Lecture 5 Open to the World

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Lecture 5Open to the World

• Se Yan
• Guanghua School of Management
• Peking University
• Fall 2009

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About Group Group 1

• Evan OCallaghan
• Julia von Massow
• Louis BATAILLE
• Mattia Scafoletti
• Sophia Barnes

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About Group Group 2

• Pitichoke Daniel Chulapamrosnri
• Chen maurizio
• Sruthi Mylavarapu
• ??
• ???

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About Group Group 3

• Lee, Brian Kyu Won
• Natalie Lam
• Chanda Wong
• Song Park

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About Group Group 4

• Michael Shiraev
• Tom Hoorn
• Tao Tao
• Nicole Lee
• Crystal Fang

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About Group Group 5

• Brent Sarcone
• Erik Lundberg
• Lora Tloczkowski

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About Group Group 6

• Gregor Eugen Wissler
• Nikolaus Delius
• Saskia Sefranek
• James Byrne
• Thomas McGwire

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About Group Group 7

• Shu Mei Yu
• Min Jung Kwon
• Stephanie Kit Ling Trinh
• Koo, Bonjung

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About Group Group 8

• Ronstadt Yip
• Jiwon Yang
• Jose Coronado
• Baozhu Kwong
• ???

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About Group Group 9

• Ries Friederike
• Michael Wimmer
• Philip Dowling
• Christine Richter
• Savin Vlad Daniel
• Brice Hellio

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About Group Group 10

• Tobias Langenberg
• Till Kratochwill
• Zhao, Ning
• Gyrankowskii Martin
• ???
• ???

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About Group Group 11

• Dan Zhao
• William Armstrong
• Ang Li

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Aggregate Demand

• The quantity of real GDP demanded, Y, is the
  total amount of final goods and services produced
  that people, businesses, governments, and
  foreigners plan to buy.
• Y C I G X M.

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Aggregate Production Function

• The aggregate production function is written as
  the equation
• Y F(L, K, T )

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History of Chinas Foreign Trade
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Price Index of Chinese Exports, 1903 to 1928
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Unskilled Export and Import Shares, 1903-1928
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Factor Endowment Theories

• Comparative Advantage by David Ricardo
• Heckscher-Ohlin-Vanek (HOV) predicts
• Opening up to trade will induce an economy that
  is well endowed with unskilled labor to
  specialize in the production of products for
  export that use unskilled labor intensively
• Stolper-Samuelson Theorem
• As exports expand, the demand for unskilled
  workers will rise, driving up their wages
  relative to skilled workers

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Chinas Competitive Advantage

• Labor-abundant country
• Low-skilled, Labor-intensive goods
• Manufacturing (Low-Tech)
• Capital-scarce country
• FDI

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Steps of Chinas Openness

• 1949-1971, closed
• 1972-1978, import substitution
• Target on some specific products or markets
• Buy machines and technology.
• Protect the domestic market by trade barrier,
  tariff, exchange rate.
• 1978-2001, export oriented
• 2002-now, post-WTO, open to the world

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Trade With the World
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Trade Openness
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Chinas Foreign Reserves
Source http//www.stats.gov.cn
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Trade with the U.S.
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Trade with Japan
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Trade with Euro
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Exports

• Exports 438.4 Billion f.o.b. (2003)
• Export Commodities
• Machinery Equipment, Textiles Clothing,
  Footwear, Toys, Sporting Goods, Mineral Fuels,
  etc.
• Top Export Partners (2003)
• U.S. 21.1
• Hong Kong 17.4
• Japan 13.6
• South Korea 4.6
• Germany 4

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Chinas Top Exports (2003)
Figures in ( Billion)
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Imports

• Imports 412.8 Billion f.o.b. (2003)
• Import Commodities
• Machinery Equipment, Mineral Fuels, Plastics,
  Iron Steel, Chemicals
• Top Import Partners (2003)
• Japan 18
• Taiwan 11.9
• South Korea 10.4
• U.S. 8.2
• Germany 5.9

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Chinas Top Imports (2003)
Figures in ( Billion)
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Trade Barriers

• While China has an increasingly open and
  competitive economy, substantial barriers have
  yet to be dismantled!

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• Tariffs
• Import Quotas
• Tariff-Rate Quotas
• Import Licensing
• Export Licenses
• Transparency
• Legal Framework
• Trading Rights
• Distribution Rights
• Import Substitution
• Standards/Testing
• Anti-Competitive Practices
• Services Barriers

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China and the WTO

• China was voted in as a member on November 11,
  2001 but became an official member one month
  later, December 11, 2001
• In order for China to gain member status, China
  had to agree to separate negotiations with all of
  the current WTO members
• China tried to get member status for 15 years
  prior to 2001

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Timeline for Qualification

• 1986 -- China applies to join General Agreement
  on Tariffs and Trade (GATT), predecessor to WTO.
• 1989 -- China's suppression of pro-democracy
  demonstrators in Tiananmen Square on June 4
  derails negotiations.
• November 1995 -- China unveils economic and trade
  reforms aimed at winning U.S. backing to enter
  the WTO. It plans to slash import tariffs by 30
  percent and allow joint venture companies to be
  set up.
• April 8, 1999 -- President Bill Clinton and
  Premier Zhu Rongji sign a joint statement in
  Washington welcoming substantial progress and
  committing them to completion of a WTO deal by
  the end of the year. The gap is closed on about
  90 percent of WTO issues.
• May 7, 1999 -- China freezes WTO talks after NATO
  forces accidentally bomb the Chinese embassy in
  Belgrade.
• September 11, 1999 -- Clinton and Chinese
  President Jiang Zemin agree on the sidelines of
  the Asia-Pacific Economic Cooperation (APEC)
  forum in New Zealand to resume WTO negotiations.
• November 15, 1999 -- U.S. and China announce a
  WTO pact. China agrees to open a wide range of
  markets, from agriculture to telecommunications.
  Clinton must persuade the U.S. Congress to grant
  China permanent normal trade relations (PNTR).

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Timeline for Qualification

• May 19, 2000 -- The European Union signs a WTO
  accession pact with China
• October 10 -- Clinton signs a law giving China
  normal trade status with U.S.
• January, 2001 -- Further multilateral talks end
  in acrimony as China and some WTO members
  disagree on farm subsidies.
• June 9 -- China and the U.S. announce consensus
  on issues holding up China's entry, including
  farm subsidies, after meetings on the sidelines
  of an APEC trade ministers' meeting.
• June 20 -- The European Union says it has
  resolved outstanding bilateral issues with China
  over its accession.
• September 14 -- WTO members agree on terms for
  China's entry at an informal meeting, clearing
  the way for the nation to join by the end of the
  year.
• November 10 -- Trade ministers from across the
  world officially approve China's entry. The move
  was approved unanimously at the WTO meeting in
  the Gulf state of Qatar
• December 11 -- China ends its 15-year quest to
  join, officially becoming a fully-fledged member
  of the international trading system.
• http//archives.cnn.com/2001/WORLD/asiapcf/east/09
  /18/china.wto.timeline/

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What has been changed/reformed?

• Chinas entry into the WTO set in motion the most
  far-reaching reforms since Beijing since 1978.
• Over 1100 laws and regulations have been changed
  since 2001
• China can not impose one level of barriers (e.g.,
  tariffs) against one member country and another
  level for others
• China will participate in the WTO's dispute
  settlement system
• Manufactured goods saw the largest decrease in
  tariffs.
• Tariffs were eliminated on computers,
  semiconductors and other information technology
  products in compliance with the Information
  Technology Agreement
• In agriculture, it has pledged to reduce tariff
  from an average level of 31.5 percent to 17.4
  percent
• Foreign car makers will be able to distribute and
  retail vehicles on their own, and provide
  financing to buyers.

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What has been changed/reformed?

• China has promised to open its telecommunications,
  financial services, distribution, and many other
  industries to foreign service providers.
• Pledged to apply its trade policy uniformly
  across the country and to enforce only those
  laws, regulations, and other measures that have
  been published beforehand.
• Agreed to eliminate all prohibited subsidies
  (including those to state-owned enterprises),
  liberalize trading rights, and require state
  trading companies to conduct their operations in
  a commercial manner.
• -http//www.imf.org/external/pubs/ft/fandd/2002/09
  /adhikari.htm

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Actual Implementation-tariff
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Machinery Sector

• Market openness did not cause shocks. On the
  contrary, this sector experiences the best period
  of development in history
• Lead by domestic demand, so rapid economic growth
  is favorable to the machine sector
• Previously protected by national trade barriers,
  but the protection rate was not high due to
  licensed import policies. Thus the short term
  effect of WTO was not big.
• Long-term effect will take time to be reflected
  completely.

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Machinery Sector
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Automobile Sector

• The market becomes more open after WTO, which did
  not cause the negative impact which was expected.
• From 2005 to 2006, the import quotas for
  automobiles was eliminated,
• the import tariff was reduced to the binding
  rate, i.e. the average tariff for vehicles as
  25, and that for auto parts, 10.

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Automobile Sector

• Rapid economic growth has led to rapid expansion
  of auto market in China as cars have become
  affordable for many families.
• A more competitive imported automobiles together
  with improved domestic producers due to the
  market opening.
• To prevent the accession shocks, the government
  has adopted some policies that is in compliance
  with international rules.

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Automobile Sector
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Automobile Sector
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Automobile Sector
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Automobile Sector
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Foreign Direct Investment (FDI)

• When is investment best defined as direct?
• When investment gives rise to foreign control of
  domestic assets
• IMF- made to acquire a lasting interest in an
  enterprise where the investor has an effective
  voice in the mamagment of the company

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FDI- What Does it Offer?

• Capital- long-term, risky investment
• Market Access- export markets
• Promote Export-led strategies of growth
• Employment
• Technology- transfers increase productivity
• Spillovers and Linkages- introduction of more
  competitive environment and connections to local
  industry boost productivity and output of entire
  economy

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FDI in China

• Foreign direct investment in China the biggest
  recipient of FDI among the developing countries
  for the last 17 years
• Over 400 of 500 biggest transnational
  corporations invested in China and about 30 of
  them have established or moved their
  head-quarters to China.
• 86 of FDI is in the east and southeast regions

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What has FDI Done for China?

• Role in Economic Transformation-General
• Established new industrial branches
• Employment opportunities
• Technological transfers
• Technological and Managerial Skills
• Spillovers to domestic industry
• International Trade- boosted immensely
• Export production by Foreign-Invested Enterprises
• Increased from 1 in 85 to 45 in 98

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Various Forms of FDI

• Contractual Joint Venture (CJV)
• Informal, not a legal person
• Equity Joint Venture (EJV)
• Legal person, minimum foreign share 25, profits
  shared according to investment
• Wholly-Owned Foreign Enterprise (WOFE)
• Legal person, 100 foreign owned
• Build-Operate-Transfer (BOT)

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FDI into China since 1985(US billion)
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Foreign Investment in China

• Despite the governments efforts to cool the
  economy, FDI in China continues to rise.
• In 2004, the total number of contracts signed was
  up 15.
• In 2004, the contracted amount of FDI rose 42.7.
• Retail investment has increased
• Wal-mart
• 7-Eleven
• Financial Institutions HSBC Holdings

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Foreign Investment in China

• Government is trying to spur investment in
  northeastern western China.
• Intel Corp. announced a 375 million chip testing
  packaging facility in Chengdu.
• Other major investors in Western China include
• Ford Motor Co.
• Tenneco Automotive
• Lear Corp.
• Some other High Tech companies are also
  establishing operations in western China.

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2006 Data on Foreign Capital

• FDI
• EJV US 14.38 bil
• CJV 1.94
• WOFE 46.28
• Other 0.42

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Origins of FDI in China
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Is Foreign Capital All Foreign?

• Round tripping
• CITIC and the HK bank loan

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A New Chapter Chinese FDI Abroad

• Individual deals
• Lenovo purchase of IBM PC business
• Haier factory in South Carolina
• CNOOC bid for Unocal
• China Investment Corporation

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Foreign Exchange System Reform

• In China, de facto (in practical) regimes differ
  from its de jure (in principle) regime.
• Three de facto regimes from 1979.
• First phase Dual Track (1979 - 1993)
• Second phase fixed peg (1994 - 2005)
• Third phase New Managed Float ( post - 2005)

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First Phase Dual - Track

• 1979 1984 peg within a horizontal band
• Fluctuation margin of more than 1 around a
  central rate.
• 1985 1993 managed float
• Intervention to counter the long-term trend
  without specifying a predetermined path.

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1979 1984 peg within a horizontal band

• In 1979,
• Foreign exchange retention scheme for domestic
  Foreign Trade Corporations.
• an official RMB exchange rate was established as
  an accounting tool at overvalued level.
• In 1981, Internal Settlement Rate (ISR) for
  foreign trade transaction to remedy overvalued
  RMB.
• In 1984, ISR was unified with official rate.
• Retention quotas were traded at the ISR of RMB
  2.8 per dollar within a range of 10.
• Access to ISR and official rate was limited to
  domestic enterprises.

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1985 1993 Managed Float

• In 1985, ISR was abolished.
• In 1986, Foreign Currency Swap Center
• For foreign trade transaction by Foreign Funded
  Enterprises
• A swap rate (more market determined) coexisted
  with the official rate.
• A dual exchange rate system re-emerged.
• In 1988, access to swap rate were extended to all
  domestic enterprises with foreign exchange
  receipts and retention quotas.

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Dual - Track
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Second phase Fixed peg ( 1994 2005 )

• In 1994
• Official rate was unified with swap rate
• Retention system was abolished.
• Interbank market was established for domestic
  enterprises, where unified RMB rate was
  determined.
• In 1996, foreign enterprises have access to the
  interbank market
• In 1998, SWAP closed
• The RMB exchange rate was allowed to float within
  a narrow margin of 0.3 around reference rate.

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Second phase Fixed peg ( 1994 2005 )
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Third Phase New Managed Float( Post-2005 )

• On 21st July, 2005
• Switched to a managed float system that was based
  on market supply and demand and linked to a
  basket of currencies.
• On 10th August, 2005
• PBC published composition of currency basket,
  which includes U.S. dollar, Euro, Japanese Yen,
  Korean Won as well as currencies of other
  countries such as Singapore, UK, Malaysia,
  Russia, Australia, Thailand and Canada.

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Third Phase New Managed Float( Post-2005 )
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Impossible Trinity
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Chinas Dilemma

• China will not give up monetary policy
  independence.
• Chinas future growth will depend more and more
  on international capital markets.
• RMB revaluation will be gradual.