U.S. – China Trade

U.S. – China Trade

With: The ClappersJared BakerRob Gillis

John PinegarDean Thompson

Josh Tomsik

China’s Recent Economic History

Mao Zedong

• Marxist• War & Revolution• Great Leap Forward• Cultural Revolution• Died 1976

具有中国特色的社会主义 Socialism with Chinese Characteri

stics• Farm Privatization• Special Economic Zones (SEZ)

– Shenzhen– Shanghai

• Joined WTO

Special Economic Zones

• Special tax incentives for foreign investments in the SEZs

• Greater independence on international trade activities

• Economic characteristics are represented as "4 principles":

– Constructions primarily relies on attracting and utilizing foreign capitals

– Primary economic forms are sino-foreign joint ventures and partnerships as well as wholly foreign-owned enterprises

– Products are primarily export-oriented – Economic activities are primarily driven by market

“Diplomatic Exchanges”

“Shanghai Communique”• 1972 – President Nixon visits C

hina to sign the initial pact• 1973 – Established liason office

s in Beijing & Washington D.C.• 1975 – President Ford visits Bei

jing to “reaffirm…U.S. interest”

• 1977 – President Carter also commits to the 1972 agreement

• January 1, 1979 – official diplomatic relations established – normalization

• March 1, 1979 – Embassies established in both countries

After “Normalization”• 1979 & 1980 – agreements

reached on maritime, civil aviation, & textiles

• 1980’s – multiple state visits by both parties led to cooperation in “scientific, technological…cultural and trade relations”

• 1989 – Tiananmen Square – Economic sanctions issued by U.S. in response to these events

U.S. Economic Approach to China

1) The United States seeks to fully integrate China into the global, rules-based economic and trading system- China's participation in the global economy will nurture the process of economic reform- Encourage China to take on responsibilities commensurate with its growing influence- China's stake in the stability and prosperity of East Asia.

2) The United States seeks to expand U.S. exporters' and investors' access to the Chinese market- As China grows and develops, its need for imported goods and services will grown even more rapidly- Will continue to work with China’s leadership to ensure full and timely conformity with China’s WTO commitments- Encourage China to move to a flexible, market-based exchange rate in order to further increase U.S. exports of goods, agricultural products and services

Source: U.S. State Department (www.state.gov)

The United States seeks to fully integrate China into the global, rules-based economic and trading

system3 Examples:1) Encourage responsibilities commensurate with its growing influence - Intellectual Property Rights – Hu Jintao visited MSFT in April 2006

- in 2004, China had a reported 90% software piracy rate*

2) China's stake in the stability and prosperity of East Asia- China & U.S. role in the North Korean nuclear talks

- Multilateral talks to discourage nuclear proliferation

3) China's participation in the global economy will nurture the process of economic reform

- Secretary Paulson recent visit to China (9/06) - meeting to encourage further economic reform

* Source: Business Software Alliance (www.netadvantage.standardandpoors.com)

The United States seeks to expand U.S. exporters' and investors' access to the Chinese market

Investors Access to China- U.S. companies have established more than 20,000 equity & contractual joint ventures, and wholly owned enterprises- 100+ U.S. multinational firms have business in China- $54 Billion cumulative U.S. investment in China - 2nd largest- $3 billion (2005) in foreign direct investment - 5th largest –behind Hong Kong, Japan, S. Korea and Virgin Islands

U.S. Exports to China- $285 billion in two way trade in 2005- $33 billion in 1992 (763% increase)- 20% growth rate in U.S. exports to Chi

na - U.S. is China’s largest trading partner- China is U.S.’s 3rd largest trading part

ner (behind Canada & Mexico)

Sources: U.S. State Dept. (www.state.gov) and U.S. China Business Council (www.uschina.org)

The United States seeks to expand U.S. exporters' and investors' access to the Chinese market

WTO Commitments:- Officially joined WTO in December 2001

- Agreed to lower tariffs and abolish market impediments- U.S. agricultural import tariffs dropped from 31% to 14%- U.S. industrial import tariffs dropped from 25% to 9%- Opened opportunities to banking, telecommunications &

insurance

“While accession does not guarantee smaller trade deficits, full implementation of all WTO commitments would further open China’s markets to--and help level the playing field for--U.S. exports.”

- China is the 4th largest importer of U.S. agricultural goods

April 11, 2006 – Joint Commission on Commerce & Trade- Addressed U.S. concerns regarding trade with China

- Lack of transparency in regulatory process causes trepidation amongst U.S. investors

- Concerns still existed regarding strict testing and standards requirements

Video: Walmart/U.S Trade and China

Current Trade Situation and U.S. Deficit

2005 Trade SituationChina • Total exports 752.2

B• To US 21.4%• Imports 631 B• From US 7.4%

United States• Total Exports 927 B • To China 4.6%• Total Imports 1.727

T• From China 15%*Trade Data from CIA factbook; Walmart Data from “Is Walmart Good for America”

Walmart 2004• Walmart Claimed $15 B in Chinese imports (To

tal U.S. Deficit $162 B)• Other estimates higher $20+ or $30+ B

Deficit with China (Billions)

0

50

100

150

200

250

China deficit % of U.S. Total

0100200300400500600700800

Billions

*Data from http://www.census.gov

U.S.

China

* Graphs from St. Louis Fed’s International Economic Trends publications

New Records - August 2006

• Record one month total deficit - $69.86 B

• Record one months deficit with China - $21.96 B

• 3 times the trade gap with Japan

*From the Wall Street Journal

What are we trading?Top 12 2005 Imports (millions) Top 12 2005 Exports (millions)

Computer accessories, peripherals and parts

25,742 Civilian aircraft 3,837

Other (clocks, port typewriters, oth household gds 22,646 Semiconductors 3,361

Toys, shooting and sporting goods, and bicycles

20,158 Soybeans 2,253

Computers 14,446 Plastic materials 1,831

Apparel and household goods-other textiles 13,112 Industrial machines, other 1,531

Furniture, household items, baskets 11,548 Steelmaking materials 1,466

Television receivers, vcr's & other video equip. 10,779 Computer accessories 1,426

Footwear of leather, rubber, or other materials

9,628 Cotton, raw 1,399

Apparel and household goods-cotton 7,607 Chemicals-organic 1,365

Household and kitchen appliances 7,082Measuring, testing, control

instruments 1,072

Radios, phonographs, tape decks, and other stereo

7,081 Pulpwood and woodpulp 1,023

Telecommunications equipment 7,022 Telecommunications equipment 1,001

*Data from http://www.census.gov

Trade and Currency Regulations

Import Regulations

• China– Since joining WTO, China has

made efforts to reduce administrative barriers to trade. Mostly tariffs and exchange rate adjustments

– Categories of commodities subject to licensing controls reduced to 3 from 8

– Average Tariff rate 9.9% in 2006 vs. 15.3% in 2001

– In 2000 import taxes cut by as much as 2%. Import taxes imposed on certain types of goods, mostly textile and raw material sectors

– Gradual abolishment of state monopoly of foreign trade

– Introduction of tariff-free and VAT-exemption imports for capital equipment for projects within the hi-tech and priority sectors

– WTO bars quotas, China has been gradually eliminating them.

• United States– No foreign exchange controls over

payments for imports

– Imports to US often subject to duties, but import licenses are generally not required

– Usually ad valorem or specific import duties. Regular rates on imports from locations enjoying normal trade relations of formerly most-favored nation status, including Hong Kong and the Chinese mainland.

Chinese Securities Market

• 1970’s- Chinese Securities market begins development• 1984- 1st joint stock company in China is founded (Beijing Tiangia

o Department Store Co. Ltd.)• 1990- Shanghai and Shenzhen stock exchanges established with

Shenzen Shekov Anda Ind Co Ltd. the first listed company• 1992- International investors allowed to invest in B-shares• 2002- Qualified Foreign Institutional Investors (QFII) allowed to i

nvest in A-shares• 2006- Largest IPO, ICBC raises $19bb, lists on both Hong Kong an

d mainland exchanges to attract domestic and intl. investment• Regulated by Chinese Securities Regulatory Commission (CSRC),

China’s equivalent of SEC

Chinese Securities MarketChinese Markets

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005No. of domestic listed companies (A,B) 53 183 291 323 530 745 851 949 1088 1160 1224 1287 1377 1381No. of B share companies 18 41 58 70 85 101 106 108 114 112 111 111 110 109Total Shares Issued (100 million shares) 68.87 387.73 684.45 848.42 1219.54 1942.67 2526.79 3088.95 3791.71 5218.01 5875.45 6428.46 7149.43 7629.51Tradable Shares (100 million shares) 21.18 107.88 226.04 301.46 429.85 671.44 861.94 1079.65 1354.26 1813.17 2036.9 2269.92 2577.18 2914.77

Total Stock Mkt Cap (RNB 100 million yuan)

1048.13 3531.01 3690.61 3474.28 9842.38 17529.24 19505.64 26471.17 48090.94 43522.2 38329.12 42457.72 37055.57 32430.28Mkt Cap (millions US dollars) 133.18 448.67 468.95 441.46 1250.62 2227.35 2478.48 3363.55 6110.67 5530.14 4870.28 5394.88 4708.46 4120.75

NYSE2006

No. companies 2019No. US companies 1655

No. non-US companies 364Total Mkt Cap (billions US dollars) 19257

Trade Regulations• The most comprehensive guide to Chinese Customs re

gulations is The Practical Handbook on Import & Export Tax of the Customs of the PRC, compiled by the General Customs Administration. This guide contains the tariff schedule and national customs rules and regulations.It may be obtained for 220 RMB plus shipping and handling from: Xing Sheng Zhong Hai Fa Xing Zhong Xing Company. #6 JianNei DaJieDong Cheng Qu, Beijing 100730. Phone: (8610) 6519-5923 Fax: (8610) 6519-5616.

Currency

• Official Currency Renminbi• Means People’s Currency• Also know as Yuan and Kuai• Official Abbreviation CNY• Also abbreviated RMB

Renminbi• 1 Yuan = 10 Jiao =

100 Fen

• Notes– Yuan 100, 50, 20 ,

10, 5, 2 and 1– Jiao 5, 2, and 1– Fen 5, 2, and 1

• Yuan = Kuai• Jiao = Mao

• Coins– Yuan 1– Jiao 5, 2, and 1– Fen 5, 2, and 1

History

• Renminbi first issued shortly before takeover of mainland China by Communists in 1949

• 1st task was to end hyperinflation• 1978 dual track currency: RMB usable only do

mestically, foreigners forced to use foreign exchange certificates.

• Strong black market in currency transactions• In 1980s and early 1990s swap centers brought

the exchange rates to realistic levels abolishing the dual track

US $/RMB exchange rate

• From 1994 to July 2005, policy was to peg the value of the renminbi to the US $.

• Policy was praised during the Asian financial crisis of 1998 as it prevented a round of competitive devaluations.

• In 2003, came under criticism by the US as the value of the dollar fell.

Currency

• Pegged to the US $ at 8.28 during the previous decade

• July 21, 2005, removed from the peg to the US $

• Subsequently revalued to 8.11 per US $

Revaluation

• Resulted from pressure from US and World Economic Council

• RMB would be pegged to a basket of foreign currencies and would trade within a 0.3% band against this basket of currencies.

• Dominated by US $, euro, Japanese yen and South Korean won

• Smaller proportion of British pound, Thai baht and Russian ruble.

DATE RATE

3-Jan-00 8.28

31-Jul-00 8.28

2-Jan-01 8.28

31-Jul-01 8.28

2-Jan-02 8.28

31-Jul-02 8.28

2-Jan-03 8.28

31-Jul-03 8.28

2-Jan-04 8.28

30-Jul-04 8.28

3-Jan-05 8.28

29-Jul-05 8.11

3-Jan-06 8.07

31-Jul-06 7.97

2-Nov-06 7.87

Exchange Rate Jan 2000-Present

RMB/US$

Revaluation

• Revalued by 2%• Another 3% since• September 2006 G7 urged China to

let its currency rise faster – Imbalances in trade and capital flows

pose one of the biggest risks to global growth

– China claimed that it would slowly increase the band the Yuan trades in

Consequences of revaluation or floating RMB

• US economy– Chinese buy less US securities– Demand down, prices down, interest up– Hamper US economy

• China– Fewer exports

• The purchase of US bonds (briefly touch on this and mention that Prof. Bryson will further address it.)

Currency Regulations

• Foreign currency cannot be circulated within China or used to determine the price and settle accounts

• You have to show your currency exchange receipts when you change RMB back to your own currency when you depart

• No limit on the amount of foreign currency brought in but it must be declared

• Cannot bring Renminbi into China• Cannot take Renminbi out of China

Questions