Transition to Market Economy (Part II)
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Transcript of Transition to Market Economy (Part II)
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. 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.
More and more open
19521954
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19601962
19641966
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19721974
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0%
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30%
40%
50%
60%
70%
80%
Openness of China (1952-2011, (X+M)/Y)
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
1980 1989 1991 1996 1998 2000 2005 2006 2007 20080
10
20
30
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Percentage of processing with intermediate inputs in total trade processing
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
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
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A. Goods and Services (USD100ml) B. Factor Payments (USD 100ml) C. Current Transfer (USD 100ml)
Factor Income
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 2012-700
-600
-500
-400
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0
100
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1. Labor income (USD 100ml) 2. Capital income (USD 100ml)
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)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
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FDI
FDI/GDP (%)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
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FDI/GDP (%)
International Comparison (USD ml)
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19961997
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20042005
20062007
20082009
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50000
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Brazil 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
19821983
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Net FDI (USD 100ml) Net Portfolio Investment (USD 100ml) Other Investment (USD 100ml)
External Debt
29921 -2052yyy
y
30286 -2052yyy
y
30651 -2052yyy
y
31017 -2052yyy
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31382 -2052yyy
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31747 -2052yyy
y
32112 -2052yyy
y
32478 -2052yyy
y
32843 -2052yyy
y
33208 -2052yyy
y
33573 -2052yyy
y
33939 -2052yyy
y
34304 -2052yyy
y
34669 -2052yyy
y
35034 -2052yyy
y
35400 -2052yyy
y
35765 -2052yyy
y
36130 -2052yyy
y
36495 -2052yyy
y
36861 -2052yyy
y
37226 -2052yyy
y
37591 -2052yyy
y
37956 -2052yyy
y
38322 -2052yyy
y
38687 -2052yyy
y
39052 -2052yyy
y
39417 -2052yyy
y
39783 -2052yyy
y
40148 -2052yyy
y
40513 -2052yyy
y
40878 -2052yyy
y0
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Total External Debt (% of GDP)
Decomposition of the External Debt
29921 -2052yyy
y
30286 -2052yyy
y
30651 -2052yyy
y
31017 -2052yyy
y
31382 -2052yyy
y
31747 -2052yyy
y
32112 -2052yyy
y
32478 -2052yyy
y
32843 -2052yyy
y
33208 -2052yyy
y
33573 -2052yyy
y
33939 -2052yyy
y
34304 -2052yyy
y
34669 -2052yyy
y
35034 -2052yyy
y
35400 -2052yyy
y
35765 -2052yyy
y
36130 -2052yyy
y
36495 -2052yyy
y
36861 -2052yyy
y
37226 -2052yyy
y
37591 -2052yyy
y
37956 -2052yyy
y
38322 -2052yyy
y
38687 -2052yyy
y
39052 -2052yyy
y
39417 -2052yyy
y
39783 -2052yyy
y
40148 -2052yyy
y
40513 -2052yyy
y
40878 -2052yyy
y
41244 -2052yyy
y0
2
4
6
8
10
12
14
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China's External Debt (% of GDP)
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”
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-30
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All Other/GDP (%) Statistical Error/GDP (%)
Korea’s Capital Account Balance
33208 -2052yy
yy
33573 -2052yy
yy
33939 -2052yy
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34304 -2052yy
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34669 -2052yy
yy
35034 -2052yy
yy
35400 -2052yy
yy
35765 -2052yy
yy
36130 -2052yy
yy
36495 -2052yy
yy
36861 -2052yy
yy
37226 -2052yy
yy
37591 -2052yy
yy
37956 -2052yy
yy
38322 -2052yy
yy
38687 -2052yy
yy
39052 -2052yy
yy
39417 -2052yy
yy
39783 -2052yy
yy
40148 -2052yy
yy
40513 -2052yy
yy
40878 -2052yy
yy
41244 -2052yy
yy-12
-10
-8
-6
-4
-2
0
2
4
6
Capital Account Balance (% of GDP)
Content• International Trade• Trading reform• Processing trade
• Inbound Investment• FDI Into China• Other capital flows
• Outbound Investment
Inbound and Outbound FDI (USD 100ml)
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 2012-1500
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Inbound FDI Outbound FDI
Case Study: Chinese Investment in Europe• As investors fled Europe in the worst
days of its sovereign debt crisis, China-based 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)
Europe and the U.S.
The New Silk Road• “One Belt, One Road”• The belt refers to the land trade route linking central Asia, Russia and Europe. • The road refers to a maritime route via the western Pacific and Indian Ocean.
• For China, it is an outlet for the manufactory overcapacity.• For the countries along the new silk road, it is an opportunity to
improve infrastructure with external financing and engineering expertise.
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.• “Shenzhen-Hong Kong Connect” and “Shanghai-London Connect” are
already in discussion. • It can be conjectured that restrictions on portfolio investments,
inward and outward, would soon be lifted.
Major Stock Exchanges (as of Jan 31 2015)