Chinese Balance of Trade

Introduction:

In May 2012 the National Congress of PRC will approve its 12th Five Years Plan, which is expected to shift the Chinese economic growth model, based on exports, to a new one more focus on Chinese consumers, by employing more and more people in the service sector.[1]

The fact that the exchange rate represents a very important variable in the policy making is not surprising,  “…[it] determines the trade flows, capital flows & FDI, inflation, international reserve and remittance of an economy”. [2]

This topic becomes even more relevant when politics and economics collide one into the other. A clear example of it is about the accusations of unfair manipulation of the exchange rate of the Chinese currency, CNY, in the United States economic-political agenda[3] as it happened recently.[4]

The main critics moved by US policy makers and economists are directed against the Chinese government accused to control its currency to favor its exports and to preserve its commercial surplus. By the other hand, China saw in the recent bill passed in the US Senate and in the American critics for an appreciation of the RMB a way to obstruct the trade ties between the two countries.[5]

Many observers have stressed the fact that the low appreciation rate in currency and the growth in the Chinese export should have increased the commercial surplus of China.

Before seen the charts utilized to demonstrate the recent trends we should consider few points about delocalization or imports from abroad:

  • Is not true that it doesn’t’ exist a direct competition. Basically, is not always convenient to produce abroad or in China, mainly due to some logistic and qualities reasons;
  • Rethinking the previous point it must not forget that nowadays the global production is performing and shaping itself in regional conglomerates (Far East Asia, Europe, North America, etc.).

 

Inflation rate, price of oil and GDP growth Vs foreign currency accumulation:

At the base of the exchange rate, in China, is the sensible relationship between the balance of trade, inflation and the value of its currency in relation with the consumer price index.[6] But this is also at the base of the main critics of US, EU and Japan against China for a faster appreciation not yet allowed by the Chinese government. One of the observations is that a steady rise in the Yuan’s value is supposed to invite the speculators to pour more money into China in an effort to ride the increasing value.

Chinese Inflation rate Chart 1          This chart shows the trends of the inflation rate (%) in China since the year 1999. [7]

In Chart 1 is marked the steady increase in the inflation rate in China except for the year 2009, which reflects the consequences of the outbreak of the global financial crisis began in 2008, which leads to a decrease in the price of oil and other main raw materials.

In fact, the inflation rate represents for China one of the first factors determining the policies on the exchange rate. By one and inflation in afflicting the Chinese consumers facing a higher price on oil and food, and by the other the exports, due mainly in the increasing costs on factories productions and labor forces.

Oil price in ChinaChart 2          Weekly price of oil in US$ per barrel in China from January 2000 to October 2011.[8]

Lowest price was reach the 26th of December 2008, the lowest since January 07th 2005, as show in Chart 2. By comparing the two charts is evident a correlation in the increase and decrease on the Chinese inflation rate.

But what about the exchange rate of the RMB (or CNY, or Yuan), the amounts of foreign currency and the Chinese GDP growth?

The Chinese government knows that is bank system is vulnerable while the country is moving towards a financial liberalization. Therefore the foreign currency could help it to do a recapitalization.[9]

Chinese official reserves of foreign currencies are mostly utilized to purchase American and other foreign/international bonds with a minimal rate of interest.

In Chart 3 is evident a steady increase in the GDP and in the foreign currency reserves accumulate by RPC, both almost doubled since 2008, while the exchange rate policy has helped the sustain the export oriented guidelines.

Chart 3          Foreign currency amount, RMB exchange rate and GDP growth in China since 1977 ( the year before 1978’s first liberalization policies) to 2011.

Still, in the last two years the Chinese economy has been more equilibrated than in the past in its foreign trade relationships. Equilibrium which is still not evident and far from be evident, but still substantial if compared with the past. This is not depending on the exchange rate policies but rather in the internal demand of Chinese consumers’.[10]

Since the exchange rate is a relevant factor in foreign trade, it remains still significant to analyze imports and exports together.

Imports:

In Chart 4 is listed the ranks of the top 10 countries per imports volume in 2010. China has reached the second position in the world economy per imports volume, importing US$ 1.327 billions.

Imports Chart 4 World biggest importers in 2010 (EU is excluded from this chart resulting first if included).

The main products imported are electrical components and machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics and organic chemicals.[11]

The mayor trade partners determining its imports volume are Japan, South Korea, Taiwan, US, Germany, Australia, Malaysia, Brazil, Thailand and Russia.[12]

As showed in the projects presented by Group A during the Course showed that Chinese import volumes are largely composed by those goods destined to be imported, processed or assembled in China, and successively exported as final goods.

Exports:

The one that follows is a chart showing which countries were leading the global exports’ volumes in 2010. China has reach the first position in terms of exports, exporting US$ 1.581 billions.

ExportsChart 5          World top 10 countries rank for Exports (EU excluded again).

The main products imported are electrical components and machinery, data processing equipment, apparel, textiles, iron and steel, optical and medical equipment.[13]

China is currently exporting predominantly to the following US, Hong Kong, Japan, South Korea, Germany, Netherlands, UK, Singapore, India and Australia (or Taiwan).

Despite of the fast and widespread improvements in Chinese factories productions and the increase in consumptions, the relationship of imports and exports between industrialized countries, such as Europe, and China is still bi-directional, if we took in exam the nature of the final goods transported. In fact, final goods must be differentiate by row materials to be processed or by those goods imported to be assembled and successively exported again.

Chinese final goods, in fact, are still characterized by high amount of labor force and low technological contribution. Instead, the final goods imported from Europe are composed mostly by high-technological products, necessary to improve Chinese productivity but which RPC company are not still able to produce by itself.

 

Balance on trade with China

The problems related with the Chinese policies on the control of the exchange rate policies are not always influent as US claims, or at least not severe as in the american case.

As demonstrate in the following Chart 6, between the main trade partners the balance on trade is not as wide as for the United States. Only if we consider the macro contest the balance or un-balance of trade could be marked, as showed later on in the EU balance on trade with China.

Chart 6          Imports, Exports and Balance trade with China’s top 8 trade partners.

Country

Exports

Imports

Blance of trade

Japan

97,87

-130,91

-33,04

South Korea

53,67

-102,55

-48,88

Taiwan

20,50

-85,72

-65,22

US

220,80

-77,46

143,34

Germany

49,92

-55,72

-5,8

Australia

20,64

-39,49

-18,85

Hongkong

166,23

-8,7

157,53

Netherlands

36,68

-5,12

31,56

UK

31,28

-7,88

23,4

Total

697,59

-513,55

184,04

Tab 1  Balance of trade between China and its major trade partners in billion of US$ from a Chinese prospective.

In this case, what have been measured were the exports and the imports, from a Chinese prospective. So the total balance on trade for China, or trade surplus, is of US$ 184,04 billions for the last year.

Balance of trade:

 

“The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level”. [14]

This was the doubt rose by President Hu Jintao to the monetary policy of US in answer to the American deficit in its balance of trade.

Still it must me take into account that even if the US$ is not the only currency available in the global market, it still remains the most important. “In the third quarter of 2010, the allocation of only 56 per cent of global reserves was known. Of that, 61 per cent was in dollars and 27 per cent in euros. China does not reveal the composition of its reserves. But it must be heavily invested in dollars, too”..[15]

Chart 7          Balance of trade in billion of US$ between China and US from an American prospective. [16]

Except for 2008, the balance of trade of the US with China has kept on growing, and what experts are expecting a reduction in the volume of balance of trade in the next few years, due to a higher exchange rate and an increase in domestic consumptions.

Export

Import

Balance of trade

SUM (2001-2011)

697,0795

3.262,098

-2.565,0723

AVG (2001-2011)

50,832

243,984

-193,152

Tab 2             The total (SUM) and the average (AVG) volume of exports, imports and balance of trade between US and China in the years 2001 to 2011.

The gap between total and average export & import of US with China, in Tab2, reveals a ration of almost 1:5 exports to imports. The higher between the Chinese trade partners.

 

Trades with Europe:

Since the beginning of the global financial crisis the devaluation of the Euro has for example participate in sustain German exports, helping in sustain the European assets[17], China since then was seen as one of the pillars to sustain the global economics.

In the 17th of October 2011, the China Council for the Promotion of International Trade (CCPIT), has reported that China has become the largest trading partner of UE since July, surpassing the US.[18]

To analyze this tendency lets get a look to the  EU-China Balance of trade[19] [20]

Import

In billion of  €

Export

In billion of  €

Total

In billion of  €

SUM (2000-2011)

642.895

-1.812.683

-1.169.788

AVG (2000-2011)

58.445

-164.789

-106.344

Tab 3  The total (SUM) and the average (AVG) volume of exports, imports and balance of trade between China and EU in the years 2001 to 2011.

In this case the ratio between AVG Import and Export is just of 1/3rd.

Chart 8          Import & export with EU and Balance of trade [Chinese prospective].

By comparing the two trades, the American  we can see that within the years 2001 to 2010 the average amount of US and EU imports and exports in billions of US$ and the deriving (un)balance of trade is the one that follows.

Chart 9          A comparison of the AVG American and European Import-export volume and Balance of trade with China between 2001-2011 in US$ billion.

The total amount of imports and exports, the total balance of trade, between the years 2001 and 2010 of US and EU in the following picture shows that:

Chart 10        A comparison of the SUM American and European Import-export volume and Balance of trade with China between 2001-2011 in US$ billion.

US are not only importing more from China than Europe but also exporting less, showing a balance of trade 1,6 times higher. This condition can be even more evident by comparing the balance of trade between some European state members, such as Germany or Nederland with US, even more drastic and pronounced.

Conclusions

Is too early to conclude whether China will  be able in the short-run to achieve a trade balance, but surely it would happen only if the export towards US and EU will diminish and the imports grow. Some Chinese experts asserts that starting from 2012 the exports volume should diminish due to dept crisis in US and EU and to a Rmb appreciation (plus trade protectionism).[21]

In order to reach a balance point a further revaluation of the Rmb will necessary. Also more measures will be indispensable to sustain the trade, such as promoting the quality of the goods to be export (means that even if labor force will be more expensive, at least the products will improve their quality), increase and spread more efficiently the wealthy within the population, and therefore to produce a new exchange rate regime approach step by step.

Finally a last word must be spent around the role of the Rmb. Will it became a global reserve currency as well? Probably yes, because China by proclaiming its role as leader of the political and economic arena must also proclaims its currency to be reliable and global. The only solution in that case will be to move aside it from the US dollar and to be freely traded and convertible.

Maybe in the meanwhile, what it could happen is a revaluation of the RMB and a steady reduction in the accumulation of the dollar. This strategical change will also change the trade habits of China with the rest of its trade partners in terms of products, prices and in quality of the services that will be offered.


[1] ROACH S., Stephen, “La svolta della Cina”, IlSole24Ore, 24 February 2011, http://www.ilsole24ore.com/art/economia/2011-02-24/svolta-cina-150951.shtml?uuid=AaGJUzAD&fromSearch .

[2] NUSRATE, Aziz, “The Role of Exchange Rate in Trade Balance: Empirics from Bangladesh”, University of Birmingham, 2008, pg.2.

[3] ANONIMOUS, “Hard strike up of Obama with China: manipulates its currency. And against Europe: Acts quickly and with a concrete plan”, IlSole24Ore, 6 October 2011,    http://www.ilsole24ore.com/art/notizie/2011-10-06/obama-crisi-euro-rischia-181231.shtml?uuid=Aa4MibAE&fromSearch .

[4] In this article the dispute as been described as “commercial war” between RPC and USA. MAN.An., 12 October 2011, “China warns America: the agains-yuan law is like a time bomb that could provoke a commercial war”, IlSole24Ore, http://www.ilsole24ore.com/art/notizie/2011-10-12/cina-avverte-america-legge-124135.shtml?uuid=AadjFKCE&fromSearch.

[5] ANONIMOUS, Currency Stand, Beijing Review, 13 October 2011, Vol.54, n.41, pg.5.

[6] BRADSHER, Keith, “China Lets Currency Appreciate a Bit Faster”, The New York Times, 29 December 2007, http://www.nytimes.com/2007/12/29/business/worldbusiness/29yuan.html .

[7] For year 2011, is expected to reach the 5,5% of increase. ANONIMOUS, 15 October 2011, “China think tank: 2011 inflation rate likely 5.5%”, Market Watchhttp://www.marketwatch.com/story/china-think-tank-2011-inflation-rate-likely-55-2011-10-15

[8] Data available from EIA, U.S. Energy Information Administration: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WEPCDAQ&f=W .

[11] ANONIMOUS, “ China Trade, Imports and Exports”, EconomyWatch, 30 June 2010, http://www.economywatch.com/world_economy/china/export-import.html

[12] Lately Russia and China are signing many agreements to promote their inter-regional cooperation. For further readings visit: On global recovery: (http://www.larouchepub.com/pr_lar/2011/lar_pac/110915agreement_ru_ca_develop.html ); On border agreements:( http://www.chinadaily.com.cn/china/2008-07/22/content_6865847.htm ); and, On currency:(http://www.ibtimes.com/articles/85424/20101124/china-russia-drop-dollar.htm ).

[13] Ibdr.

[14] WOLF, Martin, “Why China hates loving the dollar”, Financial Times, 25 January 2011, http://www.ft.com/intl/cms/s/0/456895b0-28c0-11e0-aa18-00144feab49a,s01=1.html#axzz1c5AYMFz6.

[15] Ibdm.

[16] Trade in goods with China, U.S. Census Bureau, 2011,  http://www.census.gov/foreign-trade/balance/c5700.html

[17] ROGOFF Kenneth, “The final encounter could wait”, IlSole24Ore, 3 January 2011, http://www.ilsole24ore.com/art/economia/2011-01-03/scontro-finale-attendere-183323.shtml?uuid=AYY0xlwC&fromSearch

[18] ANONIMOUS, “China Become EU’s Largest Trading Partner in July 2011, Surpassing the US ”, MOFCOM, 17 October 2011, http://www.bizchinanow.com/Contents/Channel_1850/2011/1017/310373/content_310373.htm .

[19] ANONIMOUS, “EU27 deficit in trade in goods with China of 170 bn euro in 2008”, EU-China Summit, 18 May 2009, http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18052009-BP/EN/6-18052009-BP-EN.PDF .

[20]ANONIMOUS, “EU-China Trade Relations”, Directorate-general for external policies, 2001, http://www.europarl.europa.eu/activities/committees/studies/download.do?language=en&file=48592#search=%20EU%20-%20China%20

[21]ANONIMOUS, “China heading for trade balance in 2012”, Khaleej Times, 23 August 2011, http://khaleejtimes.ae/biz/inside.asp?xfile=/data/biztalk/2011/August/biztalk_August39.xml&section=biztalk .

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