keskiviikko 25. elokuuta 2010

China is the winner in international trade - Finland has a lot to learn

Since the 1980s, China has been the fastest-growing nation with an average annual GDP growth rate over 10%. Exporting has been the primary catalyst of rapid economic growth. In the 1980s, China permitted FDI (Foreign Direct Investment) inflows for foreign investors with two conditions: export creation and joint ventures with Chinese firms. For FDI, China opened special economic zones (SEZs) [1] along the coast and, 14 coastal cities/ 3 coastal regions. China provided favored tax treatment for foreign investors and laws on contracts, patents, and other matters of concern to foreign businesses according to international standards. A major growth factor is China state’s investment in communication[2] and traffic[3] and in technology industries[4]. Following Deng Xiaoping’s[5] "socialist market economy", China has allowed the private sector to invest in export-oriented consumer industries such as the textile and clothing. A factor of Xiaoping’s success model has been to follow the “One Country, Two Systems policy” in Hong Kong and Macao that are the former European colonies[6]. Hong Kong and Macau are both free to participate as full members in international organizations, such as the WTO. When the former colonies are global centers of trade and finance, 98% of banking assets in China’s continent are state owned[7]. China has a well structured group of financial institutes:

1. People's Bank of China (PBC) is mainly responsible for international trade and overseas transactions

2. Bank of China (BOC) and its branch offices in many countries manages remittances of overseas Chinese

3. China Development Bank (CDB) funds economic development and outward FDI

4. Agricultural Bank of China (ABC) funds the agricultural sector

5. China Construction Bank (CCB) is responsible for capitalizing a portion of overall investment and for providing capital funds for certain industrial and construction firms.

6. Industrial and Commercial Bank of China (ICBC) conducts commercial transactions and acts as a savings bank for the public. 75% of state bank loans go to state owned enterprises (SOEs)[8] that provide inputs from utilities, raw material, and energy that facilitated private sector to grow and to invest, the foundation of national economy.

As a paradox to a "socialist market economy", China’s income distribution is continuously widening. Because of their success in international trade, a growing number of persons are becoming ultra-rich[9]. China’s average per capita income is relatively low[10] worldwide - $6,675 (ppp) in 2009[11]. Poor people are living in the vast rural regions[12]. The three wealthiest regions in the continent China are along the southeast coast[13]. China’s governmental policy is designed to remove the obstacles to accelerated growth in the wealth regions. Shanghai by itself accounts for 8-10% of China's gross value of industrial output and the east coast accounts for about 60% of China’s imports and exports[14]. The People's Republic of China (PRC) has wisely tolerated Hong Kong - GDP per capita $43,862 (ppp [15]) and Macao - GDP per capita $58,262 (ppp[16]) that as regions are among the richest countries in the world. Hong Kong is the second largest stock market in Asia after Japan. In 2007, Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange in China (mainland) had a market value of $1 trillion. China (mainland) is the third largest stock market in Asia and will be the world's third largest stock market after the U.S. and Japan by 2016. China’s (mainland) stock of money[17] is the third biggest in the world.

Table 1: The stock of money in 15 leading economies

Rank country Stock of money[18] Date of Information

1 European Union 5,542,000 31.12.2008
2 Japan 5,417,000 31.12.2008
3 China 2,434,000 31.12.2008
4 United States 1,436,000 31.12.2008
5 Burma 622,600 31.12.2008
6 Canada 356,200 31.12.2008
7 India 278,800 31.12.2009
8 Switzerland 275,500 31.12.2008 est.
9 Russia 252,500 31.12.2008
10 Australia 248,500 31.12.2008
11 Sweden 185,400 31.12. 2008
12 Denmark 155,600 31.12.2009
13 Hong Kong 127,300 31.12.2009
14 Brazil 125,000 30.12.2009
15 Poland 118,200 31.12.2008

China’s labor force is 813.5 million persons (2009 estimation) of which about 50% is working in agriculture, forestry, and fishing. There is a huge potential to improve the productivity and international competitiveness of China’s manufacturing industry[19].The official unemployment ratio for urban areas is 4.3% (September 2009 estimation) [20]. About 200 million rural laborers[21] and their dependents have been relocated to urban areas to find work. From 50 to 100 million surplus rural workers were adrift between the villages and the cities, many subsisting through part-time low-paying jobs. When including migrants the total unemployment in urban areas will be boosted to 9%. In rural areas the underemployment is still a serious social problem. China needs adequate job growth programs for tens of millions of migrants and new entrants to the work force. In 2008 the export demand for Chinese products, e.g. in toy and textile manufacture, calmed down as a result of financial crisis. China’s labor markets were in imbalance since 20 million jobs in 67,000 factories were lost[22]. In the long run, there is strong demand for young workers in manufacturing industries. However, Chinese school children prefer to attend college rather than minimum-waged factories. The positive result of education is that China provides a huge increase in the world’s collective brain capacity.

China expanded the public sector to take up the slack caused by the global financial crisis[23]. In order to deal with the crisis of 2008–2009, China launched its Economic Stimulus Plan ($586 billion), called China's "New Deal" financed from China’s foreign exchange reserves (over $2 trillion)[24] and was focused on investment into infrastructure development, such as the rail network, roads and ports[25]. In 2009, China's economy grew by 8.7% and its GDP reached $4.9 trillion.[26] China is the second largest economy in the world after the U.S. (GDP $8.77 trillion, measured in purchasing power parity, ppp)[27]. Because of stimulus-driven domestic demand imports grew faster than exports. The trade surplus shrank 34% in 2009[28]. In July 2010 China’s surplus climbed to $28.7 billion. Exports grew 38.1% from the same month a year earlier, while imports rose only 22.7%[29]. China is the world's leading exporter. About 80% of China's exports are manufactured goods. Its exports are over $1.5 trillion (30% of GDP) slightly over Germany's exports[30]. Table 2 shows the distribution of China’s trade.

China’s primary export commodities include electrical goods, apparel, textiles, iron and steel, optical and medical equipment. China’s primary import commodities include oil and mineral fuels, optical and medical equipment, metal ores, plastics and organic chemicals. China's main
export countries 2008) are US 17.7%, Hong Kong 13.3%, Japan 8.1%, South Korea 5.1%, Germany 4.1% and the main import countries Japan 13.3%, South Korea 9.9%, US 7.2%, Germany 4.9%[31] The intra-regional trade is important for China. About 50% of China's imports come from South-East Asia, and 25% of China's exports go to the same destinations. China’s export to the U.S. has been a political issue since China’s trade surplus with the U.S. jumped to $232.5 billion in 2006 doubling from 1999[32]. On June 2010 China’s central bank finally announced that it will allow the country’s currency, the renminbi, to fluctuate more against other currencies, a decision that the U.S. expected to lead to the renminbi’s appreciation against the dollar. However, the pace of that appreciation has been very slow so far. A stronger renminbi would make Chinese export products more expensive in foreign markets, and would make foreign goods more affordable for Chinese buyers.[33] The political debate between the U.S. and Chinese governments is useless since the primary decision-makers are the U.S. consumers and traders. Many of the big U.S. traders are active partners with China. Wal-Mart, the world’s largest retailer, is China's 7th largest export partner, just ahead of the UK. China can take so big markets shares of Wal-Mart for the reason that Chinese firms are ready to provide full-scale services to Wal-Mart combined with the reasonable prices.

Besides China there are two big industrializing countries in Asia, India and Russia. China is India's largest trade partner. Bilateral trade rose 34% to $51 billion in 2008 from the year earlier. While trade is flourishing, the economic rivalry is becoming harder. In 2009, India blocked Chinese toy imports for safety reasons. India has a dozen antidumping cases against China at the WTO. India uses to claim that while China talks about free trade China subsidizes exporters, obstructs Indian farm imports and supports Chinese firms who collapse weak Indian industries. Even in complementary trade areas, there have been problems recently. Indian trading companies have complained that Chinese steelmakers have backed away from orders of Indian iron ore, causing major losses. The Chinese who are doing business in India complain about discrimination. India and China still are far from forging a broad economic alliance that is the common mission. Despite both countries oppose the U.S. on farm imports at the Doha Round they compete fiercely for export markets, energy assets and investment projects.[34] In 2009, the bilateral trade between Russia and China declined 32% to $38.8 billion, according to Russian and Chinese statistics. Chinese exports to Russia fell 47% in the year to $17.5 billion[35]. China exports manufacturing goods, such as apparel, footwear, machinery and electronics to Russia. China has about 750 investment projects in Russia, involving $1 billion[36]. Russia’s crude oil is transported by rail and electricity exports via Russian electricity grids. Russia is building the Eastern Siberia-Pacific Ocean oil pipeline with a branch to Chinese border. Russia has power grid monopoly and Unified Energy System of Russia (UES) is building some of its hydropower stations with a view of future exports to China.[37] China and Russia can easy identify the complementary trade areas. The bilateral trade system is, however, restrictive and sensitive to politics.

China’s production facilities have only partly been modernized. Most of its industrial output still comes from ill-equipped facilities. The technology level and quality of industry is in average relatively low. The public sector is mainly made up of State Owned Enterprises (SOE's). Major state industries are iron, steel, coal, machine building, light industrial products, armaments, and textiles. By 2002 the share in gross industrial output by state-owned and state-holding industries had decreased to 41%, and the state-owned companies themselves contributed only 16% of China’s industrial output.

These industries completed a radical reform in the 1980s and the 1990s. The 1999 industrial census revealed that there were 7,930,000 industrial enterprises at the end of 1999 (including small-scale town and village enterprises); total employment in state-owned industrial enterprises was about 24 million.[38] The automobile industry has grown rapidly since 2000, as has the petrochemical industry. Machinery and electronic products became China's main exports. China is the world’s leading manufacturer of chemical fertilizers, cement, and steel. Out of the five busiest ports in the world, three are in China. The majority of China's FDI inflows come from Hong Kong, Macau and Taiwan. According to a study "World Investment Prospects to 2010”, China will receive over $80 billion FDI inflows when India will attract $14.3 billion[39].

[1] Jao, Y.C. (Editor) and Leung, Chi-Kueng (Editor) (1987) China's Special Economic Zones: Policies, Problems and Prospects, OUP China.
[2]China's cell phone users top 670 million and Internet users 162 million in 2007 making China the second largest Internet user after the U.S.
[3] China has 77,834 km railways (number 3 after India and Canada), 3,583,715 km roadways (number 2 after the U.S.) and 110,000 km navigable waterways (number 1) CIA - The World Factbook
[4] China is the largest producer of steel in the world, the second in electricity after the U.S., and the third in automotive vehicles after US and Japan CIA - The World Factbook
[5]Deng Xiaoping (1904-1997) was a Chinese politician, statesman, theorist, and diplomat. As leader of China from 1978 to the early 1990s, Deng was a reformer who led China towards a market economy. Deng Xiaoping: Leading Thinker in China's Market Economy
[6] Wang, Fei-Ling (1998) Institutions and Institutional Change in China: Premodernity and Modernization, New York, Palgrave Macmillan.
[7] Chui, Becky and Lewis, Mervyn K. (2006) Reforming China's State Owned Enterprises and Banks, London, Edward Elgar Publishing, p. 205.
[8] Chui and Lewis, 2006, p.11.
[9]According to the latest Forbes China Rich List (2007), China had 66 billionaires, the second largest number after the United States, which had 415 IBISWorld Newsletter March 2008, China – Let the Good Times Roll, IBISWorld
[10] According to the IMF, China belongs to the lower middle category by world standards.
[11] World Bank (2009)
[12] Fighting Poverty: Findings and Lessons from China’s Success (World Bank). Retrieved August 10, 2006.
[13]1. centred on the Pearl River Delta; 2. along the east coast, centred on the Lower Yangtze River; and 3. near the Bohai Gulf, in the Beijing–Tianjin–Liaoning region. Economy of the People's Republic of
[14] China Statistical Yearbook 2007
[15] World Bank (2009)
[16] World Bank (2009)
[17] This "M1" comprises the total quantity of currency in circulation (notes and coins) plus demand deposits denominated in the national currency, held by nonbank financial institutions, state and local governments, nonfinancial public enterprises, and the private sector of the economy. The national currency units have been converted to US dollars at the closing exchange rate on the date of the information. CIA - The World Factbook
[18]million dollars
[19]The labor costs are around 40 cents/hour in China. Zhang, W. & Zhang, T. (2005) Competitiveness of China’s Manufacturing Industry and its Impacts on the Neighbouring Countries, Journal of Chinese Economic and Business Studies, Vol. 3, No. 3, 205–229.
[20]CIA - The World Factbook
[21]CIA - The World Factbook
[24] China's economic stimulus plan targets its infrastructure
[25]China GDP grows by 8.7 percent in 2009 -
[26]China GDP grows by 8.7 percent in 2009 -
[27]China 2009 GDP World's Second Largest Economy
[28] China's April Trade Surplus Shrinks 87% on Imports
[29] China's Trade Surplus Reaches $28 Billion -
[30] Asia Pacific Trade, Asia Pacific Exports, Asia Pacific Imports
[31] Asia Pacific Trade, Asia Pacific Exports, Asia Pacific Imports
[32]IMF World Economic Outlook Database
[33] China's Trade Surplus Reaches $28 Billion -
[34] Downturn Heightens China-India Tension on Trade -
[35]Russia moves into trade surplus with China
[36] The Voice of Russia.
[37] Russia economy business opportunities in Russia government tenders
[39] 'India miles behind China in FDI inflow' - International Business

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