Chinas trade relations with the rest of the world.

Economics Project Division C

Submitted By: Group4 Ishant Bhatia Agrim Bothra Rajat Goel C007 C008 C020

Manoj Jain

C025

Gaurav Lalwani C038 Virang Shah Abin Thomas C050 C060

Economic Structure of China - Chinese Economic Profile

Structural changes in Chinas economy gave more authority to local officials and plant managers, and permitted a wide variety of small-scale enterprises in the service and light manufacturing sector to boom. Due to its increasing openness to foreign trade and investment, in 1999, China became the second largest economy of the world after the USA. Since 1978, China has been moving towards a market oriented economy. China de-collectivized agriculture, yielded tremendous gains in production. Driven by a sharp rise in the procurement price paid for crops and what amounted to the semi-privatization of agriculture. The share of agricultural output in total GDP rose from 30 percent in 1980 to 33 percent three years later. However, the share of agriculture started falling shortly after, and by 2002 it accounted for only 15.4 percent of GDP. In 2010, the agriculture sector accounted for 10.9 percent of GDP, 48.6 percent from industry and 40.5 percent from services. 39.5 percent of the 812.7 million labour forces are employed in agriculture, 27.2 percent in industry and 33.2 percent in services. Most of China's agricultural production is restricted to the east of the country. China is the world's largest producer of rice and wheat - for cash crops, China ranks first in cotton and tobacco and is an important producer of oilseeds, silk, tea, ramie, jute, hemp, sugarcane, and sugar beets. China also ranks first in world production of red meat (including beef, veal, mutton, lamb, and pork). Due to improved technology, the fishing industry has grown considerably since the late 1970s. Apart from crops and food products, China is one of the world's major mineral-producing countries. Coal is the most abundant mineral (China ranks first in coal production). There are also extensive iron-ore deposits in China; the largest mines are at Anshan and Benxi, in Liaoning province. Oil fields were discovered in the 1960s and turned China into a net exporter, and by the early 1990s, China was the world's fifth-ranked oil producer. Growing domestic demand beginning in the mid-1990s however, has forced the nation to import increasing quantities of petroleum. Coal is the single most important energy source; coal-fired thermal electric generators provide over 70 percent of the country's electric power. China also has extensive hydroelectric energy potential.

ROLE OF STATE vs. MARKET IN CHINA

Until 1978, industrial output was dominated by large state-owned enterprises (SOEs). Gradually, the share of state-owned and state-holding enterprises in gross industrial output value had shrunk; in 2002 it was around 41 percent. However, state-owned companies, controlled by economic ministries in Beijing (Capital of China), represented only 16 percent of industrial output. State-holding enterprises may control large numbers of state firms, and are not 100 percent state-owned. The changes in economic policy, including decentralization of control and the creation of "special economic zones" to attract foreign investment, led to considerable industrial growth, especially in light industries that produce consumer goods.

China Industry Sectors:

Chinas industry sectors are growing at phenomenal proportions, and the country is fast becoming the epicentre for mass manufacturing of goods and products. In 2010, Chinas industrial production growth rate was 8.1 percent.

Chinas industries include:

mining and ore processing, iron, steel, aluminium, and other metals and coal machine building and armaments textiles and apparel petroleum cement chemicals fertilizers consumer products, including footwear, toys, and electronics food processing transportation equipment, including automobiles, rail cars and locomotives, ships, and aircraft telecommunications equipment, commercial space launch vehicles and satellite

In 2010, the agriculture sector accounted for 10.9 percent of GDP, 48.6 percent came from industry and 40.5 percent from the services sector. 39.5 percent of the 812.7 million labour force is employed in agriculture, 27.2 percent in industry and 33.2 percent in services.

Chinas Manufacturing Industry:

The manufacturing industry in China forms the backbone of the economy of China. With China's entry into World Trade Organization, China has enhanced productivity by leaps and bounds. However, China is still lagging behind developed countries. Technical standards determine to a large extent the success of any manufacturing industry. Studies reveal that in terms of technical standards, the Chinese manufacturing industry has not been able to cope. Technical know-how used in the Chinese manufacturing industry is not up to international industry standards.

2010 Chinas Economic Indicators at a Glance: Geography: Eastern Asia, bordering the East China Sea, Korea Bay, Yellow Sea, and South
China Sea, between North Korea and Vietnam

Terrain: mostly mountains, high plateaus, deserts in west; plains, deltas, and hills in east Climate: extremely diverse; tropical in south to subarctic in north Natural Resources: coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony,
manganese, molybdenum, vanadium, magnetite, aluminium, lead, zinc, rare earth elements, uranium, hydropower potential (world's largest)

Population: 1.341 billion Age groups: 0-14 years: 19.8%; 15-64 years: 72.1%; 65 years and over: 8.1% Labour Force: agriculture: 39.5% industry: 27.2% services: 33.2% Unemployment: 4.1 %. Inflation:
Inflation in China soared during the 1930s and 1940s, when the countrys economy became highly unstable. The economic scenario worsened due to a civil war in the late 1940s. Food prices soared and hit purchasing power. In the early 1950s, the government implemented a series of recuperative measures, such as currency reforms, nationalization of banking institutions and the strict regulation of product prices and money supply. These policies continued till 1978. Owing to this, China succeeded in achieving record breaking price stability. Between 1950 and 1978, there was only a marginal increase of 0.6% in the retail prices of consumer products. As the government reduced its control, Chinas inflation reappeared. In 1980, urban residents were hit by a 7.5% inflation rate. Inflation spiked again in 1985 to 11.6%. In 1990, the government managed to control the inflation rate, bringing it down to 6.1%. According to the Central Intelligence Agencys World Fact book, Chinas inflation rate for 2003-2006 was:

China Inflation: Statistics

The International Monetary Fund (IMF) has been calculating Chinas inflation rate since 1980. A tabular presentation of its findings reveals that there have been irregular periods of ups and downs over the past two decades.

Year 1980 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

Rate of Inflation
5.998 2.383 1.928 1.5 2.828 9.3 6.5 7.3 18.8 18 3.1 3.4 6.4 14.7 24.1 17.1 8.3 2.8 -0.8 -1.4 0.4 0.725 0.767 1.167 3.9 1.8 1.467 4.752 5.857

China Inflation: Steps to Control It

In August 2007, the monthly consumer price index reached a decade-high of 6.5%. This resulted from an alarming rise in the price of food products. To control the inflation situation, the Chinese government tightened its monetary policy. A series of anti-inflationary measures, such as a reduction in product prices and a rise in the interest rate and the cash reserve ratio, were implemented. A stronger Yuan also facilitated the

China Income: Trends in Per Capita Levels

In 1990, Chinas average per capita national income was around $350. Within a decade, there was a threefold increase, taking the figure to $1,000. At the end of 2008, the figure tripled yet again and Chinas average per capita national income reached another high of $3,000. If Chinas

average national income continues to rise at an annual rate of 8%, the countrys per capita income will reach $8,500 by 2020 and will touch the $20,000 mark by 2030. Hence, Chinas average per capita income will exceed the current income of Taiwan and Korea and the country will qualify for an OECD membership.

China Income: Highlights

According to Goldman Sachs estimates, Chinas Gross National Product (GNP) stood at $1,529 billion in 2005. The research organization projected that by 2050 Chinas GNP would reach $44,453 billion, perhaps the highest in the world. Around 4% of Chinas national earnings results from state-owned enterprises. According to World Bank reports, Chinas GNP doubled in 2007 and reached an impressive level of $3,126 billion. At this pace, China will definitely reach the ambitious GNP target for 2050. Although the worlds fastest growing economy is set to become the worlds number one, but its current economic system is characterized by:

Income inequalities: The distribution of wealth in the economy is extremely lopsided. A major portion of Chinas national income accrues to coastal areas. The Pearl River delta, located on the southeast coast, is home to some of Chinas wealthiest people. On the eastern coast, individuals with high per capita income are centred on the Bohai Gulf of the Yangtze River. These powerful regions have amassed a major portion of Chinese income. By attracting liberal government policies, coastal areas are aiming to accumulate more wealth. Low purchasing power: Over the last three decades, there has been an eightfold increase in Chinas per capita income. However, rising personal income did not translate into increased consumer spending. This was on account of the surge in product prices, which is determined by market forces.

The government is also following a heavy taxation policy, which is hindering the expansion of private enterprises. To maintain the countrys buoyant growth rate, the need of the hour is to make the regulations less stringent.

Chinas Trade with the United States and the World

U.S. trade with the Peoples Republic of China (PRC) has raised several policy concerns. The trade is highly unbalanced in Chinas favour with a U.S. deficit of $201 billion in 2005. Year-to-date (January-October 2006), the U.S. deficit reached $190 billion. Many associate this deficit with the concomitant loss of American jobs in industries competing with rapidly rising imports from China. Some policymakers as well as leaders of industry and labor blame China for unfair trade practices, including deliberately undervaluing its currency, which they claim create an uneven playing field for U.S. companies when competing against imports from the PRC. U.S.-China trade issues are often driven by larger policy objectives. U.S. trade with China is but one aspect of the overall U.S. policy of engagement with the PRC, a policy that serves broader U.S. interests. Trade also underpins Beijings development strategy and contributes to domestic support for the PRC government. This report presents data and analysis of Chinas trade that shed light on various policy issues, provides an overview of recent U.S. legislative initiatives, and examines the goals and constraints of U.S. trade policy toward the PRC. Some of the specific questions addressed are how the U.S. trade balance with China compares with those of the European Union and Japan, whether imports from China are merely replacing imports from other Pacific Rim nations, and how imports from China by industry compare with imports from other countries.

The Rationale for U.S. Policy and Initiatives

Allowing trade with China to develop is part of the overall U.S. strategy of engagement with the PRC. The rationale behind engagement is that working with China through economic, diplomatic, informational, and military interchanges helps the United States to achieve important national security goals such as preventing nuclear proliferation, defeating global terrorism, defusing regional conflicts, fostering global economic growth, and championing aspirations for human dignity These goals are aimed at achieving U.S. national interests of security and prosperity for all Americans and projecting U.S. values abroad. U.S. trade policy toward China is based upon the assumption that trade between the two countries has both economic and political benefits: (1) in general, trade with China benefits both sides and allows for a more efficient allocation of available resources; (2) the rapidly developing Chinese economy affords a rare opportunity for U.S. businesses to become part of a huge and rapidly expanding market; (3) Chinas membership in the World Trade Organization (WTO) compels the PRC to comply with international trading rules and spurs the development of market forces in the country; and (4) foreign trade and investment create a dependency on exports, imports, and foreign investment and other interaction with the outside world in China, which in turn strengthen its relations with the Western world, create centres of power outside the Chinese Communist Party, and foster economic and social pressures for democracy; (5) a country as significant as China accounting for a quarter of the worlds population, armed with nuclear weapons, and a member of the U.N. Security Council cannot be ignored or isolated. According to some experts, globalization

and economic interests may be exerting a moderating influence on Beijings policies toward protecting Chinas national security interests. However, the Chinese Communist Partys determination to maintain political legitimacy through economic growth also creates tensions with other countries and with emerging non-Party political actors. The possible problems or challenges raised by the U.S. strategy of economic engagement with China include adjusting to economic competition in sectors where China has a comparative advantage, responding to PRC unfair trade practices, and the rise of an economically powerful China that is becoming more assertive in global affairs: (1) Imports from China may be entering in such increased quantities that they are a substantial cause of serious injury, or threat thereof, to competing U.S. industries; (2) Imports from China may be dumped, subsidized, or unfairly aided by government entities in China, which still wield considerable influence in the economy; (3) According to some economists and many policymakers, the U.S. trade deficit with the PRC stems in large part from Beijings policy of maintaining an undervalued currency; (4) China has a poor record of adopting or enforcing internationally recognized standards for working conditions and environmental regulation which, in addition to violating human rights and harming the environment, may provide PRC businesses with unfair competitive advantages; and (5) U.S. economic engagement with China arguably contributes to the legitimacy of the socialist government and the strengthening of Chinas military by facilitating general economic development. U.S. trade law and WTO regulations can deal with injury from imports and unfair trade practices. Trade disputes with China would normally be first discussed bilaterally before taking the case to the WTO for dispute resolution. Chinas alleged violations of international labor and environmental standards, as well as its own laws and government regulations, have fewer institutional remedies for the United States. Policy options include working to improve Chinas compliance through bilateral consultations and technical assistance, international organizations (such as the International Labor Organization), non-governmental organizations, and multilateral treaties (such as the U.N. Framework Convention on Climate Change and Kyoto protocol) and the threat of trade sanctions. U.S. Exports, Imports, and Balance of Trade with China, 1983-2005
300 200 100 0 -100 $Billions

Imports
(U.S. figures)

Exports
(U.S. figures )

Balance
-200 -300 (U.S. figures)

Balance
(PRC data)

01

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4

Trade Policy Developments

In the past few years, the United States has taken numerous actions in response to PRC trade practices that is has deemed unfair while China taken some incremental steps to heed U.S. demands. o In December 2006, China hosted the first China-U.S. Strategic Economic Dialogue led by U.S. Treasury Secretary Henry Paulson and PRC Vice-Premier Wu Yi. Talks focused on the following issues: Chinas exchange rate flexibility, the bilateral trade imbalance, PRC intellectual property rights violations, energy, and the environment. The U.S. Treasury Department released a report on December 19, 2006, that did not refer to China as engaging in currency manipulation for the purpose of gaining a trade advantage. o On January 13, 2006, the Bush Administration announced that it would apply the socalled military catch-all rule to items on the Commodity Control List which could require licenses for the export of items to China that could be used to strengthen Chinas military power.
o

On November 8, 2005, the United States Trade Representative (USTR) announced that the United States and China had, after three months of intense negotiations, reached a broad agreement on textile trade. The Agreement lasts through the life of the China WTO Textile Safeguard (through 2008), covers more than 30 individual products, and contains quotas that begin at low levels.

o On July 21, 2005, the 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. However, according to most experts, Chinas central bank continues to intervene in the currency market in order to maintain a stable exchange rate. In May 2005, the Bush Administration imposed safeguard quotas on 16 categories of Chinese apparel in response to a surge in such imports following the lifting of textiles and apparel quotas worldwide in January 2005. In December 2004, the U.S. government imposed anti-dumping duties on imported Chinese bedroom furniture. This case, the largest anti-dumping action against China, reportedly has both supporters and opponents in the U.S. furniture industry. In September 2004, the U.S. government rejected a Section 301 (Trade Act of 1974) complaint filed by the China Currency Coalition alleging that Chinas fixed exchange rate constituted currency manipulation. In November 2004, the Administration rejected a similar petition filed by Members of Congress, while continuing to press and advise China on revaluing or floating its currency. In April 2004, the Bush Administration rejected a Section 301 petition filed by the AFLCIO alleging unfair trade practices based upon exploitation of labor in the PRC and

calling for a tariff of up to 77% on goods imported from China. In July 2006, the USTR rejected another, similar Section 301 petition filed by the AFL-CIO. In March 2004, the Bush Administration filed the United States first complaint against China under the WTOs dispute settlement mechanism, charging that the PRC unfairly taxed imported semiconductors. In July 2004, China eliminated the tax breaks for domestically-produced semi-conductors.

Congressional Actions. On December 15, 2006, Representative Sander Levin, who is to chair the House Ways and Means Trade Subcommittee in the 110th Congress, declared that he would support policies that would address what many regard as Chinas unfair trade advantage, gained largely through the PRC governments manipulation of the value of its currency. These measures include legislation that would impose countervailing duties against non-market economies such as Chinas and the filing of a Section 301 petition requesting the Administration to file a WTO case against China. Senator Max Baucus, incoming Chairman of the Senate Finance Committee, stated that greater flexibility for Chinas currency is long overdue. In the 109th Congress, several bills aimed at reducing the U.S. trade imbalance with the PRC were introduced. These bills addressed issues such as Chinas currency practices, other alleged unfair trade practices (including dumping and export subsidies), violation of intellectual property rights, and non-compliance with WTO regulations. The following are selected bills from the 109th Congress related to U.S.- China trade: o H.R. 4808 (Jones: Introduced February 28, 2006) To prohibit the importation of motor vehicles of the PRC until the tariff rates that China imposes on motor vehicles of the United States are equal to the rates of duty applicable to motor vehicles of the PRC. o S. 2267 (Dorgan/Graham: Introduced February 9, 2006) To withdraw normal trade relations treatment from, and apply certain provisions of Title IV of the Trade Act of 1974 to, the products of the Peoples Republic of China. Related bill: H.R. 728 (Sanders). o H.R. 3283 (English: Introduced July 14, 2005) Amends the Tariff Act of 1930 to impose countervailing duties on certain merchandise from nonmarket economy countries. Passed in the House on July 27, 2005. Related bill: S. 1421 (Collins). o H.R. 1498 (Ryan: Introduced April 6, 2006) To clarify that exchange-rate manipulation by the Peoples Republic of China is actionable under the countervailing duty provisions and the product- specific safeguard mechanisms of the trade laws of the United States. o S. 377 (Lieberman: Introduced February 15, 2005) To require negotiation and appropriate action with respect to certain countries that engage in currency manipulation. o S. 295 (Schumer/Graham: Introduced February 3, 2005) To authorize the

imposition of a 27.5% tariff on goods imported from China unless the President certifies that China has made a good faith effort to revalue its currency to reflect its fair market value. Related bills: S. 14 (Stabenow), H.R. 1575 (Myrick), S.Amdt. 309 (Schumer) to S. 600. o H.Con.Res. 33 (Ryan: Introduced January 26, 2005) Urging the President to take immediate steps to establish a plan to adopt the recommendations of the United StatesChina Economic and Security Review Commission in its 2004 Report to the Congress in order to correct the current imbalance in the bilateral trade and economic relationship between the United States and China.

Summary of Trade Data

What light do the trade data shed on the controversy over economic relations with China? First, China has burst onto the U.S. trading scene in recent years. In 2003, the PRC surpassed Japan to become Americas third largest trading partner, after Canada and Mexico, while the United States is the PRCs second largest trading partner, after the expanded European Union (25 nations). In 2005, according to PRC data, EU-China trade was valued at $217.3 billion compared to U.S.-China trade of $211.6 billion. Chinas largest export market is the United States followed by the EU-25 and Japan. Although China is a new player in international trade, it is taking major shares of markets once dominated either by other countries and U.S. domestic industries. China is the second largest source of U.S. imports of merchandise ($243 billion in 2005) after Canada ($287 billion). PRC imports surpassed those of Mexico in 2003 and of Japan in 2002. China now accounts for over 14% of U.S. imports (2005), up from 12% in 2003, 8% in 1999, and 3% in 1990, although this share still falls short of Japans 18% in the early 1990s. Second, the data show that while U.S. trade with China is unbalanced, the same is also true for Europe and Japan, although to a lesser extent. China runs a trade surplus with the worlds three major economic centres. The U.S. bilateral deficit in 2005 ($201 billion), however, was 1.6 times larger than that of the EU-15 ($121.8 billion; the EU-25 deficit was $133 billion) and seven times that of Japan ($28.5 billion). (As reported by the United States, EU, and Japan.) Third, the data show that the U.S. trade deficit with China is rising with the overall U.S. trade deficit or growing at a slightly faster rate. Between 1996 and 1998, Chinas share of the overall U.S. merchandise trade deficit averaged 24%; between 1999 and 2001, Chinas share was 18%, and between 2002 and 2004, 22%. In 2005, the United States trade deficit with China constituted 26% of its global trade deficit. Over the same period, the shares of the U.S. deficit in goods trade accounted for by Japan, the Association of Southeast Asian Nations (ASEAN), and the East Asian newly industrialized countries (NICs) have decreased while the European Unions share has increased.

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Fourth, the data show that U.S. exports to China are growing faster than U.S. exports to other nations. U.S. exports to China (up 157% between 2000 and 2005) have grown faster than U.S. exports to Canada (up 19.8% over the same period), Mexico (7.5%), and Japan (-15%), although exports to China have grown from a low base. In 2004, China replaced Germany and the United Kingdom to become the 4th largest market for U.S. goods, moving up from 11th place in 1999. The United States exported somewhat more to China ($41.8 billion) than it did to the United Kingdom ($38.6 billion) in 2005. According to Japanese, European, and Korean data, in 2005, Japan was the largest overseas supplier of products to China with $79.9 billion in exports. South Korea and the EU-15 and were the second and third largest exporters to China in 2005 with $69.8 billion and $61.9 billion in exports, respectively. Fifth, the U.S. industrial sectors most at risk from import competition from China are generally labor intensive, but China is moving quickly up the technology ladder. The sectors in which the United States runs the largest trade deficits are generally those that depend on abundant and low-cost labor, while the United States accrues surpluses with China in some advanced technology items, such as aircraft, as well as in some agricultural products. In Chinas trade with the developed countries, over two-thirds of its exports are low-end manufactures appliances, toys, furniture, footwear, apparel, and plastic goods while 85% of its imports are capital-intensive machinery and equipment, electronic goods, and natural resource- related products. The United States has incurred large trade deficits with China in some high valueadded sectors as well. These sectors include office and data processing machines, telecommunications and sound equipment, and electrical machinery and appliances. In 2003, China became the third largest car market and the fourth largest maker of automobiles with an output of 4.4 million vehicles. Production of cars reached an estimated 5.5 million units in 2005, putting the PRC on par with Germany in automobile production. However, China is not a major global importer or exporter of cars and it remains heavily reliant upon foreign technology in this sector. Sixth, PRC data show much smaller bilateral trade deficits than those claimed by its trading partners. PRC trade data differ from U.S. data primarily because of the treatment of products from or to China (mainland) that pass through the Hong Kong Special Administrative Region (SAR). Other reasons include different accounting systems and a lack of transparency in Chinas data reporting. China counts Hong Kong as the destination of its exports sent there, even goods that are then transhipped to other markets. By contrast, the United States and many of Chinas other trading partners count Chinese exports that are transhipped through Hong Kong as products from China, not Hong Kong, including goods that contain Hong Kong components or involve final assembly or processing in Hong Kong. Furthermore, the United States counts Hong Kong as the destination of U.S. products sent there, even those that are then re-exported to China. However, the PRC counts many of such re-exported goods as U.S. exports to China. Some analysts argue that the U.S. Department of Commerce overstates the U.S. trade deficit with China by as much as 21% because of the way that it calculates entrecote trade through Hong Kong.

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According to PRC data, Chinas trade surplus with the United States in 2005 was $114 billion not $201 billion as reported by the United States government. In Japans case, both countries claim to be running trade deficits with each other. According to PRC data, in 2005, China ran deficits with many of its major trading partners, including Taiwan ($57.9 billion), South Korea ($41.7 billion), Japan ($16.3 billion), Malaysia ($9.5 billion), Saudi Arabia ($8.4 billion), Philippines ($8 billion), Thailand ($6 billion), Australia ($5 billion), Brazil ($5 billion) Iran ($3.5 billion). Seventh, some trade specialists suggest that the surge of U.S. imports from China do not pose an additional threat to U.S. industries and workers because it merely represents a shift of investment and production from other Pacific Rim countries. Chinas share of U.S. imports has been rising while those of other Pacific Rim nations have been falling or holding steady. In terms of absolute values, until recently, U.S. imports from all major Pacific Rim countries continued to rise, although at slower rates than imports from China. In 2005, U.S. imports from the East Asian NICS South Korea, Taiwan, Hong Kong, and Singapore fell or barely rose from the previous year. Eighth, the rapid growth of the Chinese economy is adding to world demand for basic commodities that is causing upward pressure on world prices. Particularly significant are Chinese net imports of crude oil, copper, and soybeans.

China and the Asia Pacific Region

While China is gaining manufacturing prowess and its trade surplus with the United States is spiralling, the country is purchasing heavily from neighbouring trading partners. In 2004, Chinas imports rose by 35%, including machinery, raw materials, and components for manufacturing, although this growth in imports slowed to 17% in 2005. In addition, the bulk of Chinas exports are manufactured under foreign brand names, and over half of Chinas exports are produced by foreign-owned companies. According to PRC official estimates, 70% of PRC exports to the United States contain foreign components, particularly from Taiwan, South Korea, and Singapore. China (not including Hong Kong) has become the largest trading partner of Taiwan and the second largest trading partner of Japan. The PRC has become South Koreas largest foreign investment destination and largest export market. According to Taiwanese and Korean data, in 2005, Taiwans estimated trade surplus with China was $31.9 billion, while South Koreas surplus was $31.2 billion. China has become a huge buyer of raw materials, agricultural commodities, industrial machinery, and electronic components from Southeast Asia, as well as an important source of foreign investment and second largest source of foreign tourists in the region. Chinas top exports to Southeast Asia include machinery, electronic goods, iron and steel, mineral fuels, textiles and apparel, and optical, photographic, and medical equipment. Despite worries about economic competition, in 2004, ASEAN, which ran a trade surplus of $20 billion with China that year (PRC

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data), agreed to establish a free trade zone with China which would be implemented gradually over five years. In the view of many of its major trading partners in Asia, Chinas economic growth and open trade policies have presented both competitive challenges and economic opportunities. However, according to some analysts, Chinas appetite for imports is slowing, while its export production shows little sign of abating. Although ASEAN accumulated a trade surplus with China again in 2005 ($19.5 billion, according to PRC data), Chinas exports to ASEAN grew 50% faster than its imports from Southeast Asia. Some trade specialists suggest that the surge of U.S. imports from China do not pose an additional threat to U.S. industries and workers because it merely represents a shift of investment and production from other Pacific Rim countries. In other words, expanding imports from China have been offset by declining imports from other East Asian or Pacific Rim countries. These countries include those at a similar level of development which are competing directly with China, such as Malaysia and Thailand, and more industrialized countries or special administrative regions that have moved their lower-end production to the PRC, such as Macao, Hong Kong, South Korea, and Taiwan. In sectors such as footwear, handbags, apparel, furniture, and building and lighting fixtures, U.S. imports from China have been displacing those from Hong Kong, South Korea, Taiwan, and Mexico and reducing imports those from other developing Asian nations. As is the case with the United States, Japan has run a trade deficit with China since the 1980s (according to Japanese data). Japans balance of trade with China dropped from a surplus of $6 billion in 1985 to a deficit of nearly $6 billion in 1990. Japans trade deficit with China reached a peak of $26.5 billion in 2001, which was surpassed in 2005 ($28.5 billion). Japans exports to China have grown dramatically in the past few years, its largest exports to the PRC being electronics, general machinery, iron and steel, optical, photographic, and medical equipment, and organic chemicals. According to EU data, the European Union incurred a trade deficit with China of $947 million in 1988, which grew to $121.8 billion in 2005. According to Chinese figures, however, the EU trade deficit with China began in the late 1990s and grew to $63 billion in 2005. Compared to the worlds two other major economic centres, the U.S. trade deficit with China at $201 billion in 2005 was the largest, followed by the EU-15 deficit with China at $121.8 billion and Japan at $28.5 billion. Within the EU, according to trading partner 2005 data, Germanys trade deficit with China was $23 billion, the U.K.s was $18.8 billion, and Frances was $9.9 billion. Chinas trade statistics indicate smaller European trade deficits or even surpluses.

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Japans Merchandise Imports, Exports, and Balance of Trade with China, 1983-2005
120 100 80 60 40 20 0 -20 -40 $Billions

Imports
(Japan's Data)

Exports
(Japan's Dat) a

Balance
(China's Data)

Balance (Japan's Data)

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 Year

European Union Merchandise Imports, Exports, and Balance of Trade with China, 1983-2005
200 150 100 50 0 -50 -100 -150 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 Year $Billions

Imports
(EU/EEC Data)

Exports
(EU/EEC Data )

Balance
(China's Data)

Balance
(EU/EEC Data)

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Chinas Trade Balance, Export and Imports

China Exports
In 2010, China exports totalled $1.194 trillion, down from $1.429 trillion in 2008. Its main exports are electrical goods and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment; China's main export partners are US (17.7%), Hong Kong (13.3%), Japan (8.1%), South Korea (5.2%) and Germany (4.1%)

China Imports
In 2010, China imports totalled $921.5 billion, down from $1.131 trillion in 2008. Its main imports are electrical components and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics and organic chemicals; China's main import partners are Japan (13.3%), South Korea (9.9%), US (7.2%) and Germany (4.9%).

Challenges Faced by China

In the early 21st century, China faced the challenge of balancing its highly centralized political system with an increasingly decentralized economic system. Also, China's economy, though strengthened by liberal economic policies of the 1980s and 90s, continues to suffer from inadequate transportation, communication, and energy resources. However, since the 1980s, China has undertaken a major highway construction program and China is working hard on building world-class infrastructure. China's poor human development index highlights the economic disparity between urban China and the rural hinterlands. Human rights campaigners continue to criticize China for executing hundreds of people every year and for failing to stop torture. Other critical problems include corruption, which affects every level of society, and the growing rate of HIV infection. Tensions between a highly centralized political - and an increasingly de-centralized economic system is also a cause of tension. Another long term threat to China's continued economic growth is the deterioration in the environment, notably air pollution, soil erosion and the steady fall of its water table in the north.

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Chinas 2012 Outlook: Bad News about the Reserve Cut

Weve heard both sides of the debate of how Chinas economy will land. Some have predicted a soft landing, others the contrary. At the same time, many others have said 2012 will be the year of the Europocalypse and the final mile for Chinas economic boom. But what does the Chinese Central Bank feel about 2012, and what can we infer from the Banks recent reserve cut? On Wednesday November 30, Chinas central bank, the Peoples Bank of China (PBC) reversed a June 19 decision to raise the amount of reserve capital it requires Chinese banks to hold. The action represents a major shift from the fiscal tightening China had been deploying to combat rising inflation, and signals a move to monetary easing a clear sign that China is worried that an economic slowdown is starting to get a grip on the countrys economy. The action also coincided with a move by six major central banks, namely the US Federal Reserve, the European Central Bank and the Canadian, British, Japanese and Swiss central banks to cut the costs of existing dollar swap lines to just 50 basis points above LIBOR, thus helping to ease what was fast becoming a chronic shortage of dollars in the interbank lending market. The cut will hold till February 2013 and should help ease a developing liquidity crunch in the interbank markets. The move is said to have been prompted by the Governor of the Bank of England, Sir Mervyn King who made a series of telephone calls to his counterparts. News of the Chinese and the six central bank actions prompted a large bounce in global stock markets, which had been trending rapidly downwards over the last few weeks. Chinas rate cut takes effect on 5 December and is expected to free up more than US$60 billion from Chinese bank reserves, which will now be available for lending to Chinese enterprises. One of the worries for China, however, is that it has been battling a menacing asset bubble in its real estate market, which developed after the governments massive economic stimulus package in 2008. There has to be concerns that some, at least, of this new lending will find its way into an already overheated property market instead of into industrial projects that could help to drive the Chinese economy forward. Another worry for China is that not only is the European sovereign debt crisis causing a pull back in Europes imports from China, it is also damaging global trade credit, which has huge implications for Asian trade. European high yield fund managers point out that beleaguered European banks, faced with tougher capital reserve requirements under Basel III are reacting by cutting off many of their lending lines, with trade credit being one of the most affected areas. Banks have two choices, the fund managers point out. They can raise more capital through equity issuance, but in the current markets this would have to be at a steep discount and would be very diluting for existing shareholders. Or they can cut lending, which reduces the amount of capital they have to hold. Moreover, European banks have a very easy trade available to them that is far more attractive at present than normal commercial lending, with its steep demands on capital reserve requirements. An Italian bank can borrow money from the ECB at 1.5% which it can then use to buy Italian government bonds, which have virtually zero risk capital weighting, and which generate a return for the bank of say 6.6% or higher. With returns of five percent available for no effort, why lend? This is fuelling a growing liquidity crunch across Europe and with Europe providing some 40% of global trade finance, the cut back in European bank appetite for funding trade finance is starting to hammer global trade. Chinese banks and US banks are going to have to take up the slack, but that is going to take time and in the meantime, the absence of readily available trade finance is adding to Chinas slowdown.

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