Foreign Trade Environment in China

Liping HeSchool of Economics and Business Administration

Beijing Normal University

23 March 2010

Contents

• China’s Foreign Trade: A snapshot• Geography and Foreign Trade• Government Policy and Regulation on Foreign Trade• Labor Market • Finance and Banking• The Exchange Rate Issue• China’s International Relations

China’s Foreign Trade:A Snapshot

• China’s foreign trade has been growing rapidly in last three decades, with its annual growth rates averaged at 15%

• Foreign trade, together with foreign direct investment inflow, has served as an important “growth engine” for the Chinese economy

• China is now among largest trading nations in the world, and perhaps the world’s top exporter (the role once occupied by Britain, America, Germany, or Japan)

• Yet somehow different with its predecessors, China mainly relies on its vast manpower, not necessarily on technology, in achieving the leading role in foreign trade.

• Looking ahead, foreign trade will remain as essential for Chinese economic growth.

China’s Trade in Goods, $ billion, 1991-2008

China’s Commodity Export, $ billion, 1991-2008

Geography and Foreign Trade(Internal)

• Nearly 4/5 China’s foreign trade ($2,562 b) takes place in five coastal provinces

• GuangDong ($718 b), Jiangsu ($430 b), Shanghai ($314 b), Zhejiang ($242 b), and Shandong ($188 b)

• These coastal provinces are also largest ones where foreign direct investment (FDI) flows in.

• Comparative advantages: (1) geographical position (2) infrastructure (3) historical connections (4) regional governments’ drive

Geography and Foreign Trade(External)

• China’s main trading partners: EU, US, Japan, ASEAN, Hong Kong

• Geographical diversification has been remarkably ostensible in the recent years

• Export diversification in geography: market driven and product competitiveness

• Import diversification in geography: resource and technology driven

Government Policy and Regulation on Foreign Trade

• China becomes a member of World Trade Organization from 2001, and commits to the principle of free and fair trade

• Currently China is under negotiation with the U.S. and EU about the Market Economy Status (MES)

• China has so far signed 20-odds bilateral FTAs with other trading partners (latest one with ASEAN from January 2010), and has CEPA with Hong Kong (and similar one with Taiwan)

• China has engaged a number of talks on establishing and developing multilateral framework on trade and investment promotion schemes, including APEC and the Doha round

Government Policy and Regulation on Foreign Trade

• Ministry of Commerce is the Central Government agency responsible for policy making and regulation implementing

• There are four Special Economic Zones (SEZs), and recently the Hainan province approved as the “International Tourism Island”: these titles give the regions some policy privileges.

• In almost every province and large city, there are “Economic Development Zone”, where local authorities have certain discretion over the matter of foreign trade and investment.

• Regional and local governments have strong appetite for external development, seeking growth in foreign trade and FDI inflow.

Labor Market

• China today is in general a “labor-based economy”, not exactly a “knowledge-based economy”.

• “Surplus labor” has been diminishing as population slows down and non-farming employment grows rapidly.

• But recently emerges a problem of “oversupply of college graduates”.

• Labor flexibility across regions and occupations is relatively high.

• Low flexibility mainly a problem with employment in the public sector and state-owned enterprises (SOEs).

• New “Labor Contract Law” is introduced from 2008.

• Trade unions and social security system are under development.

Finance and Banking

• China now has fairly a competitive market structure in the finance and banking sector.

• Five largest national banks, ten-odds regional banks, and hundred-odds city banks.

• Full-scale foreign banks are in operation from 2006. • Securities (issuing and trading) are also active. • Local financing becomes increasingly accessible for

foreign firms.

The Exchange Rate Issue

• China has adopted a de facto “dollar-pegging” regime since the mid-1990s, in a backdrop that the fight against domestic inflation and endless devaluation expectations was running high.

• A reform on the exchange rate regime took place in July 2005, aimed to let the RMB to have more flexibility.

• But the reform has not been so successful because China’s financial markets and the corporate sector were not well prepared to cope with exchange rate variability on their own.

• The recent global financial crisis had effectively made the RMB more closely tied to the dollar than before.

• Whether and how much the RMB has been undervalued is an intellectually debating issue.

• China would see through a gradual reform in the exchange rate regime.

Recent Trends in Trade

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Trade Bal ance (Bi l $) I mport Growth Export Growth

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International Relations

• China wishfully sees a “multi-polar world” – reluctantly sees itself as a “superpower” or a contender.

• Foreign policy is dominated by territorial and political integrity, which is often the cause of frictions with the US on the issue of Taiwan, or that with Europe on the issue of Tibet.

• East Asia has been on the top priority of China’s diplomacy in the recent years.

• Many in China would like to see to make steady progress on the issues such as human rights, democracy, and ideology.

• Leaders of China commit themselves to “peace and development”.

International Relations - Asia

• China sees itself in the center stage of Asia• China tries to seeks to maintain friendly and cooperative relations

with all other Asian countries as it is believed to be at the core for overall stable international relations

• China’s relations with other Asian countries are sometimes troubled by historical issues, border (territory) issues, and trust issues

• Notable that with two Koreas, Japan, countries neighboring the South China See, and India.

• Economically, China’s relations with all other Asian countries have developed remarkably over time (“Triangle relations between the U.S., China and Asia”).

What China Exports

• China exported $1,218 billion, equivalent to 37.5% of the country’s GDP

• Of the total exports, $617.5 billion was “processed exports”, or $695.4 billion was undertaken by foreign firms

• Great variety in exports• Major “staples”: textile and clothing; metal products;

machinery and electronics; car parts; furniture and toys

What China Imports

• China imported $955.9 billion, equivalent to 29.4% of the country’s GDP

• Of the total imports, $368.5 billion was that for “processed exports”, or $559.8 billion was undertaken by foreign firms

• Great variety in imports• Major imports: fuels and other mineral products;

chemicals; plastic and rubber products; machinery and electric equipment; advanced industrial equipment

Trade in service(2007)

Export Import Balance

Total trade in service ($ million) 122,206 130,111 -7,904

1.Transport 31,323 43,270 -11,946

2.Travel 37,233 29,786 7,446

3.Telecommunication 1,174 1,081 92

4.Construction service 5,377 2,909 2,467

5.Insurance 903 10,664 -9,760

6.Financial service 230 556 -326

7.IT service 4,344 2,208 2,136

8.Patent and Royalty 342 8,192 -7,849

9.Consulting service 11,580 10,856 724

10.Advertizement and Publicity 1,912 1,336 575

11.Filming and audio-video products 316 153 162

12.Other commercial service 26,914 18,238 8,676

13.Gov΄t service unrecorded elsewhere 552 856 -304

Thank You!