PRESENTED BY: CARRIE BANG WENDY GREER BONITTO HOUSEN CHINA-U.S. TRADE RELATIONS CHINA U.S.
AGENDA • China Financial Markets, Economy & Political • U.S. Financial Markets, Economy & Political • Trade Agreements and Regulations • US and China Balance Accounts • Current Account • Capital Account • Summary and Analysis • Conclusions
China’s Political History • Early Chinese History before 1949 • Economy barely able to meet basic needs of huge population (droughts, floods, & civil disorders) • China was one of the 23 original signatories of the General Agreement on Tariffs and Trade (GATT) in 1948, and reinitiated membership in 1986. • (1953-1975)implementation of 5 year plan • Basic framework of the Chinese central planning system established • Improving management in industry, commerce, and the fiscal relationships between the central and local governments
Readjustment of 1959 • Open rural free markets: Govt. concentration in technological advancements in agriculture • Households to cultivate small private plots, run sideline productions, and responsible for profits and losses • agricultural taxes • Recentralized oversight of industrial enterprises back to Central Government • defense industry, railroads and major harbors • approval authority of all large fixed investments • 1969 recovery of economy, agriculture & industrial output by 23.8%
China’s Trade History • People’s Republic of China (PRC)1949 • No significant foreign trade for first 30 years • 1950s and 1960s total value of trade 2% of GNP • Annual import & export volume & national income averaged -12.2% (1950’s) - 8.4% (1960’s) - 9% (early 1970’s) • 12/15/1978:US & China announced that the two governments would establish diplomatic relations on 1/1/1979
China’s Trade History Cont… • Trading partners • 1950’s – Soviet Union and Eastern Europe • L/T credits from the Soviet Union U.S.$1.9B • Funding of construction projects • 1960’s – Developing countries • Deferred payment method to import U.S. $670M worth of technological & equipment from the West • Banking • People’s Bank of China (central bank, founder of China’s banking system, and govt. treasury) has sole responsibility of issuing currency and controlling the money supply • Bank of China handles dealings in foreign exchange
China’s Account Balances • 1964 • negative balance with USSR reduced to U.S.$55M • surplus of U.S.$345M in international financial resources (monetary gold holdings and foreign exchange trade balances) • 1965: cleared all of USSR debt • 1968:redeemed all national bonds and free of L/T external and internal debts • 1978:$900M in current accounts surpluses and $1.1B deficits in capital accounts • 1980: $1B in current account surplus
Source: Chinese government statistics. Top six investors according to cumulative FDI from 1979 to 2005. CRS Report for Congress, China’s Economic Conditions July 12, 2006
Foreign Direct Investment to China Sources: U.S. Departments of Commerce and State, Doing Business In China: A Country Commercial Guide for U.S. Companies, 2005, and China Daily
China’s Foreign Exchange Reserves Source: International Monetary Fund, Direction of Trade Statistics, and official Chinese statistics
China’s Foreign Exchange Reserves and Chinese Ownership of U.S. Treasuries $Billions
China’s and WTO Membership 9/17/01: WTO successfully concluded negotiations on China's terms of membership: • Non-discriminatory treatment to all WTO Members • Eliminate dual pricing practices of domestic and exports of goods • Revision of China’s existing domestic laws and enacting new legislation fully in compliance with the WTO Agreement • China will not maintain or introduce any export subsidies on agricultural products
Recent Controversies • The Chinese government announced the formation of a new agency to oversee investment of China's $1 trillion in foreign currency reserves, March 2007 • Most of the reserves China now accumulates are conservatively invested in U.S. Treasury bonds and other government securities • Analysts say the agency could deploy hundreds of billions of dollars to acquire financial or strategic assets around the world, particularly in developing countries in Africa and Latin America. • “They're not going to be looking for financial assets, but energy assets and natural resources, minerals — things China desperately needs," J.P. Morgan analyst • The biggest priority is safety, and under the principle of security we will try to will try to increase the efficiency of management and the investments' returns," Finance minister of China, Jin Renqing.
U.S. Trade History • Highlight trends in the capital account in recent decades • Relationship with GATT and WTO
Foreign Owned Assets in the U.S. • Foreign Official Assets • Reported Liabilities • Direct Investment
Capital Inflows to the U.S. • Relationship between capital inflows and foreign investors (liquidity of capital) • Capital Inflows finance the trade deficit • Savings and Investment in the U.S.
Capital Flows and the Dollar • Capital Inflows affect the international exchange value of the dollar
Purchases and Sales of U.S. Securities • Trends in Security Transactions between the U.S. and foreign countries • Relationship between Treasury Securities and Stock Prices • Foreign Official and Private Purchases of Treasury Securities
Foreign long-term investments of foreigners buying our Treasuries, Agencies, corporate bonds and equities, minus U.S. purchases of their bonds and equities
Purchases of Treasuries since the beginning of 2005 by the biggest holders • Caribbean Banking Centers - acting on behalf of investors from other nations who are passing money through the banks of the Caribbean to make their purchases • British investment - large percentage of this flow is indirectly from other countries using London money center banks to make transactions for them
Amounts in $Billions • Shift in the composition of the purchases of Treasuries: • Central Banks are buying less and the rest of the public is buying more • In the month of March 2005 the central banks actually sold off $15B from their holdings, which was the second highest rate ever. • The only bigger month was during the Russian default and the LTCM collapse of August 1998. • This shift is also consistent with the halt in Chinese and Japanese purchases, as they use official institutions to carry out their actions.
US purchases of foreign stocks were close to a high at $14.4B in 2005, reflecting US attitude becoming more positive for foreign investments. This is growing just as foreigners have slowed their buying of US stocks from the time of our stock bubble
Trade Policy Developments • December 2006: • U.S. & China talks on China’s exchange rate flexibility, the bilateral trade imbalance, PRC intellectual property rights violations, energy and the environment • July 2005: • 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 trading within a narrow 0.3% band against this basket of currencies • U.S. dollar, euro, Japanese yen, and South Korean won, with a smaller proportion made up of the British pound, Thai baht, and Russian ruble
Compliance of WTO Obligations • U.S. complaints: • China’s policies to promote the development of mainly state-owned industries • Issuance of regulations on auto parts tariffs that discourage the use of imported parts • “Race to the bottom”
Chinese Ownership of Major U.S. Companies • 2004: Lenovo Group Limited, a computer company primarily owned by the Chinese government, signed an agreement with IBM Corporation to purchase IBM’s personal computer division for $1.75 billion. On April 30, 2005, the acquisition was completed. • 2005: Haier Group, a major Chinese home appliances manufacturer, made a $1.28 billion bid to take over Maytag Corporation. The bid was withdrawn on July 19, 2005, after Whirlpool made a higher bid. • 2005: The China National Offshore Oil Corporation (CNOOC), through its Hong Kong subsidiary (CNOOC Ltd.), made a bid to buy a U.S. energy company, UNOCAL, for $18.5 billion; CNOOC withdrew its bid.
Balance of Payment Definitions Current Account • Trade balance between net sales of import and exports of goods and services. Capital and Financial Account • Net balance between foreign and domestic purchases of assets – stocks, bonds, loans, FDI-, and reserves.
Capital Market Comparison China • $72.4 Billion in FDI • $39 Billion Capital Account Balance (USD) • $114 Billion Current Account (USD) • $1.347 Trillion in foreign reserves • Hong Kong is largest investor • U.S. 5th largest Investor U.S. • $95 Billion FDI • $715 Billion Capital Account Balance • ($201 Billion) Current Account • Caribbean banks are largest investors • $66.85 Billion in foreign reserves (USD)
Benefits U.S. • Capital account surplus allows domestic investment to be maintained at a higher level which is critical for promoting future growth. PRC • Capital deficit allows foreign investors to receive higher returns on savings than they would have gotten in their domestic market
Factors Affecting Capital and Financial Accounts • National and Domestic investment levels. • Favorable business climate and global competitiveness. • High productivity and growth rate. • Size and efficiency of financial market • Global acceptance of a country’s currency. • Policy decisions on fixed exchange rates.
Recommendations China • Reduce domestic savings in relation to domestic investments. • Greater exchange rate flexibility and further financial sector reform in PRC is needed. • High level of capital investment is critical for promoting future growth. • Surplus in Balance of Payment Accounts may create real estate bubble and stock bubble; susceptible to speculative attacks.
Recommendations U.S. • Raise domestic savings in relation to domestic investments and reduce fiscal deficit in U.S. • No adverse effect on GDP once Current Account deficit can be offset by Capital Account Surplus.
Conclusion • U.S. carries Current Account deficits and Capital account surplus with its trading partners; standoff with China is more political than economical. • U.S. can sustain trade imbalances indefinitely once the Capital Account surplus can offset the Current Account deficit with minimal effect on real GDP and economic growth. • It's best to view trade deficits in the context of growth, unemployment, inflation, and other measures of economic performance.