China Comment

Energy, Environment, and Economy

Off the Shelf: China’s Economic Influence

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 TRADE

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).

CHINA FDI

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.

CONCLUSION

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

17 June, 2008 Posted by | Book Review, China Diplomacy, China Economy, China Future | , , , , , , , , , , , | Leave a comment

Who’s #1?

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.)

UNITED NATIONS

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.

GDP

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.

AGING CHALLENGES

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.

CONCLUSIONS

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.

10 June, 2008 Posted by | China Business, China Economy, China Future | , , , , , , , | Leave a comment