group Table 2 Export shares of the Netherlands and the European Union with China, 2004 The Rise of China and the Impact on the Dutch Economy 24

25 Table 3 Import shares of the Netherlands and the European Union with China, 2004 The Rise of China and the Impact on the Dutch Economy 25

26 Appendix 4: Inflation of Imports from China Table 5 The impact on inflation of imports from China The Rise of China and the Impact on the Dutch Economy 26