The Economy and Foreign Trade of China

1
The Economy and Foreign Trade of China

• Dr. Shoufeng Zhang
• Associate Professor of Jinan University, China
• E-mail grace3360_at_sina.com

2
Chinas Economic Conditions

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

3
Chinas 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 Chinas 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.

4
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 worlds fastest-growing
  economy.
• 1979-- 2005, Chinas real GDP grew at an average
  9.6 annually.

5
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.

6
Inefficient state-ownedcommercial banks(SOCBs)

• Due to its financial support of SOEs and its
  failure to operate solely on market-based
  principles. Chinas 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..

7
Foreign trade

• Trade continues to play a major role in Chinas
  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 worlds third-largest trading
  economy after the United States and Germany.
• Chinas trade boom is largely the result of large
  inflows of foreign direct investment (FDI) into
  China.

8
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.

9
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..

10

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

11
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).
• ,.

12

• Chinas 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.

13
BACKGROUND AND ANALYSIS
An Overview of Chinas Economic Development
14
Chinas Economy Prior to Reforms

• Prior to 1979, China maintained a centrally
  planned, or command, economy.
• A large share of the countrys 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 Chinas individual household
  farms were collectivized into large communes.

15

• 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 Chinas economy relatively
  self-sufficient. Foreign trade was generally
  limited
• to obtaining only those goods that could not be
  made or obtained in China.

16
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.

17
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

18
Causes of Chinas 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.

19
The principal driving force for economic growth.

• Driven by growing domestic demand, Chinas
  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 .

20
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.

21
Foreign Direct Investment (FDI)

• a surge in foreign direct investment ---- a major
  source of Chinas capital growth. Chinas 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.

22
Foreign exchange reserves

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

23
Chinas 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.)
• Chinas 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).

24

• 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.

25
Comparative Advantage

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

26
State-owned enterprises (SOEs)

• About one-third of Chinese industrial production
  from State-owned enterprises. put a heavy strain
  on Chinas 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.

27
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 worlds 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

28

• Chinas 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.

29
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.

30
Outlook for Chinas Economy
31
Major Chinese Trade Commodities

• Chinas top five imports electrical machinery
  and parts boilers, machinery, mechanical
  appliances, and parts crude oil plastics and
  organic chemicals.
• Chinas 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 .

32

• 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.
•     

33
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. 

34

•  "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.   

35

• 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.
•   

36

•   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.

37

• 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.

38
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.
•    

39

•  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.

40
 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

41

• 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.

42
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.

43
 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.
•     

44
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.

45
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.
•     

46
Visa issue

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

47
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.

48

• 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.

49

• 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.

50
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.

51

• China became a Member of the World Trade
  Organization (WTO) inDecember 2001, after more
  than 15 years of difficult negotiations.

52
China set to narrow rich-poor gap 

• China's economy is likely to be heading for
  another year of galloping development, but how to
  make more Chinese people reaping the benefits is
  still a challenge for the government.    Powered
  by domestic economic development and worldwide
  recovery, China's economy is expected to see
  stable development this year following a growth
  rate of 9.8 per cent in 2005.

53

• China is taking measures to maintain steady and
  relatively fast economic growth and prevent major
  ups and downs in development.
• Taking greater steps to improve conditions for
  the rural poor, and bolster education, health
  care, and the social security system

54
Resolute and decisive measure

• Chinese government will take forceful and
  effective measures to address the existing
  problems in the economy.
• Excessive growth in fixed asset investment,
• Bank credits
• Money supply
• Growing inflationary pressure.

55

• China will unswervingly push forward reform of
  the investment system and the financial sector so
  as to uproot of the structural and institutional
  causes of the existing problems.
• The economy will maintain stable, relatively fast
  growth without major ups and downs.

56
Outlook of Chinese Economy

• Average 8.0 of real GDP over the next 5 years.
• Double the size of its economy in less than 10
  years.
• The worlds largest exporter by 2010
• The worlds largest economy by 2020.