The Economy and Foreign Trade of China

The Economy and Foreign Trade of China Dr. Shoufeng Zhang Associate Professor of Jinan University, China E-mail: grace3360@sina.com

China’s Economic Conditions • China’s Economy Prior to Reforms • The Introduction of Economic Reforms • China’s Economic Growth : 1979-2005 • Causes of China’s Economic Growth • Foreign Direct Investment in China • China’s Major Trading Partners and Commodities • Major Long-Term Challenges Facing the Chinese Economy • Outlook for China’s Economy and Implications for the United States

China’s Economy Prior to Reforms • Enterprises according to centrally planned output targets. • By 1978, nearly 3/4 of industrial production was produced by centrally controlled state-owned. • A central goal of the Chinese government was to make China’s economy relatively self-sufficient. • Private enterprises and foreign-invested firms were nearly nonexistent. • Foreign trade was only limited to those goods that could not be made or obtained in China.

Introduction of Economic Reforms • In 1978, China embarked upon incremental reforms that transformed its command economy into a mixed economy. • Since initiation of economic reforms, China has become one of the world’s fastest-growing economy. • 1979-- 2005, China’s real GDP grew at an average 9.6% annually.

Chinese economy as a whole in good shape • . • Fast growth, • Growing profits, • Improving agricultural production, • Expanding foreign trade, • Surging fiscal revenue • Constantly rising incomes for residents.

Inefficient state-ownedcommercial banks(SOCBs) • Due to its financial support of SOEs and its failure to operate solely on market-based principles. China’s banking system is regulated and controlled by the central government. • Currently, over 50% of state-owned bank loans now go to the SOEs. • Having extended far too many Non-performing loans from Four major SOCBs were $221 billion or 12.3 percent of GDP based on non-market criteria to the SOEs in 2005..

Foreign trade • Trade continues to play a major role in China’s booming economy. • In 2005, exports rose by 28.4% to $762 billion, • Imports grew by 17.6% to $660 billion, producing a $102 billion trade surplus. • China is the world’s third-largest trading economy after the United States and Germany. • China’s trade boom is largely the result of large inflows of foreign direct investment (FDI) into China.

China prudential in reforming RMB exchange rates mechanism • RMB exchange rate has never been frozen . • Two directions will be followed in the reform, keeping the RMB exchange rates basically stable at a balanced, reasonable level and exploring a market-based exchange rates mechanism.

Problem • China experienced some inflationary • pressures in 2004, fueled in part by speculation in real estate, over-investment in certain industries, and rising costs for energy and raw materials..

The government responded by raising interest rates and using administrative • controls to slow investment in certain sectors

Foreign exchange rate • On July 21, 2005, the Chinese government announced major reforms to its currency • policy. • China appreciated its currency to the dollar from 8.28 to 8.11 (an appreciation of 2.1%) • Replace its dollar peg with “a managed float exchange rate regime” with reference to a basket of currencies (including the dollar). • ,.

China’s economic growth presents huge • opportunities for U.S. exporters. • the surge in Chinese exports to the United States has put competitive pressures on many U.S. industries.

BACKGROUND AND ANALYSIS An Overview of China’s Economic Development

China’s Economy Prior to Reforms • Prior to 1979, China maintained a centrally planned, or command, economy. • A large share of the country’s economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. • During 1950s, all of China’s individual household farms were collectivized into large communes.

by 1978 nearly three-fourths of industrial production was produced by centrally controlled state-owned enterprises according to centrally planned output targets. • Private enterprises and foreign-invested firms were nearly nonexistent. • A central goal of the Chinese government • was to make China’s economy relatively self-sufficient. Foreign trade was generally limited • to obtaining only those goods that could not be made or obtained in China.

The Introduction of Economic Reforms • Beginning in 1979, China launched several economic reforms. • The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion of their crops on the free market. • Establishing four special economic zones along the coast and attracting foreign investment, boosting exports, and importing high technology products into China.

Comparisons of US, Japanese, and Chinese GDP 2005 ($ billions) • Country Nominal GDP Nominal Per Capita GDP • US 12,473 42,180 • Japan 4,605 36,150 • China 1,912 1,460

Causes of China’s Economic Growth • large-scale capital investment (financed by large domestic savings and foreign investment). • Rapid productivity growth. • Economic reforms led to higher efficiency in the economy.

The principal driving force for economic growth. • Driven by growing domestic demand, China’s economy was steadily up, with 8% of GDP growth. • Increased investment. • Considerable consumer spending in such hot spots as housing, cars, telecommunications, tourism and education .

High rate of savings. • In 1979, domestic savings as a percentage of GDP stood at 32%. and most savings generated by the profits of state-owned enterprises. • Substantial growth in Chinese household savings now accounting for 50% of Chinese domestic savings. • Savings as a percentage of GDP has reached 49% in 2005. • The U.S. savings rate was 10.7% in 2005.

Foreign Direct Investment (FDI) • a surge in foreign direct investment ---- a major source of China’s capital growth. China’s trade and investment reforms and incentives led to • Annual utilized FDI in China grew from $636 million in 1983 to $61 billion in 2004. • The cumulative level of FDI in China stood at about $618 billion at the end of 2005.

Foreign exchange reserves • Merchandise trade surpluses, large-scale foreign investment, and its peg to the U.S. dollar have enabled China to accumulate the world’s second largest foreign exchange (after Japan). • China’s total reserves reached $769 billion at the end of September 2005, up nearly 50% over the same period in 2004.

China’s Major Trading Partners • Chinese top five trading partners: the EU, the US, Japan, Hong Kong, and the 10 nations that constitute the Association of Southeast Asian Nations (ASEAN including Indonesia, Malaysia, Philippines,Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar, and Vietnam.) • China’s largest export markets were the US, Hong Kong, and the EU. • Its top sources for imports were Japan, the EU, and Taiwan (the United States ranked sixth).

Chinese exports to the United States as a share of total Chinese exports grew from 15.3% in 1986 to 33.1% in 2004. • Chinese data on its bilateral trade often differ substantially from the official trade data of other countries on their trade with China.

Comparative Advantage • China’s abundance of cheap labor has made it internationally competitive in many low-cost, labor-intensive manufactures. • Manufactured products constitute an larger share of China’s trade. • A large share of China’s imports( raw materials, components and parts, and production machinery )is used to manufacture products for export.

State-owned enterprises (SOEs) • About one-third of Chinese industrial production from State-owned enterprises. put a heavy strain on China’s economy. • Over half lost money and must be supported by subsidies, mainly through state-owned banks. • Government support of unprofitable SOEs diverts resources away from potentially more efficient and profitable enterprises.

Major Long-Term Challenges • Public unrest over pollution, Government corruption, and growing income inequality poses threats to social stability. • 16 out of 20 of the world’s most polluted cities are in China, and the direct costs to the economy according to the World Bank. • Over 300 million people living in rural areas that drink unsafe water. • Rising income inequality between the urban and rural areas was among the highest in the world. • Growing government corruption

China’s economy has shown remarkable economic growth over the past several years, • Many economists project that it will enjoy fairly healthy growth in the near future. • However, these projections are likely to occur only if China continues to make major reforms to its economy. • Failure to implement such reforms could endanger future growth.

The lack of the rule of law • The lack of the rule of law in China limits competition and undermines the efficient allocation of goods and services in the economy. • government “connections,” not market forces, are the main determinant of successful firms. • rules and regulations are generally not consistent or transparent, contracts are not easily enforced, and intellectual property rights are not protected.

Outlook for China’s Economy

Major Chinese Trade Commodities • China’s top five imports: electrical machinery and parts; boilers, machinery, mechanical appliances, and parts; crude oil; plastics; and organic chemicals. • China’s top five exports: boilers, machinery, mechanical appliances and parts; electrical machinery and parts; apparel; furniture, bedding, and lamps; and optical, photo, and medical equipment and parts .

China had 1.26 billion US dollars' worth of trade barrier cases in 2004, more than any other country, according to an annual report issued by the Ministry of Commerce (MOC) on March 31.

China sees more trade barrier cases than other countries • China had 1.26 billion US dollars' worth of trade barrier cases in 2004, more than any other country, according to an annual report issued by the Ministry of Commerce (MOC) on March 31. • China has finished adapting its laws in accordance with WTO rules as part of its WTO entry commitments.

"The Foreign Market Access Report 2005" covers 22 trade partners of China, including Egypt, South Africa, Nigeria, Saudi Arabia, Turkey, Thailand, the Philippines, Malaysia, Indonesia, Vietnam, India, the Republic of Korea, Japan, Russia, the European Union, Canada, the United States, Mexico, Brazil, Argentina, Australia and New Zealand. • China's exports to these countries accounted for about 68 percent of China's total exports in 2004.

Trade barriers were classified into 14 categories, such as tariffs and tariff administrative measures, import restrictions, customs barriers and trade remedy measures. Investment barriers have three categories: barriers to investment access, barriers to operation and barriers to withdrawal of investment.

With the fast development of Chinese foreign trade and investment, some trade partners set up barriers to trade and investment to protect their domestic industries and home markets.

According to the WTO, a total of 16 countries and regions initiated 57 anti-dumping, countervailing, product-specific safeguard investigations against Chinese exporters. From 1995 to the first half of 2004, WTO members initiated 2,537 anti-dumping cases, 356 involving Chinese products -- one seventh of the total.

The Trade relation of Sino-US • By frequently using anti-dumping and safeguarding measures, the US government has practically restricted exports from China. From 1980 to the end of 2004, it had initiated 110 anti-dumping investigations and 19 safeguard investigations against Chinese exports. According to statistics from the US International Trade Commission (ITC), 59 anti-dumping orders were still in force by the end of last year. The United States initiated six new anti-dumping investigations against imports from China and 12 special safeguard investigations against Chinese textiles in 2004.

There are many discriminatory provisions against Chinese products in relevant US anti-dumping legislation. Many unfair practices that exist in the investigations have also constituted barriers to China's exports to the United States.

Market economy status • In spite of China's accession to the WTO and China's achievements in the development of its market economy over the years, the United States has consistently treated China as a non-market economy and refused to grant market-economy status (MES) to China. • The US Department of Commerce (DOC) held a public hearing on China's MES for the first time in June

Although most recognized the progress and achievements China has made in developing its market economy since the opening up, it was deemed by most people that there was still a gap China needed to fill before becoming a market economy. Many US officials have said publicly on many occasions that unless China makes significant reforms in its labor market and exchange rate mechanism, the US Government will not recognize China's MES.

Market oriented industry • According to US laws, if the respondent company in a non- MES country can prove that its industry meets standards for Market Oriented Industry (MOI), the US anti-dumping authorities should adopt the cost data of this respondent company or its industry when calculating production costs and dumping margin, rather than adopting costs in a third country.

Surrogate country • To non-MES countries, the US DOC usually uses surrogate country data to determine the normal value and calculate dumping margins. The surrogate country should have a level of economic development comparable to that of the non-MES country and be an important producer of the subject product.

Import control • The US Government announced it would remove all quotas on textiles on January 1, 2005, according to the World Trade Organization agreement. In terms of implementation, however, restrictive measures still remain. • The CITA declared on December 13 last year that all shipments exported in 2004 that exceed that year's agreed quota limit would not be allowed to enter upon the removal of the quota.

Export restrictions • US controls on export of technology to China have long been in place, and have remained a big issue affecting the trade balance between the two countries. • The intention is to prevent China from benefiting from nuclear weapons, missiles, chemical and biochemical weapons, and other important military items.

Visa issue • The increasingly strict visa policies of the US affected bilateral trade.

Banking service • The US Government places stringent restrictions on the marketing network and business scope of foreign banks. • If a foreign bank wants to set up a new branch, it has to go through the application procedures one more time even though it has already established itself in the country.

a shift in the country's mode of economic growth is an important and urgent strategic task, noting it is crucial to maintaining national economic and social development.

A new growth pattern was in the making, which were characterized by dual driving forces of increased investment and growing consumer spending, and guidance by domestic demand.

China Sets to Build Innovation-Oriented Country • China will embark on a new path of innovation with Chinese characteristics, the core of which is to adhere to innovation, seek leapfrog development in key areas, make breakthroughs in key technologies and common technologies to meet urgent requirements in realizing sustained and coordinated economic and social development and make arrangements for frontier technologies and basic research with a long-term perspective.

The Economy and Foreign Trade of China