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CHINA-U.S. TRADE RELATIONS
CHINA
U.S.
PRESENTED BY:
CARRIE BANG
WENDY GREER
BONITTO HOUSEN
AGENDA
• China Financial Markets, Economy & Political
• U.S. Financial Markets, Economy & Political
• Trade Agreements and Regulations
• US and China Balance Accounts
– Current Account
– Capital Account
• Summary and Analysis
• Conclusions
China’s Political History
• Early Chinese History before 1949
– Economy barely able to meet basic needs of
huge population (droughts, floods, & civil
disorders)
– China was one of the 23 original signatories of
the General Agreement on Tariffs and Trade
(GATT) in 1948, and reinitiated membership in
1986.
• (1953-1975)implementation of 5 year plan
– Basic framework of the Chinese central
planning system established
– Improving management in industry,
commerce, and the fiscal relationships
between the central and local governments
Readjustment of 1959
• Open rural free markets: Govt. concentration
in technological advancements in agriculture
– Households to cultivate small private plots, run
sideline productions, and responsible for profits
and losses
– agricultural taxes
• Recentralized oversight of industrial
enterprises back to Central Government
– defense industry, railroads and major harbors
– approval authority of all large fixed investments
– 1969 recovery of economy, agriculture &
industrial output by 23.8%
China’s Trade History
• People’s Republic of China (PRC)1949
– No significant foreign trade for first 30 years
– 1950s and 1960s total value of trade 2% of
GNP
• Annual import & export volume & national
income averaged
-12.2% (1950’s)
- 8.4% (1960’s)
- 9% (early 1970’s)
• 12/15/1978:US & China announced that the two
governments would establish diplomatic relations
on 1/1/1979
China’s Trade History Cont…
• Trading partners
― 1950’s – Soviet Union and Eastern Europe
• L/T credits from the Soviet Union U.S.$1.9B
―Funding of construction projects
― 1960’s – Developing countries
• Deferred payment method to import U.S. $670M
worth of technological & equipment from the West
• Banking
— People’s Bank of China (central bank, founder of
China’s banking system, and govt. treasury) has sole
responsibility of issuing currency and controlling the
money supply
— Bank of China handles dealings in foreign exchange
China’s Account Balances
• 1964
– negative balance with USSR reduced to
U.S.$55M
– surplus of U.S.$345M in international
financial resources (monetary gold holdings
and foreign exchange trade balances)
• 1965: cleared all of USSR debt
• 1968:redeemed all national bonds and free of
L/T external and internal debts
• 1978:$900M in current accounts surpluses and
$1.1B deficits in capital accounts
• 1980: $1B in current account surplus
Major Foreign Investors in China: 1979-2005
($ billions and % of total)
Cumulative Utilized
FDI:1979-2005
Country
Amount
($billions)
Utilized FDI in 2005
% of
Total
Amount
($billions)
% of
Total
Total
632.8
100
72.4
100
Hong Kong
259.5
41.8
17.9
29.7
Japan
53.3
8.6
6.5
10.8
United States
51.1
8.2
3.1
5.1
British Virgin Islands
45.9
7.4
9
14.9
Taiwan
41.8
6.7
2.2
3.3
South Korea
31.1
5
5.2
8.6
Source: Chinese government statistics. Top six investors according to cumulative FDI from
1979 to 2005. CRS Report for Congress, China’s Economic Conditions July 12, 2006
Foreign Direct Investment to China
Year
Total FDI
($Millions)
U.S. FDI
($ Billions)
U.S. FDI in
China as a %
of Total
1985
1.7
0.4
21.5
1990
3.5
0.5
13.1
1995
37.5
3.1
8.2
2000
40.7
4.4
10.8
2001
46.6
4.9
10.5
2002
52.7
5.4
10.2
2003
53.5
4.2
7.9
2004
60.6
3.9
6.4
2005
72.4
3.1
5.1
Cumulative
634.5
51.1
8.2
Sources: U.S. Departments of Commerce and State, Doing Business In China: A Country
Commercial Guide for U.S. Companies, 2005, and China Daily
China’s Foreign Exchange Reserves
800
700
600
500
400
$ billions
300
200
100
0
1990 1992 1994 1996 1998 2000 2002 2004
Source: International Monetary Fund, Direction of Trade Statistics, and official Chinese statistics
China’s Foreign Exchange Reserves and
Chinese Ownership of U.S. Treasuries
$Billions
1200
1,066
1000
818.9
800
Chinese Ownership
of U.S. Treasuries
609.9
600
403.3
400
291.1
310.9
222.9
346.5
215.6
158.4
200 168.3
118.4
78.6
60.3
0
2000 2001 2002 2003 2004 2005 2006
Chinese Central
Bank’s Foreign
Exchange Reserves
China’s and WTO Membership
9/17/01: WTO successfully concluded negotiations
on China's terms of membership:
• Non-discriminatory treatment to all WTO
Members
• Eliminate dual pricing practices of domestic
and exports of goods
• Revision of China’s existing domestic laws
and enacting new legislation fully in
compliance with the WTO Agreement
• China will not maintain or introduce any
export subsidies on agricultural products
Recent Controversies
• The Chinese government announced the formation of a new
agency to oversee investment of China's $1 trillion in foreign
currency reserves, March 2007
– Most of the reserves China now accumulates are
conservatively invested in U.S. Treasury bonds and other
government securities
– Analysts say the agency could deploy hundreds of billions
of dollars to acquire financial or strategic assets around the
world, particularly in developing countries in Africa and
Latin America.
– “They're not going to be looking for financial assets, but
energy assets and natural resources, minerals — things
China desperately needs," J.P. Morgan analyst
– The biggest priority is safety, and under the principle of
security we will try to will try to increase the efficiency of
management and the investments' returns," Finance
minister of China, Jin Renqing.
U.S. Financial Markets and Economy
U.S. Trade History
• Highlight trends in the capital account in
recent decades
• Relationship with GATT and WTO
Foreign Owned Assets in the
U.S.
• Foreign Official Assets
• Reported Liabilities
• Direct Investment
Capital Inflows to the U.S.
• Relationship between capital inflows and
foreign investors (liquidity of capital)
• Capital Inflows finance the trade deficit
• Savings and Investment in the U.S.
Capital Flows and the Dollar
• Capital Inflows affect the international
exchange value of the dollar
Purchases and Sales of U.S.
Securities
• Trends in Security Transactions between the
U.S. and foreign countries
• Relationship between Treasury Securities and
Stock Prices
• Foreign Official and Private Purchases of
Treasury Securities
Foreign long-term investments of foreigners buying our
Treasuries, Agencies, corporate bonds and equities, minus
U.S. purchases of their bonds and equities
Purchases of Treasuries since the beginning of 2005 by the biggest holders
• Caribbean Banking Centers - acting on behalf of investors from other
nations who are passing money through the banks of the Caribbean to
make their purchases
• British investment - large percentage of this flow is indirectly from other
countries using London money center banks to make transactions for them
Amounts in $Billions
Shift in the composition of the purchases of Treasuries:
• Central Banks are buying less and the rest of the public is buying more
• In the month of March 2005 the central banks actually sold off $15B from their holdings, which
was the second highest rate ever.
• The only bigger month was during the Russian default and the LTCM collapse of August 1998.
• This shift is also consistent with the halt in Chinese and Japanese purchases, as they use official
institutions to carry out their actions.
US purchases of foreign stocks were close to a high at
$14.4B in 2005, reflecting US attitude becoming more
positive for foreign investments. This is growing just as
foreigners have slowed their buying of US stocks from
the time of our stock bubble
Trade Agreements Begin…
Trade Policy Developments
• December 2006:
– U.S. & China talks on China’s exchange rate
flexibility, the bilateral trade imbalance, PRC
intellectual property rights violations, energy and the
environment
• July 2005:
– PRC government announced that its currency, the
yuan, would be revalued upward (from 8.3 yuan to
8.11 yuan to the U.S. dollar) and that its future
value would be “referenced” to a basket of currencies
trading within a narrow 0.3% band against this
basket of currencies
– U.S. dollar, euro, Japanese yen, and South Korean
won, with a smaller proportion made up of the
British pound, Thai baht, and Russian ruble
Compliance of WTO Obligations
• U.S. complaints:
– China’s policies to promote the development
of mainly state-owned industries
– Issuance of regulations on auto parts tariffs
that discourage the use of imported parts
– “Race to the bottom”
Chinese Ownership of Major U.S. Companies
• 2004: Lenovo Group Limited, a computer
company primarily owned by the Chinese
government, signed an agreement with IBM
Corporation to purchase IBM’s personal
computer division for $1.75 billion. On April 30,
2005, the acquisition was completed.
• 2005: Haier Group, a major Chinese home
appliances manufacturer, made a $1.28 billion
bid to take over Maytag Corporation. The bid
was withdrawn on July 19, 2005, after Whirlpool
made a higher bid.
• 2005: The China National Offshore Oil
Corporation (CNOOC), through its Hong Kong
subsidiary (CNOOC Ltd.), made a bid to buy a
U.S. energy company, UNOCAL, for $18.5
billion; CNOOC withdrew its bid.
Summary Analysis Begin…
Balance of Payment Definitions
Current Account
• Trade balance between net sales of import and
exports of goods and services.
Capital and Financial Account
• Net balance between foreign and domestic
purchases of assets – stocks, bonds, loans,
FDI-, and reserves.
Capital Market Comparison
China
• $72.4 Billion in FDI
• $39 Billion Capital Account Balance (USD)
• $114 Billion Current Account (USD)
• $1.347 Trillion in foreign reserves
• Hong Kong is largest investor
• U.S. 5th largest Investor
U.S.
• $95 Billion FDI
• $715 Billion Capital Account Balance
• ($201 Billion) Current Account
• Caribbean banks are largest investors
• $66.85 Billion in foreign reserves (USD)
Benefits
U.S.
• Capital account surplus allows domestic
investment to be maintained at a higher level
which is critical for promoting future growth.
PRC
• Capital deficit allows foreign investors to
receive higher returns on savings than they
would have gotten in their domestic market
Factors Affecting Capital and
Financial Accounts
• National and Domestic investment levels.
• Favorable business climate and global
competitiveness.
• High productivity and growth rate.
• Size and efficiency of financial market
• Global acceptance of a country’s currency.
• Policy decisions on fixed exchange rates.
Recommendations
China
• Reduce domestic savings in relation to
domestic investments.
• Greater exchange rate flexibility and further
financial sector reform in PRC is needed.
• High level of capital investment is critical for
promoting future growth.
• Surplus in Balance of Payment Accounts may
create real estate bubble and stock bubble;
susceptible to speculative attacks.
Recommendations
U.S.
• Raise domestic savings in relation to domestic
investments and reduce fiscal deficit in U.S.
• No adverse effect on GDP once Current
Account deficit can be offset by Capital
Account Surplus.
Conclusion
• U.S. carries Current Account deficits and
Capital account surplus with its trading
partners; standoff with China is more political
than economical.
• U.S. can sustain trade imbalances indefinitely
once the Capital Account surplus can offset
the Current Account deficit with minimal effect
on real GDP and economic growth.
• It's best to view trade deficits in the context of
growth, unemployment, inflation, and other
measures of economic performance.