Download International Trade and Foreign Investment

International Trade and
Investment
Junhui Qian
2014 October
Content
• International Trade
• Trading reform
• Processing trade
• Inbound Investment
• FDI Into China
• Other capital flows
• Outbound Investment
Trade Reform
• “Double Air Lock”
• State monopoly of foreign trade
• Inconvertible RMB
• The reform began with an urgent attempt to increase and diversify sources of
foreign exchange.
• The first step in opening came in 1978 when Hong Kong businesses were allowed
to sign “export-processing” (EP) contracts with Chinese firms in the Pearl River
Delta.
• Four Special Economic Zones (SEZ) were set up in Guangdong and Fujian.
• Liberalizing the Foreign-Trade System
•
•
•
•
Devaluation of RMB
De-monopolize trade
Creation of tariff and nontariff Barriers
Import substitution and export promotion
Toward An Open Economy
• China formally applied to rejoin the GATT (General Agreement on Trade
and Tariffs, the forerunner of WTO) in 1986.
• On Dec 11 of 2001, China finally joined WTO (which was created during the
Uruguay Round negotiations in 1996).
• China implemented substantial reforms before formal accession into WTO.
There reforms were on reformists’ agenda anyway. WTO membership was
a powerful excuse for pushing through reforms that reduced dualism in the
economy.
• China has been committed to open its trade system and lower its tariffs.
• The average nominal tariff was reduced in stages from 43% in 1992 to 17% in 1999,
the year when the breakthrough in WTO negotiations finally came. In the actual
agreement, China agreed to lower average industrial tariffs to 9.4% by 2005, and this
rate was actually achieved in 2004. The agreement lowered average agricultural
tariffs to 15%, which was also easily achieved.
1952
1953
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1982
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1991
1992
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1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
More and more open
Openness of China (1952-2011, (X+M)/Y)
80%
70%
60%
50%
40%
30%
20%
10%
0%
Trade By State of Production
Composition of Trade
Regional Distribution of Trade
China’s Free-Trade Zones
Processing Trade
• Processing trade involves domestic firms obtaining raw materials or
intermediate inputs from abroad, processing them locally, and exporting
the value-added goods.
• Chinese firms started with “processing with assembly”.
• An example: A Hong Kong firm would ship fabric to a Chinese firm and have it sewn
into shirts. The Chinese firm would be paid a processing fee, while the fabric and
shirts would be owned by the Hong Kong firm at all times, so they did not have to
pass through the foreign-trade system. In this way, the export production network
already created by Hong Kong could expand into China, but Chinese industrial firms
were not exposed to import competition.
• Soon Chinese firms started to purchase raw material (e.g., fabric) and build
their own production network. This is called “processing with intermediate
inputs”.
• Globally, there is a redistribution of the stage of production.
Rising share of processing with intermediate
inputs
Percentage of processing with intermediate inputs in total trade processing
90
80
70
60
50
40
30
20
10
0
1980
1989
1991
1996
1998
2000
2005
2006
2007
2008
Current Account
• The current account of an economy reflects net income (income flow).
• In the current account, we have
Current account balance= trade surplus + factor income + transfer.
• Trade surplus includes surpluses in goods and services trade
• Factor income includes labor income and capital income
• Transfer includes remittance, donations, etc.
Current Account Balance
A. Goods and Services (USD100ml)
B. Factor Payments (USD 100ml)
C. Current Transfer (USD 100ml)
4000
3500
3000
2500
2000
1500
1000
500
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-500
-1000
Factor Income
1. Labor income (USD 100ml)
2. Capital income (USD 100ml)
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Content
• International Trade
• Trading reform
• Processing trade
• Inbound Investment
• FDI Into China
• Other capital flows
• Outbound Investment
Attracting FDI to China
• The policy of attracting FDI also starts from the want of foreign
currency reserve.
• Local governments, in the “GDP contest”, compete for FDI. What
they offer include tax reduction, rent discount on land use, low
environmental standards, etc.
China as a favorite FDI Destination
• Labor cost/quality
• Infrastructure
• Stable governance and law enforcement
• Consumer market size
• Intermediate goods markets
Foreign Direct Investment (FDI)
FDI
250
200
150
100
50
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
FDI/GDP (%)
FDI/GDP (%)
6
5
4
3
2
1
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
International Comparison (USD ml)
Brazil
350000
300000
250000
200000
150000
100000
50000
0
China
India
United States
Characteristics of FDI Into China
• Foreign direct investment has been the predominant form in which
China has accessed global capital (as opposed to portfolio capital or
bank loans).
• An unusually large proportion of Chinese FDI inflows are in
manufacturing industry, as opposed to services or resource extraction.
• FDI inflows have predominantly come from other East Asian
economies, especially Hong Kong and Taiwan.
Main Sources of FDI
Modes of FDI in China
Capital Account
• In international finance, the capital account reflects net change in
ownership of national assets (capital flow).
• In the capital account, we have
Capital account balance=
FDI + portfolio investment + other investment + official reserve changes.
• “Other investment” include bank loans and other flows into bank accounts.
• As an accounting identity, we must have
Capital Account Balance + Current Account Balance + Statistical Error = 0
Net FDI (USD 100ml)
Net Portfolio Investment (USD 100ml)
Other Investment (USD 100ml)
4000
3000
2000
1000
0
1982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012
-1000
-2000
-3000
External Debt
Total External Debt (% of GDP)
20
18
16
14
12
10
8
6
4
2
0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Decomposition of the External Debt
China's External Debt (% of GDP)
16
14
12
10
8
6
4
2
0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Long-Term Private
Long-Term Public
Short-Term
Measure of “hot money”
• Despite the heavy regulation on the capital account, investors or
speculators may find ways to move money in or out of the country.
This illegitimate form of capital flow is often called “hot money”.
• Different measures of “hot money”.
• Statistical error
• All other =
(Current account balance – trade surplus) +
(Capital account balance – gross FDI inflow) +
statistical error
“Hot Money”
All Other/GDP (%)
Statistical Error/GDP (%)
15
10
5
0
-5
-10
-15
-20
-25
-30
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Korea’s Capital Account Balance
Capital Account Balance (% of GDP)
6
4
2
0
-2
-4
-6
-8
-10
-12
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Content
• International Trade
• Trading reform
• Processing trade
• Inbound Investment
• FDI Into China
• Other capital flows
• Outbound Investment
• RMB Internationalization
Inbound and Outbound FDI (USD 100ml)
Inbound FDI
Outbound FDI
3500
3000
2500
2000
1500
1000
500
0
-500
-1000
-1500
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Case Study: Chinese Investment in Europe
• As investors fled Europe in the worst
days of its sovereign debt crisis, Chinabased companies moved in the other
direction and surged in, with cash
flowing from China into some of the
hardest-hit countries of the eurozone
periphery.
• In 2010, the total stock of Chinese
direct investment in the EU was just
over €6.1bn – less than what was held
by India, Iceland or Nigeria. By the
end of 2012, Chinese investment stock
had quadrupled, to nearly €27bn.
Chinese Investments and Contracts in Selected
European Countries (2005-2014Jun, $bn)
Toward An Open Capital Account
• In 2014, China has announced to establish the “Shanghai-Hong Kong
Connect”, a mechanism that allows international investors to
purchase A-share stocks in the Shanghai Securities Exchange and
domestic investors to purchase stocks in Hong Kong Stock Exchange.
• A “Shenzhen-Hong Kong Connect” is already in discussion.
• It can be conjectured that restrictions on portfolio investments,
inward and outward, would soon be lifted.
Major Stock Exchanges (ranked at June 2014 )
Content
• International Trade
• Trading reform
• Processing trade
• Inbound Investment
• FDI Into China
• Other capital flows
• Outbound Investment
• RMB Internationalization
RMB Internationalization
• The objectives of RMB internationalization
•
•
•
•
Invoicing in RMB
Trade settlement in RMB
Investment in RMB
A reserve currency
Benefits of RMB Internationalization to China
• Reduce exchange rate risk for international trade, investment, and
finance.
• Less need for foreign exchange reserve (e.g. USD).
• Seigniorage income.
Benefits of RMB Internationalization to the
World
• The international monetary system over-relies on USD as the
dominant reserve currency, but the US fiscal future is highly
uncertain.
• RMB internationalization would provide an alternative reserve
currency which is backed by a strong flow of fiscal revenue.
• RMB internationalization would also supply Chinese assets, including
the risk-free government bonds, to the world. As a result, there
would be less pressure on creating safe assets by financial
engineering, one cause of the Global Financial Crisis.
The Implications of RMB Internationalization
• The Chinese capital market will be fully open to the world.
• The Chinese outbound investment, especially from the private sector,
will take off.
• The foreign exchange reserve will decline as private outbound investment
increases.