The BRICs are getting cozier.
In 2007 Brazil finally experienced a trade deficit with China. “Brazil’s official figures show its China-bound exports totaled $10.75 billion in value in 2007, with imports from China reaching $12.62 billion,” according to Xinhua. ” 6 percent of all Brazilian exports went to China last year, while 10 percent of all imports came from China,” according to NPR. Bilateral trade rose 71.7% in 2007. Trade between the two took off between 2000 and 2003, when trade rose five-fold, and then again from 2004-2007 when trade more than doubled (BBC).
In 2007, the United States, Brazil’s #1 trading partner, exported $24.6 billion to Brazil and imported $25.6 billion; however, China may soon supplant the United States and Argentina in trade importance to Brazil.
In Brazil’s July-launched China Agenda program, the Brazilian Foreign Trade Secretary spoke of hopes to triple exports to China by 2010, which would account for $30 billion. This could mean that by 2011, Brazilian-China trade could surpass US-Brazil trade. However, I think that is unlikely, as I explain below.
China Supplies Mfg. Goods, Brazil Supplies Raw Materials
“96 percent of Brazil’s Chinese imports are high-value manufactured goods, 74 percent of its exports to China are low-value commodities such as soybeans and pig iron,” according to the AP.
According to Agenda China, Brazil hopes to increase exports of 619 product lines, including “Brazilian pharmaceutical products, chemicals, plastics, shoes and metals, as well as expanding the array of agricultural goods, through a higher Brazilian presence at trade fairs and through visiting delegations of businessmen” (AP). Brazil currently has three consulates in China. They are located in Beijing, Shanghai, and Xianggang (Hong Kong).
Brazil supplies raw materials China will require, such as iron. However, it is difficult for Chinese ships to reach Brazil, which could feasibly increase transport costs. They only have three options; a sea route (through Panama), another sea route around the tip of South America, or perhaps a land/sea route that would need extensive development before it could be widely feasable.
Of the three, transport through the Panama canal is by far the quickest (by days). The planned increase in Sino-Brazilian trade will make it even more vital that Panama’s expansion of the canal (to serve larger ships) is completed by 2014. (Panama Canal Expansion Proposal)
“The current locks are 33 metres (108 feet) wide, but the new locks would be 50 metres (150 feet). A third lane of traffic would be able to handle the wider loads” (BBC).
There are fears, perhaps over-stated, by some in American Ports, that US ports are not prepared to handle the newer large class of ships that can transverse the channel. If US ports are not dredged deeper, the US will lose a percentage of trade to the Venezuelan, or Brazilian economies.
Given the current fuel-price increases and the necessity of long journeys for goods to be transported from Brazil to China, I consider it doubtful that Brazil will increase exports to China three-fold in the next two years. Although the countries have demonstrated an ability to increase trade, the current economic slowdown and Chinese resource investments in Africa and in Australian companies will make purchases from Brazil of less immediate importance.
Trade will increase, since both countries’ are growing despite global difficulties, both will experience slight drags on expansion due to the global slowdown. This will ultimately make unattainable Brazil’s three-fold growth in trade to China .
After 2014, however, with the Panama Canal’s widening, all bets are off. In those circumstances, Brazil-China trade could certainly increase, perhaps exponentially.
* An interesting blog post from MarketOracle on the Brazil-China trade (crica, Feb 2007)
Off the Shelf:
While much is often stated of China’s trade surplus with the rest of the world, China actually ran a trade deficit with Latin America for much of the 2000s. China is the continent’s third largest trading partner, after the United States.
Eduardo Lora opens the book with a discussion on whether Latin America should fear China. From the data he presents, the answer appears to be “not yet.” He points out several economic weaknesses faced by China.
1.) Allegedly, China still has poor corporate governance and inefficient state-owned companies. Lora notes that the amount of state-run underperforming assets has massively declined over the years, but he makes much of the nonperforming loans and debt that burdened Chinese banks until restructuring and bank sheet balancing resulted in NPLs at only 9.5% as of late 2006. Considering how flush with reserves, investment and other cash China currently is, and how their companies are modernizing business practices, I do not think corporate governance questions is necessarily a crippling problem for China to overcome with investments in Latin America… especially when compared to indigenous Latin American companies’ problems with inefficiency and corruption.
To back up his assertion, Lora goes on to argue (27) that the three largest firms in main economic sectors are state owned and that China is propping up 30-50% of those firms as “national champions” by giving them loads of state support so they will become globally competitive multinationals by 2010 (27). He argues this will lead to inefficiencies.
For comparison for how strong China’s companies are. As of 2007, China managed to get eight companies into Fortune 500’s World’s Most Admired Companies (The US had 135; Japan, 61; Britain, France, and Germany, 26 apiece) . A good amount of the top companies, however, are state owned. [I find it odd though that Huawei, Lenovo, Haier, Baidu, and Galanz were not listed as admired companies– a lot can be said for them as Donald Sull (2005) discussed in Made In China.] And indeed, being listed on Interbrand’s listing of Top Global Brands still escapes Chinese companies. As of 2007, China still had no companies on the list (Here’s the report). The Best China brands are examined here. An easy chart of them is here.
2.) Lora gets a bit technical by discussing how China’s financial system is still undeveloped (28-30). Keep in mind though that a lot he discusses as being undeveloped has evolved since his article was written (in late 2006). He complains how until 2006, foreigners could only buy nonvoting B-shares in several sectors (infrastructure, utilities, and finiancials). Now, he says foreigners can purchase A shares, but to ensure stability they are required to buy over 10% of shares and hold for longer than 3 years. Lora argues this lack of easy-foreign investment will eventually damage Chinese companies’ ability to efficiently expand. (Then again, China has a lot of money even within its country, so maybe it will escape these problems.)
3.) Allegedly 50% of GDP (31) is locked up in savings and investments. Lora states this could be good, but it prevents capital and labor from moving to the most efficient sectors.
4.) Lora points out that 40% of private entrepreneurs with companies that have incomes over $120,000 USD are CCP members (31). This could be a neutral comment, or it could imply possibility that corruption rather than efficiency might govern China’s future capital markets.
Lora then discusses weaknesses that are shared between the countries:
5.) Weak higher education. (More on that in a later article)
6.) Corruption/Weak Rule of Law
As of 2007 there were 122,000 Chinese lawyers at one per 10,650 people [In the US the ratio is 1 per 270] (“Chinese Seek a Day in Court”, WSJ, July 1, A12) but most judges are retired from the PLA and lack legal expertise.
I don’t particularly believe Lora’s view that China’s companies are doomed to not meet expectations of world-dominance, since China is confronting many troubles he identifies. However, the points he raises have at times been overlooked by people willing to too-quickly crown China the next world hegemon.
Chapter 2, by Jorge Blázquez-Lidoy, Javier Rodríguez and Javier Santiso discuss whether China’s markets complement or threaten Latin America’s.
China’s export-mix competes the most with Thailand, Hungary, and Mexican goods (53). Costa Rica also, to a lesser degree, faces competition (54).
Brazil and China are highly complementary in trade (55).
In a chart on (54), Santiso excellently documents, through use of his own data tables, how Venezuela, Peru, Chile, Columbia and Argentina have very little competitive overlap with China.
Mexico and China share interest in IT, consumer electronics, clothes, and manufacturing. Transportation equipment is Mexico’s only advantage.
Latin America allegedly has too inefficient ports, so they cannot gain in transport cheapness vis-a-vis China in trade with other countries and regions. Customs are too slow, taking up to seven days on average to clear across the region. However, Latin America will still not be overly burdened by China competition since the two regions specialize in different products.
Latin America, for example, gains in trade to China by sending copper, oil, soybeans, and coffee.
According to the article, “in 2004, 1/2 of Chinese FDI went to Latin America, exceeding the 30 per cent that went to Asia (70).” I’m not sure that’s completely true and will have to consult my other sources, but it bears examining, because it’s quite interesting, given all the media attention lavished on China-Africa relations.
In essence, Santiso concludes that “China will benefit other emerging economies in [Latin America in] the long term.” “Latin America faces few if any short-term trade costs” (55), except in Mexico and Costa Rica, of course.
Chapters 3-5 were okay, but didn’t reveal too much of immediate interest. The pamphlet-book is a good read, and I’ll recommend it even though it is fast getting out of date. There simply aren’t that many good articles/books written on China-Latin America relations, but of the ones that do exist, Santiso’s is certainly a gem.
* Mohan Malik, writing for PINR has a digestable version of Sino-Latin American Relations.
* There is a 2005 CRS Congressional report on China’s influence in Latin America.
* PBS had a radio program on China-Latin America ties. One Brazilian disagreed with Santiso’s statement that China benefitted the Brazilian economy. He called attention to textile competition.
China has finally raised the prices on its oil. It came a bit sooner than I expected, but as I stated in “China’s Oil Price Freeze,” the raise was a lot lower than needs to be done (China’s prices are still 1/4 cheaper than gas in the US and 1/3 cheaper per liter than oil in the UK). The United States’ prices on oil have risen over 50% since December 2007 (based on calculations of average gas prices of 2.71 in 2007, according to the EIA);
China only raised their oil prices 16 to 18%. (In November, they raised prices 11% to confront $80/barrel oil; China’s oil companies appear to still have a shortfall of $21 dollars per barrel from current prices of nearly $130 a barrel.)
Rising oil prices will affect Chinese stability, inflation, and government openness.
According to Xinhua, the Chinese State news agency: “more subsidies would be offered to farmers, public transport, low-income families and taxi drivers to cushion the crunch of price rises.” According to FT, “the finance ministry said the targeted subsidies would amount to Rmb19.8bn ($2.9bn, €1.8bn, £1.5bn).”
Given China’s huge trade surplus, the burden of cost can be arguably borne by the government (And the amount of subsidies direct to the people currently is far less than the amount of subsidies ($50 billion plus) the Chinese government would have needed to give to state oil corporations forced to do business at under-market prices. Apparently, Sinopec was losing money on imports when “the international price exceeded $78 a barrel.”)
The problem with the Chinese government pumping a lot of money into the hands of its poor peasants, however, is that it can lead to inflation. In a similar situation in Indonesia “the [Indonesian] government forecasts inflation will rise to 12% in June — up from 8.96% in April — as the fuel-price increase feeds into the broader economy.”
Remember, in 1989, part of the impetus for the massive protests was runaway inflation, rising unemployment and lowering standards of living. And as Pieter Botellier of the Jamestown Foundation also argued; “the Communists’ defeat of the Nationalists in the Chinese civil war of 1945-1949 was greatly assisted by the run-away inflation of those years, which sharply reduced the popularity of Chiang Kai-shek’s Republic of China (ROC) government. ”
This is not to say China’s government is in any danger of losing its grip on power– but rising inflation might cause its leaders to look to past lessons of history and react skittishly to the consequences of unrestrained inflation. According to Prof. Victor Shih of Northwestern, this is the highest inflation we’ve seen in China since the mid 1990s. Also according to Shih, there is a current factional dispute in China’s leadership about whether to continue to tighten the monentary supply, or to reevaluate the RMB upward to correct the domestic inflation problem. It’s a complicated situation, and I recommend reading his article for more details.
In light of increased tensions as a result of upwardly spiraling inflation and energy costs; President Hu Jintao might be encouraged to crack down more on free press and coverage of unrest that will likely emerge as people are able to afford less and less.
The Chinese belief has long been that silencing opposition makes it go away. We’ll see what happens over the coming months.
Due to transportation costs, Chinese food prices will increase even more than the 22% percent they have already appreciated since last year. (In all, according to the BBC, China’s inflation as of April was up 8.5% on the year.) Rising inflation could lead to big problems and the end of 4 kuai (.50 cent) meals that sustain many low-paid migrant workers who labor in the cities and send remittances to their farming families.
Already, there has been a slight decrease in the amount of migrant workers in China’s coastal cities (regrettably, I can’t currently find the Journal article I saw the numbers for this cited in- I will post it as soon as I find it), driving up prices for construction and leading to more inflation. The eventual return of these workers to their villages and second-tier cities might be good for the economy in the long-term as some population stress is removed; but in the short term, their return with big city views, and big city demands for quality of life, these returnees could have big cosmopolitan demands for their local governments- demands that might not be met and could cause social unrest.
ONE Beijing still needs to subsidize a gap of around $20 in international purchases of oil. Its importing companies are still losing cash, but ultimately China can weather slightly cheaper oil prices than the rest of the world since “average Chinese [domestic] production costs were about $US20 ($21)”. It’s the internationally-bought oil gap that China has to pay for.
TWO China also has to manage the social unrest that will originate due to the rising oil prices. Subsidies to the right populations should take a lot of the bite out of that unrest. Prof. Victor Shih of Northwestern speculates a little on what needs to be done to prop up the Chinese middle and lower classes after gas prices rise.
THREE There may be citizen-government clashes over the increased oil prices, much as there were in March 2007 during the Yongzhou Mass Incident, sparked over rising public transportation costs. This could be why public transport costs are being kept steady. (According to the FT, “CSFB, the investment bank, estimates that an 8 per cent increase in fares would add 2.3 percentage points to inflation. “)
FOUR If there are clashes, the government will likely clamp down, and try to keep the media from reporting on negative developments since China does not want to look bad in the year of its Olympics (as noted in my earlier article.) How successful they are remains to be determined.
Also of note: An article on hidden cost of fuel subsidies explains why China needed to reevaluate its oil prices.
And Forbes discusses in more detail the weird situation where one of China’s national oil companies, Sinopec suffered under the system and required billions in state subsidies to prop up its foreign oil acquisitions.
http://www.eeo.com.cn/ens//Industry/2008/06/25/104320.html Also had an interesting article on the possible reprecussions of the price rise on China’s national oil companies.
The April 2008 CRS American government report I mentioned before in “China’s Soft Power” dredged up some good statistical data regarding China’s economic reach. However, the CRS analysis fell flat by not including Hong Kong’s FDI in the full calculation of China’s FDI and influence on foreign countries.
China’s 2007 stock of FDI abroad is either $93.7 billion (according to the CIA), or $73.3 billion (according to the report; CRS, 22) or $292 billion (according to UNCTAD); but if you add Hong Kong there is an additional $534 billion or $769 billion in FDI stocks to be accounted (according to the CIA and UNCTAD respectively), or $43 billion in same-year 2006 FDI flows, according to UNCTAD.
Because Hong Kong’s FDI is omitted, the CRS report understates much of China’s world-wide influence.
Of course, much of Hong Kong’s $534 billion in FDI is reinvested back in the mainland.
Many factors can be evaluated when considering China’s worldwide economic influence. Here, I highlight two main ideas touched on in the report; China’ Foreign Trade, and its FDI.
China’s main trading strengths are with countries bordering it such as Japan, South Korea, Central Asia, ASEAN, and Pacific Island Countries. Its total trade with Pacific Island Countries was $754 million in 2006, compared to $404 million by the United States, $3.7 billion by Australia, $918 million by Japan, and $832 million by the EU-25 countries (CRS, 36).
“[I]n 2007, China’s total trade with ASEAN was 17% larger than total U.S. trade ($200.6 billion versus $171.7 billion). China’s exports to ASEAN in 2007 were 55.6%” greater than United States’ exports to the region, while U.S. imports from ASEAN were 2.6% greater than China’s imports (CRS, 91).
“Based on the fact that China’s imports from ASEAN in 2007 grew by 21.1% (over the previous year), versus 12.4% for the United States, it is likely that China’s imports from ASEAN will be larger than U.S. imports [from the region] in 2008. China ran a $14.1 billion trade deficit with ASEAN, while the U.S. trade deficit totaled $50.6 billion” (CRS, 91).
China’s trade with Japan was $210.7 billion in 2006; Japan’s amount of trade with the US was $213.5. The trend in trade indicates China is probably now Japan’s number one trading partner (CRS, 43). Japan receives 9.5% of China’s exports.
China’s trade was greater that US trade with South Korea in 2006. China-SK had $118.1 billion in bilateral commerce, compared to America’s $76.9 billion in bilateral commerce with the peninsular state (CRS, 44). China’s trade with the country is rapidly accelerating and currently accounts for 4.6% of China’s exports (CRS, 45).
China’s trade with Central Asia was $12 billion in 2006 (CRS, 71), accounting for 1.34% of Chinese export trade (CRS, 72). In 2003, US trade with Central Asia amounted to $1 billion. In 2006, the United States imported $1.3 billion from the 5 Central Asian states and exported around $927 million to them (Data from HERE, HERE, HERE), HERE, and HERE). for a total of around $2.3 billion; dwarfed by China’s trade with the region.
WHERE THE UNITED STATES’ TRADE INFLUENCE REMAINS STRONG
In contrast, the United States still trades more with Latin America and Africa, two regions often identified as places where China might eventually challenge the United States’ trade dominance.
“China’s overall trade with LAC [Latin American Countries] grew to about $70 billion in 2006, representing just 4% of its overall trade. In comparison, U.S. trade with Latin America and the Caribbean amounted to almost $555 billion in 2006” (CRS, 26).
“From 2001–2006, the absolute value of U.S. goods trade with Africa, at $71 billion, was greater than that of Sino-African trade, but Chinese-African trade grew at a much faster rate than U.S.-African trade.” Then again, it had a longer way to rise. “China’s total trade with sub-Saharan Africa rose from $8.92 billion to $45.35 billion in that period, an increase of 409%, as compared to a 152% rise in total U.S.-African trade” (CRS, 119).
WHAT EFFECT DOES CHINA’S RISING TRADE HAVE?
China’s growing influence in trade with its Asian neighbors could lead to future trade embargoes and conflicts such as the 2001 mushroom/automobile trade war between China and Japan. This began when Japan placed a tariff on Chinese leeks and mushrooms. In return, the Chinese imposed oppressively high tariffs on Japanese cars, mobile phones, and air conditioners. The Japanese eventually backed off. It is important to note, however, that the mushroom trade war happened before full Chinese ascension to the WTO. Now that China is part of the WTO (since November 2001) and greater integrated into the world financial system, such trade wars might be less likely to occur.
US-CHINA TRADE & THE TRADE DEFICIT
The United States received, in 2006, 21% of China’s exports (CRS, 45). “In 2007 the United States incurred a merchandise trade deficit of $256 billion with China, $83 billion with Japan, and $13 billion with South Korea (43% of the total U.S. trade deficit of $816 billion) (CRS, 60).
As earlier noted; estimates of China’s FDI investments in foreign countries might be incorrect due to non-inclusion of Hong Kong FDI numbers into the CRS report.
From existing data, it appears China’s FDI sent abroad is relatively low.
“From 2002–2006, U.S. FDI flows to ASEAN were $13.7 billion (or 8.0% of total), making the United States ASEAN’s 4th largest source for FDI. Over this period, China’s FDI totaled $2.3 billion or 1.3% of total, making China the 10th overall source of ASEAN’s FDI” (CRS, 95). “The United States remains ASEAN’s 2nd largest trading partner (China ranks 5th) and its 4th largest source of foreign direct investment (China ranks 10th)” (CRS, 102).
“While China’s reported cumulative stock of FDI in [Latin America] amounted to $11.5 billion in 2005, the cumulative stock of U.S. FDI in the region amounted to $366 billion in 2005, and grew to $403 billion by 2006” (CRS, 26).
Considering the difficulties of analysis; rather than getting into a deeper blow-by-blow analysis of China’s FDI around the world, I’ll point out an interesting point.
According to the UN; US and Japan’s year 2005 FDI into China accounted for $95 billion, which is $22 billion more than China’s total 2006 FDI invested everywhere in the world (CRS, 47). Using those numbers, it still appears that foreigners are developing and affecting China more than China is developing and affecting the world.
At least that’s how it is for now, anyway.
There’s a lot more to read in the US Government report, from a discussion on Sino-Japanese-Korean relations, to analyses of how the Taiwan issue affects international relations and of China’s energy diplomacy and the SCO (Shanghai Cooperation Organization), to in-depth discussion of international loans and trading and nuanced explanations of where China’s FDI is heading and why.
Despite its flaws, the report is still well worth checking out.
* Also of Interest: UNCTAD’s World Investment Report: 2006
Considering recent shortages in fuel in some places in China, as reported by today’s WSJ and an article by the Jamestown Foundation, many may wonder why China is leaving its oil prices at the same level since the last raise in November 2007?
What follows is an analysis focusing on bank loans and stability concerns. More work needs to be done looking into the elite political decisions, namely the discussions between ministers in charge of different portfolios since that can also affect these decisions, but that will have to wait for later.
China wants to present a good image to the world while it prepares to host the Olympic games. The Olympics are a coming-out ceremony for them, an opportunity for much 爱国 (aiguo) or love of country/patriotism. Red, the color of China, appears everywhere. Even PEPSI changed its traditional blue to red in the run up to the Olympics. As one Chinese said in the article: “I thought it was a good idea when I saw those promotional cans. They’re supporting Team China.”
So, what stereotypes does China have to promote to present a good image of their country?
1.) China is not backward
Thus they have retranslated many formerly amusing signs that made little sense in English, such as “Deformed Man” signs outside toilets for the handicapped.
2.) China is ruled by law and order and every Chinese loves China.
Thus, they will increase security and recently presented new regulations aimed at discouraging protestors, both from outside and inside the country. Additionally, the recent clampdown on foreigners overstaying and sometimes working on tourist visas is somewhat based on this. China wants to catalogue all the people inside the country. Laxity in law enforcement is dissipating as the government becomes concerned that foreign elements might seek to upset the festivities.
This also explains the move to ban liquids on Beijing subways starting on May 9th, which appears to be based on International Flight legislation banning liquids on airplanes, and the ban on liquids in other major cities’ subways around the world.
Additionally, the ban of reporters from travelling freely in T*b*t is another example of China trying to present a good “face” to the world– if no one is seen protesting, then it doesn’t happen.
And of course China’s press has cracked down against “negative stories”, and the Hong Kong-based South China Morning Post and other media outlets routinely provide evidence of the country’s greater crackdowns on the free speech of the press. (“Free media for Games = media free of bad news, one city says.” South China Morning Post. March 20, 2007.); also see an April 30, 2007 report on: “The Olympics countdown – repression of activists overshadows death penalty and media reforms”
3.) China wants its economy to keep growing.
China has not reevaluated its currency extremely fast in order to control inflation since it fears (since 2007 in fact, when it had only appreciated 5% against the dollar since the July 2005 depegging, compared to the over 20% it has appreciated by April 2008) that exporters will not be able to survive if there is a rapid reevaluation. Chinese exports to the world have risen exponentially since the early 2000s as the multifiber agreement and trade protectionist agreements expired.
If exporters start suffering, then bad loans could accumulate back to levels not seen since 2005/6 when worries about China’s 10-45% nonperforming loans in state banks led some people to predict an imminent banking collapse– that did not happen, however (China claimed state banks NPLs were only 9.5%) . China seems to have cleaned up it banking act (surprisingly quickly), making its banks at least as solvent as those in America and Europe wracked by subprime.
Some argue that China’s state banks’ cleaned up their balance sheets. However, it appears that some exposure might be hidden. According to the 2006 NYT article: “China Construction had turned in the best numbers at that point, reducing its share to 3.92 percent of loan assets late in 2004, down from 17 percent in 2002… But the risk adviser began cautioning that bad loans were being hidden at the bank’s branches, erroneously labeled as good loans, even though company records showed that they were impaired. He told bank officials that in Beijing and Tianjin alone, he had uncovered $750 million in bad loans that had been deemed good.”
According to an article in Britain’s Telegraph from December 2006; “Less understood is that a sharp rise in the yuan could be the last straw for China’s banks, sitting on a network of loss-making factories living off marginal exports. Standard & Poor’s said a 25pc rise in the yuan combined with a 2pc rise in interest rates would slash corporate profits by a third.”
All these reasons may explain why China raised the reserve requirement to 17.5%. China’s leaders don’t want to risk a hit to their economy’s growth and want to insulate themselves from runs on banks that might happen if loans start to go bad.
As one professor said in regards to a 2006 report on China’s banks, quoted in the NYT: “If there is a slowdown, there will be a day of reckoning. It might be in a long, long time or it might be the day after the Olympics.”
BUT WHY WOULD RAISING GAS PRICES HURT THIS?
Considering all the unrest and trouble that China has recently suffered in T*b*t, and with increasingly loud voices calling for accountability in the construction of school buildings, China wants to avoid more unrest.
With inflation at around 8 percent on the year already, and likely to climb higher, increasing prices for gasoline and ending subsidies can send that rocketing even faster. China’s low per person GDP means that non-subsidized gas will negatively effect farmers, and small businesspeople disproportionately. This could cut into entrepreneurialship and send some to protest, like people have already done in India and Malaysia where “the pump price of gasoline rose Thursday by a whopping 41 percent to 87 cents a liter, or $3.30 a gallon.”
The question is, will gas shortages, caused by undersupply (due to price controls) result in more unrest than raising prices. It appears that as far as the Chinese leadership is concerned, they believe it is better to keep prices low, considering all the other hits to the world economy.
Therefore, I predict that if gas prices in China rise before the Olympics, they will rise much less than they have elsewhere in the world. More likely, the prices will be raised after the Olympic ceremonies are complete.
Barack Obama recently achieved status as the presumptive Democratic Party Presidential nominee, so it seems worthwhile to address what his future China policy might be like, should he be elected.
CHINESE CURRENCY REEVALUATION
Obama wants faster Chinese currency reevaluation, and threatens to levy duties against the Chinese if they do not move to strengthen the RMB against the dollar.
The bill Obama promotes, S. 796, Sen. Bunning (R), and Stabenow (D)’s Fair Currency Act of 2007, appears similar to the failed Baucus’ 2006 bill S. 295 which attempted to designate China a currency mainpulator but which eventually did not pass because of fears that it was non-WTO compliant.
Likewise, the Fair Currency Act appears similar to the unadopted 2007 S. 1607 Baucus/Grassley bill which sought to replace the current Treasury reporting structure which merely analyzes if foreign countries “manipulate the rate of exchange between their currency and the United States dollar for the purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade” (1) with a requirement that Treasury identify “fundamentally misaligned” currencies and designate them for priority action in semi-annual reports to Congress, whether or not the currency manipulation is maliciously intended.
Such a bill would introduce countervaling duties against Chinese exports to the United States, arguably helping domestic American manufacturers. Prices of goods will rise to some degree, but more manufacturing jobs will (theoretically) remain in the United States. (Read the bill HERE.) [A further analysis on the Bill and currency evaluation/manipulation will follow in a later article.]
Former ambassador to the UN Economic and Social Council Terry Miller gives some insight into the effects of such a bill, arguing that “changing the exchange rate will, however, affect U.S. producers who use intermediate goods imported from China in their U.S. production processes. Renminbi appreciation will increase their costs of production. U.S. consumers of basic commodities like oil will also be hurt, as renminbi appreciation will make dollar-denominated commodities like oil cheaper for the Chinese. Chinese demand, already rising rapidly, will drive up the dollar price of such commodities worldwide, forcing American consumers to pay even more at the pump.” All Roads Lead to China had another interesting analysis on the wisdom of encouraging a currency reevaluation. I’m not certain I agree with either statements, but they make intriguing arguments. The economy is never quite as simple as it initially appears.
Ultimately, the Chinese RMB has appreciated 18% since 2005 when it removed its peg from the dollar and began to float against a market basket of currencies; but the bill argues China’s currency is still undervalued by as much as 40%.
PELOSI AND ANTI-CHINA SENTIMENTS
Barack Obama, if elected, will lead a Democratic Party alongside a powerful anti-China House Majority Leader, Nancy Pelosi. Pelosi is famous (in China) for unveiling a pro-democracy banner in Tian@nmen Square in 1991 while on a Congressional docket- hardly a subdued gesture by a future national leader. She is often confrontational against China, very pro-T*b*t, and has pushed for changes in China’s population control policies. A commentary in Xinhua, the AP of China, has many derisive things to say about her.
Depending on how much influence Pelosi and the rest of the Democrats’ anti-China lobby might have on Barack Obama, Sino-American relations could degrade under an Obama presidency.
OBAMA AND TAIWAN
Obama supports the “One China Principle” and congratulates Taiwan for its developing democracy, but beyond that has had few constructive statements or declarations of policy on the situation.
Although Obama has yet to construct a fully cohesive China policy, a vote for Obama appears to be a vote against coddling China economically. It remains to be seen whether he is a military anti-China hawk, like the recently ousted air force generals who promoted purchases of 381 new F-22 jets in opposition to the Bush Administration’s suggested number of 183, partially because they saw America’s future as confronting conventional armed forces rather than insurgencies.
The Council on Foreign Relations discusses more of Obama and the other candidates’ China policies at length HERE.
–(1) Exchange Rates and International Economic Policy Coordination Act of 1988. A part of the: Omnibus
Trade and Competitiveness Act of 1988. Cornell University Law School. 1988. http://www.law.cornell.edu/uscode/html/uscode22/usc_sec_22_00005301—-000-.html
Reality check here. China’s economic power is great, and getting greater every day, but it is important to note where China stands in relation to the world.
ECONOMICS, EXPORTS, AND IMPORTS
Despite being hot on the heels of Germany in striving to become the world’s third largest economy, and despite surpassing the US in April 2008 as the world’s second largest exporter, China still trails the United States in global economic heft.
People may now buy more Chinese products than those made in America; but there is an argument that much of China’s rise in exports is due to its new position as a final assembly-point for goods made elsewhere in Southeast Asia and the world. “These patterns are reflected in the Morgan Stanley estimate that 60% of the US trade deficit with China is due to imports from subsidiaries of US firms,” according to the EU’s European Commission.
And although people don’t buy as much “American” as previously, Americans still buy much of the world; purchasing $2 trillion in imports, compared to China+Hong Kong’s $1.2 trillion. Contracts and contacts with foreign countries can restrain their actions and influence their internal policies.
THE BUSINESS OF BUSINESS
Where United States companies go, and where its IMF and World Bank head, countries shake. WalMart’s GDP in 2006 was larger than that of 144 of the world’s 170+ countries’ GDPs.
China lacks an indigenous globally recognized top brand (See BusinessWeek/Interbrand’s 2007 survey); the US has 7 of the top 10. (A discussion of the top 20 Chinese brands such as Haier, and Lenovo is HERE). (IBM discusses the problem HERE on page 7.)
The US still accounts for the greatest percentage of UN funding (22% to China’s 2%, Russia’s 1%, and Germany’s 8% as of 2006. Only Japan’s 20% comes close to the US’ level of contribution.) Without US funds going in, the UN would largely be inoperable.
Additionally, the US had a 2007 GDP of over $13.7 trillion; China possessed a GDP of $3.249 trillion; The US stock of foreign FDI investments in 2006 was worth$2.3 trillion in 2006; China’s net worth of foreign FDI investment stock was $93.75 billion in 2007. France and the UK both realized values of over $1 trillion. China ranked 23rd on the CIA/WorldFactbook list list, behind Brazil. Even with Hong Kong factored in to China’s total, however, (since many Chinese businesses mainly do business with the outside world through Hong Kong; the total equals 534 billion, placing Chinese stock of foreign FDI investments in 8th place behind Germany, Switzerland and the Netherlands and just ahead of Spain.) It should be noted, however, some of Hong Kong and China’s listed FDI is an overlap, since despite the countries being unified; Hong Kong investments in China are counted as FDI investments.
Of course, if China keeps developing at the fast economic clip it has set, over 10% year-on-year for the past 10 years, and at over 9% through 2009 according to the OECD, the country could come to pass the United States in GDP size around 2035.
However, it should be remembered that China is aging fast. By 2020, China’s population aged over 60 will be 16.7% (equal to that of the US’ elderly population in 2000); up from 10.1% in 2000 (AARP Bulletin, June 2008, 24). The US’ proportion will have grown to 22.8% by that time- on par with Japan’s proportion as of 2000. China’s One Child Policy, instituted in 1979, will begin to be harshly felt after around 2016- the date where the number of over-65 persons exceeds the number of under-18-year olds.
Worries about who will take care of the grandparents will put stress on China’s social welfare system to provide increasingly greater proportions of their GDP, similar to, and perhaps worse than America’s current social security and medicare crises. [A later article will examine China’s aging in detail.]
RURAL-URBAN ECONOMIC PLATEAU
China is growing fast, but with growth can come hiccups as an economy reaches a plateau. Once a majority of rural farmers have moved to the cities, as happened after over 25 years of growth in Korea and Japan, the productivity increases begin to decline. In China, the rural population is still 56%; compared to Japan’s 21%, Korea’s 19% and the United States’ 23%. (see page 61 of this UN report on Urbanization). Once China’s rural population drops to a 30%, then all the easy growth will be gone.
China’s economic weight in the world can be overstated, but it has natural limits to its growth, limits that were reached by the Asian Tiger economies in the 1990s. Remember, everyone thought Japan was going to “own America” in the 1990s; but bad investments, bank failures, a sluggish economy, and the American Internet-tech revolution combined to flummox Japan and help hoist America back into its position as the world’s economic leader.
America may not always hold the lofty position of the world’s #1 economy, but for the short term its government, its FDI, its companies, and its instruments- the World Bank and the IMF continue to matter more to the world.
President Hu’s policy of a harmonious society, which encourages a move toward slower, more manageable economic growth informed by environmental awareness and greater concern for the poor could be seen as a great leap forward for the Chinese toward a sustainable development model. However, the policy has increasingly resulted in greater degrees of “harmonization” (read about it and see a bizarre chinese video HERE) and suppression of free speech as the society grows increasingly challenged to appeal to ever-diverse interests.
In order to ensure harmoniousness in the face of unique challenges to China’s future, its leadership (and HERE for a more indepth look at the leaders’ CV’s) might be forced to take drastic measures to contain stresses originating from China’s rapid, but inequitable economic growth.
China’s economic progress continues at a rate of greater than 10% for the past several years, and despite cyclical shocks and a worldwide economic downturn, the Chinese economy appears strong enough to expand. This growth rate and the growth rate of other developing countries brought exuberance to the Shanghai stock market, with stock prices up to an average of 42 percent of valuation over earnings as of July 2007, according to Bill Powell of TIME Magazine. Although the Shanghai stock exchange was down 21% in 2008 by February, and was down nearly 50% in April from its high of 6,124 points reached in October 2007, the Chinese economy is still on pace to grow a bit over 9 percent, according to the World Bank.
With such high and constant growth rates over the past decade (where nearly all years recorded over-ten percent economic growth), inflation is becoming a problem. Even worse, food prices are rising higher than China’s overall rate of inflation. As China’s inflation grows, wealth disparity and purchasing power parity becomes a greater source of social instability as people lose access to amenities they once could easily purchase.
China’s Gini coefficient, used to measure income disparity, is now above .45, according to the 2003 UN Human Development Report, a number above which demonstrates a potentially dangerously unequal society on par with many economically imperiled Latin American states. In comparison, China in 1980 boasted a .33 Gini coefficient (higher numbers indicate greater disparity), according to AsiaTimes. The United States boasts a .47 Gini coefficient, up only eight points from 1970, according to Arthur Brooks in the Wall Street Journal.
Seeking a balanced economic growth rate was a major goal of President Hu Jintao’s first term. However, Hu’s “Go West” campaign to develop poorer interior regions failed to spread wealth as rapidly as was hoped– much more work needs to be done. This lack of development, and increase in rising foodstuff and transportation prices risks increasing the amount and vehemence of public protests.
Interestingly, (and ignoring for the moment the mass T1b1tan unrest) the reported numbers of protests has actually declined, but China is notorious for ordering newspapers not to report embarrassing stories. Jonathan Watts of Britain’s The Guardian discusses China’s press crackdown against “negative stories” in detail, and the Hong Kong-based South China Morning Post and other media outlets routinely provide evidence of some Chinese officials’restrictions on individuals, and of the country’s greater crackdowns on the free speech of the press. (Staff Reporter. “Free media for Games = media free of bad news, one city says.” South China Morning Post. March 20, 2007.); also see an April 30, 2007 report on: “The Olympics countdown – repression of activists overshadows death penalty and media reforms” and of course the newest info on curtailing press freedoms in coverage of the Sichuan earthquake.
As worries about rising inflation and unbalanced economic growth increase, China becomes increasingly secretive, restricting press freedoms. Today makes me recall something that happened at the end of the decade of the 1980s; a time of widening press freedoms, rising inflation, exhuberance of the future and many people gaining wealth while others were left out. This led to protests and marches that were eventually suppressed to international disdain– a suppression that was partially modelled on how President Hu, then Provincial Secretary of T*b*t cracked down on social unrest there.
If economic inequalities lead to greater citizen unrest, it is likely President Hu will look to his past experience and party ‘successes” and enact increasingly draconian restrictions, rolling back much of the late-20th Century’s increased journalistic openness- with a goal of preserving stability and maintaining a harmonious society.
The question is, though, when will these economic inequalities come to a boiling point? It isn’t going to happen before or during the Olympics, but depending on what happens with China fuel subsidies, food prices, and inflation, the protest-barometer could be interesting to watch sometime after February or June 2009.
-An earlier version of this article was written in October 2007