(Census Bureau).
There are few that can compare with China when it comes to sheer economic growth. Their Gross National Product (GNP – the measure of output for all citizens regardless of location) has blossomed from less than $1 trillion in 1985 to more than $10 trillion in 2010 (Central Intelligence Agency). When combined with the strong trade surpluses over the past decade it becomes impossible to ignore the positive changes that strategic change has brought on:
(World Bank).
In keeping with China’s plans to become a dominant player in the world market they are also planning the dominance of the yuan, their currency. “The US dollar is the currency of the world, but that dominance could begin to erode if China has its way. In recent years, China has stepped up an ambitious plan to increase the circulation of yuan outside the mainland and persuade trading partners to use it to invoice or settle transactions. And it is aggressively building a market for yuan-denominated debt. If all goes according to plan, the yuan could become one of the world's reserve currencies as soon as 2015” (Tan). There are innumerable factors that will play into the strength of the yuan, not the least of which is inflation. While recently at a more controllable rate – 5.4% for 2011 – there have been serious fluctuations over that past decade that might raise doubt in consumers’ minds (Central Intelligence Agency).
The strength of the yuan has been in the news quite a bit recently, especially where currency control is concerned. “A decade ago, following the Asian Financial Crisis of 1997-98, trading partners pressured China to float its currency. China did peg its currency to the dollar, but at a rate that is changed periodically in very small increments by China's central bank rather than being allowed to float in an open market” (Carey). The result has been difficult for trading partners of China due to the value of their currency vs. yuan. Chinese consumers are on the whole unable to purchase international products due to high exchange rates, which lend to the trade deficit for the trading partners. This does however leave China in a fine position as an exporter as it keeps the value of its good artificially low vs. the global market. China’s top 15 trading partners are as follows:
All data posted in USD $10,000 (Yearbook).
While there are many different trade agreements between the United States and China – 5 signed last November – the largest, a Free Trade Agreement (FTA), is still a ways off. An FTA would release all tariffs, quotas, and other barriers to trade – a strong potential boost to both economies. However, the significant differences between the two economies in the past have led to disputes both socially and politically. For many years we have maintained Most Favored Nation trade status, all the while raising concerns about child labor and working conditions. Before considering coming to a large-scope agreement like a FTA there would need to consensus on human rights.
Until such time as an FTA can come into being there will be exchange controls. Though the past decade has seen a liberalization of China’s foreign exchange there are still controls in place. The controls are managed by The National Development and Reform Commission (NDRC), People's Bank of China (PBOC), and State Administration of Foreign Exchange (SAFE); each one specializes in an aspect of trade – macro-economic strategy, credit and loan policy, and foreign currency, respectively. As previously mentioned, the lack of a currency floating at market value has had an impact on the ability of other countries to export to China – all current account items. “Current account items are transactional items, including payments and receipts with respect to trading of goods, provision of services and other normal fund transfers, that occur in the ordinary course of business. At present, businesses are allowed to convert foreign exchanges freely in current account items” (FAITC). Capital accounts are another story. Currently all loans, direct investment, and securities that provide any sort of revenue derived from capital accounts by Chinese entities must be repatriated in China. These exchange policies have a direct impact to the level Foreign Direct Investment (FDI).
“Since China opened its economy to foreign investment in 1979, it has become the second largest Foreign Direct Investment (FDI) destination in the world after USA” (Liu). The greatest percentage of FDI has been flowing into the secondary sector (Manufacturing), traditionally a higher tech sector than the primary (Agriculture). "The focus is to optimize the foreign investment structure, push forward technology innovation and industrial upgrading," the NDRC said (Xin). This sort of investment is the foundation of growth for those sectors. Along with the direct investment comes the knowledge and expertise that the investing company holds. By focusing on manufacturing there is the measureable drive to see a tech expansion in the country. “China has been remarkably successful in designing industrial policies, joint venture requirements and technology transfer pressures to use FDI to create indigenous national champions” (Moran). FDI has been a boon to China, allowing rapid technological increase in an already strong manufacturing/industrial sector.
China’s exchange control and investment are just part of the picture. To get a feel for the trading dynamic it is important to understand the import controls as well. China uses a classification system for imports – permitted, restricted and prohibited. While most goods fall in the permitted category there are some that fall into strict quotas or licenses as managed by the Ministry of Commerce (MOFCOM). With most goods permitted it stands that most goods have import tariffs. Since joining the World Trade Organization (WTO) in 2001the average tariff rate has dropped from 15.3% in 2000 to 9.8% in 2009 (FAITC). Along with tariffs, all imports are subject to inspection/verification as well certain packaging/labeling requirements; if these are not met the goods will be refused entry into China. The loosening of restrictions on who can import as well as tariffs by the government is making China more attractive each year.
While China is positioned for exporting, the role of foreign trade overall is still strong. Their trade surplus rose from $249.5bn USD in 2009 to $254.2bn USD in 2010 (in balance-of-payments terms). Exports came in at just under $1.6trn USD in 2010 putting the imports in the range of $1.3trn USD. In 2011 foreign trade surged up 22.5% to $3.64trn USD, an impressive gain that brought it to 36% of their GNP (New York: The Economist Intelligence Unit). These are all positive indicators of a continual strengthening of their position in global trade; however, this must be balanced against the level of external debt that was taken on in order to make it happen. “China's outstanding external debt in 2011 totaled nearly $695 billion, the highest since 1985” (Administration of Foreign Exchange). The external debt taken on rose $146bn, up 27% from 2010 – such rapid increases in foreign borrowing have historically indicated a weakening economy. In China’s situation a reduced fiscal position will likely not be the case. With their short-term debt to foreign exchange reserves at 15.75% they are well below the level of concern (near 100%) (New York: The Economist Intelligence Unit). “China's other external debt indicators, such as the 9.52 percent liability ratio, the 33.31 percent foreign debt ratio and 1.72 percent debt-service ratio, all fell into the "safety" range, according to international standards” (SAFE). These positive indicators reflect the sentiment of investors, but as with any country the decision to invest may come down to the government’s view of the business and its priorities.
In 1949 Mao Zedong outlined the new Chinese government, for business this meant all enterprises were now state-owned. It wasn’t until the 1980’s that the government would allow the privatization of any of the small and mid-sized companies. “Between 1995 and 2001 the number of state-owned and state-controlled enterprises fell by nearly two-thirds, from 1.2m to 468,000, and the proportion of urban workers employed in the state sector fell by nearly half, from 59% to 32%” (Leaders). There are now four different categories that run the gambit from private to public:
(Leaders). With the large companies there are few that qualify as fully privatized – usually no more than 30% of the shares are held outside of the government. Joint Ventures make up only a small portion of the enterprises and have historically led to attempts by the China based partner to extricate the foreign presence. The companies that are truly private are generally the direct result of the privatization from government control and the business having been left in the hands of the managers. “The state has thus forgone ownership in an effort to achieve better results. It does, however, continue to exert influence, notably through party representatives” (Leaders). The remainder of companies are those that have been created by municipally backed funds. This should result in the state being more of a funder and less of an operating partner, though there is little data that is released on the investment of the public funds. “China’s government has not only held on to economic control but found subtle ways to extend it. At the very least, they constitute an important series of large-scale economic experiments with implications for China’s economy…China has come far since the trials in Shunde and Zhucheng, but the state has always controlled the itinerary”(Leaders). For the foreseeable future any investment in China will need government cooperation.
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by
mrmacrohard (student)
