China and US: Situation and Problems in Economy

1
China and US Situation and Problems in Economy
Trade

• Dr. Haixin Yao
•  
• Professor of Economics, Liaoning University,
  China
• Visiting Scholar, California State University,
  Northridge (CSUN)
•  
• April 15, 2008

2
Outline

• Introduction
• Status Quo
• Problems
• Prospect and Suggestion

3
I. Introduction

• A brief review
• The comparison of some index China vs. US

4
1. A Brief Review

• (1) Feb.21,1972 , President Richard M. Nixon of
  USA visited China.This was the milestone for the
  normalization of China-US relationship

5
--cont

• (2)In Dec.1975, President Ford of USA visited
  China.
• (3)On Dec. 16,1978, China US published the joint
  communique.
• (4)At the end of 1978, China started to make
  economic reform and open up to the world !
• (5)0n Jan. 1, 1979,China and US established their
  formal diplomatic relationship.
• Before establishing formal diplomatic
  relationship in 1978. The total trade between
  China and US was only 0.99 billion. In 1979,this
  volume of trade increased rapidly to 2.45
  billion!

6
--cont

• (6)On Jan. 28, 1979, China leader Deng Xiao-ping
  visited USA.

7
-- cont

• (7)On Feb.1, 1980, The trade agreement of
  China-US validated formally.
• (8)During May 5-9,1982, Vice president George
  Bush visited China. (older Bush)
• (9)On Aug.17, 1982, Two government published the
  China-US joint communique.
• (10)During Apr. 25- May. 1,1984,president Ronald
  Reagan visited China.
• China and U.S. signed four agreements.

8
-cont

• (11) On Nov.19,1993, President Jiang Ze-min of
  China met President Bill Clinton in Seattle

9
-cont

• --In 1993, the volume of China-US trade
  increased rapidly to 27.65 billion.
• --China became USs the fourth largest import
  trade partner and 13th largest export trade
  partner of US.
• --US also became the second largest export
  trade partner and third largest import trade
  partner of China.

10
-cont

• (12)During Oct. 26- Nov. 3, 1997, President Jiang
  Ze-min of China visited U.S.
• Two countries published the joint communique.

11
-cont

• (13)During Jun.25- Jul.3,1998, President Bill
  Clinton visited China.
• (14)On Apr. 6-14, 1999,Premier Zhu Rong-ji of
  China visited U.S.
• (15)On Nov.15, 1999, China and US signed formally
  the bilateral agreement about China joining WTO.
  
• This bilateral negotiation had lasted for 13
  years!

12
-- cont

• (16)On May 25, 2000, US gave formally the
  permanence normal trade position to China.
• (17)On Oct. 19,2001, President Jiang Ze-min
  talked with President George W. Bush in Shanghai
• (18)On Dec.11, 2001, China joined formally WTO!
• (19)On Feb. 21-22, 2002, President George W.
  Bush visited China.
• (20)On Oct. 19, 2003, Chinas current President
  Hu Jin-tao met with President George W. Bush in
  Bangkok

13
-- cont

• (21) On Dec. 7-10, 2003, Chinas current premier
  Wen Jia-bao made a formal visit to US.
• (22)On Nov. 19-21,2005,President George W. Bush
  made a formal visit to China.
• (23)In Sep. 2006, China-US started strategic
  dialogue mechanism

14
-- cont

• (24)On Dec.15,2006,the First economic strategic
  dialogue.
• The two parties reached a series of
  substantial agreements on security, finance,
  energy and aviation.
• (25)On May 22-23, 2007, the Second economic
  strategic dialogue.

15
--cont

• (26)On Dec. 11, 2007, the Third economic
  strategic dialogue .
• 14 cooperation files about economy
  trade.
• (27)The Fourth economic strategic dialogue of
  China-US will be held in Washington in June,
  2008.

16
2. The comparison of main social and economic
index China vs. US

• Table 1 International
  Comparison(1)(2005)
• Source national bureau of
  statistics, P.R.C.

Country acreage Population by the end of year Density of pop.
(million sq.km) (billion) (person/ sq.km)
Country /area    
World 134.279 6.4378 47.9
 Developed countries 56.433 1.0113 17.9
 Developing countries 77.891 5.4264 69.7
   
 G7 21.445 0.7176 33.5
 North America 21.572 0.4319 20.0
 Southeast Asia union 4.48 0.5514 123.1
   
 China 9.600 1.3076 136.2
 USA 9.629 0.2965 30.8
 Russia 17.098 0.1432 8.4
17
Table 2 International Comparison (2)(2005)
GDP Per capita GDP GDP growth GDP composing() GDP composing() GDP composing()
Country /area (billion u.s. dollars) (u.s .dollar) () Primary Secondary Tertiary
World 44384.87 6987 4.9 3.5 28.0 68.5
 Developed countries 34466.20 35131 2.6 1.6 26.2 72.2
 Developing countries 9926.40 1746 7.4 11.7 36.0 52.3
           
 China 2228.9 1740 10.2 12.6 47.5 39.9
 USA 12455.07 43740 3.5 1.2 22.3 76.5
 Russia 763.72 4460 6.4 5.6 38.0 56.4
18
Table 3 International Comparison(3)(2005)
energy productions Energy consume Goods import Goods export Total trade Trade balance
Country /area (2003,million (2003,million (billion u.s. dollar) (billion u.s. dollar) (billion u.s. dollar) (billion u.s. dollar)
Standard unit) Standard unit)
 World 10672.01 1054371.0 21146.0 10393.0 10753.0 -360.0
 Developed countries 4351.54 537772.7 15141.5 7351.0 7790.4 -439.4
 Developing countries 6369.97 520347.8 5903.7 3041.6 2862.1 179.5

 G7 2645.58 8753.8 4034.2 4719.6 -685.4
 Europe union 445.24 122127.5 6076.0 3085.6 2990.4 95.2

 China 1380.79 140937.7 1421.9 761.95 659.95 102.0
 USA 1631.38 228079.1 26376.0 904.29 1732.71 -828.42
 Russia 110692.4 63971.7 370.4 245.26 125.1 120.13
19
Table 4 Chinas some index ranks in world
(1978-2005)
index 1978 1980 1990 2000 2003 2004 2005
Country acreage 4 4 4 4 4 4 4
population 1 1 1 1 1 1 1
Expected life 75 77 83 88 86 87
GDP(U.S. dollar) 10 11 11 6 7 7 4
Per capital GDP(U.S. dollar) 175 177 178 141 134 132 128
Total trade amounts(U.S.dollar) 27 25 16 8 4 3 3
export 28 28 14 7 4 3 3
import 27 22 17 9 3 3 3
FDI(U.S. dollar) 60 12 9 2 2 3
Foreign exchange reserve(U.S. dollar) 40 37 7 2 2 2 2
 
20
Table 5 International Comparison of Per capita
national income unitsU.S. Dollar
Country /area 1990 2000 2002 2003 2004 2005
 Total in world 4075 5244 5158 5559 6338 6987
 Low income countries 356 383 394 439 507 580
 Middling income countries 1170 1723 1770 1938 2265 2640
 Modlling-low income countries 848 1158 1183 1295 1507 1746
 High income countries 19617 26528 26130 28195 32132 35131
 non-OECD members 9150 14368 14109 14740 16341 17656
 OECD members 20394 27564 27184 29389 33547 36715
 Area of European dollar 17747 22034 20524 23118 27921 31914
 China 320 930 1100 1270 1500 1740
 USA 23330 34400 35230 37780 41440 43740
21
Table 6 International Comparison of GDP Units
billion U.S. dollar
Country /area 1990 2000 2002 2003 2004 2005
Total in world 21748 31776 32821 36875 41366 44385
Low income countries 597 837 926 1055 1216 1391
Middling income countries 3258 5215 5402 6104 7227 8535
Modlling-low income countries 386 6052 6327 7158 8443 9926
High income countries 17894 25725 26496 29719 32928 34466
non-OECD members 596 1163 1138 1218 1358 1528
OECD non-members 17293 24564 2536 28493 31562 32952
Area of European dollar 5583 6130 6753 8316 9501 9813
China 355 1199 1454 1641 1932 2229
Germany 1707 1900 2022 2443 2741 2782
Japan 3040 4746 3971 4291 4623 4506
U.K. 990 1438 1565 1798 2124 2193
USA 5757 9765 10435 10951 11712 12455
22
II. China-US economy trade relationship Status
quo

• 1. Trade
• 2. Investment
• 3. Exchange rate
• 4. Finance field and capital market

23
1. Trade

• From 1979 to 2006,the total trade between China
  and US has increased 106 fold ,its growth rate
  has averaged 18.9 per annum!
• In 2006, US was the second largest trade partner
  of China , the first largest export market, the
  sixth import origin place, and the third tech.
  import origin place.
• In 2007 US was still the second largest trade
  partner of China, it had 13.9 shares of total
  foreign trade in China.
• But, US has become the second largest export
  market of China !

24
Table 7 The data of China-US trade in recent
3 years unitbillion

• Source China customs - customs statistics

term year Total trade Total trade Export to US Export to US Import from US Import from US
term year amount Growth rate amount Growth rate amount Growth rate
2005 211.63 24.78 162.90 30.4 48.73 9.1
2006 262.68 24.12 203.47 24.9 59.21 21.8
2007 302.08 15 232.70 14.4 69.38 17.2
25
Table 8 the trade between China and main trade
partner(2005-2007) unitbillion
year country Total trade Total trade export export import import balance
year country amount growth amount growth amount growth balance
2007 EU 356.15 27 245.19 29.2 110.96 22.4 134.23
2007 USA 302.08 15 232.70 14.4 69.38 17.2 163.32
2007 Japan 236.02 13.9 102.07 11.4 133.95 15.8 -31.88
2007 HK 197.2 18.7 184.4 18.8 12.8 18.9 171.6
2007 Southeast union 202.6 26 94.2 32.1 108.4 21.0 -14.2
2006 EU 272.3 25.3 182.0 26.6 90.3 22.7 91.7
2006 USA 262.7 24.1 203.5 24.9 59.2 21.8 144.3
2006 Japan 207.3 12.4 91.6 9.1 115.7 15.2 -24.1
2006 HK 166.2 21.6 155.4 24.8 10.8 -11.8 144.6
2006 Southeast union 160.8 23.3 71.3 28.8 89.5 19.4 -12.8
2005 EU 217.3 22.6 143.7 34.1 73.6 5.0 70.1
2005 USA 211.6 24.8 162.9 30.4 48.7 9.1 114.2
2005 Japan 184.5 9.9 84.0 14.3 100.5 6.5 -16.5
2005 HK 136.7 21.3 124.5 23.4 12.2 3.6 112.3
2005 Southeast union 130.4 23.1 55.4 29.1 75.0 19.1 -19.6
26
2. Investment

• (1)U.S. Enterprise invest in China
• U.S. started to invest directly in 1980.
• At the beginning of 1990s, the investment of
  U.S. Enterprise had less than 0.4 billion per
  annum .
• In 1990, there were only 45 U.S. Enterprises.

27
Table 9 U.S. enterprise invest in China1986-2007
year project project Actual investment Actual investment
year number proportion amount(billion U.S. dollar) proportion
1986 102 6.81 0.3262 14.54
1987 104 4.66 0.2628 11.36
1988 269 4.52 0.2360 7.39
1989 276 4.78 0.2843 8.38
1990 357 4.91 0.4560 13.08
1991 694 5.35 0.3232 7.4
1992 3265 6.7 0.5111 4.64
1993 6750 8.09 2.0631 7.5
1994 4223 8.88 2.4908 7.38
1995 3474 9.39 3.0830 8.22
1996 2517 10.25 3.4433 8.25
28
--cont
year project project Actual investment Actual investment
year number proportion amount(billion U.S. dollar) proportion
1998 2238 11.3 3.8984 8.58
1999 2028 11.99 4.2159 10.46
2000 2609 11.67 4.3839 10.77
2001 2606 9.97 4.4332 9.46
2002 3363 9.84 5.4239 10.28
2003 4060 9.88 4.1985 7.85
2004 3925 8.99 3.9410 6.50
2005 3741 8.50 3.0612 5.07
2006 3208 7.73 3.0000 4.56
2007 2627 6.94 2.6262 3.50
29
--cont
30
--cont
31
--cont

• in recent five years, the number of projects
  invested and actual investment of U.S. enterprise
  has decreased gradually.
• By the end of 2006,
• 52,211 U.S. Investment enterprises
• actual accumulated investment reached 54
  billion
• 8.78 and 7.87 share of total FDI
• In 2007,those two proportions had decreased to
  6.94 and 3.5 respectively.
• By the end of July, 2007,
• accumulated project 53,754,
• actual accumulated investment 55.42 billion

32
Table 10 industry distribution of U.S.
investment in China(2004-2006)
industry year New set up corporate New set up corporate Actual investment Actual investment
industry year number prop() amount(million U.S. dollar) prop()
agriculture 2004
agriculture 2005 79 2.11 40 1.31
agriculture 2006 62 1.93 27 0.95
Manufacture , mining and extraction 2004 2669 68 2773 70.4
Manufacture , mining and extraction 2005 2403 64.23 2287 74.70
Manufacture , mining and extraction 2006 1926 59.87 1965 58.58
service 2004 1150 29.3 1057 26.8
service 2005 1259 33.65 734 23.98
service 2006 1217 37.97 873 30.47
33
---cont

• The basic aim is to
• produce in China and sell in China
• globalization strategy
• In 2002 and 2003, the U.S. enterprises
  investment in commerce, finance, insurance and
  real estate in China has increased obviously

34
The characteristics of U.S. investment in China

• ??multinational companies are main participants.
• ??purchasing from international market.
• ??production base in China, sold in China market.
• ??pay attention to localization business.
• ??business performance is all right.

35
The performance of U.S. enterprise investment in
China

• 2004
• Investment Return rate 19.2
• (the IRR of its whole world was only 10.1
  )
• 2005
• U.S. enterprises in China earned profit about
  3.0 billion
• 81 U.S. enterprise in China earned profit.

36
--cont

• (2)Chinas invest to U.S.
• Chinas outward FDI is relatively small!
• Table 11 Chinas non-finance FDI to North
  America (2003-2006) unitmillion U.S.
  dollar.
• By the end of Jun. 2007,Chinas FDI to U.S. had
  only 1.036 billion!

year year 2003 2004 2005 2006
flow flow 65.05 119.93 231.82 198.34
stock stock 502.32 665.20 822.68 1237.87
  Source www.fdi.gov.cn Source www.fdi.gov.cn Source www.fdi.gov.cn Source www.fdi.gov.cn  
37
3. Exchange rate

• Before exchange rate reform, i.e. July. 21, 2005,
  1 8.2765yuan
• Table 12 Chinese currency exchange rate
  (average value, exchange U.S. dollar)

year yuan/us dollar year yuan/us dollar
1979 1.5549 1993 5.7620
1980 1.4984 1994 8.6187
1981 1.7050 1995 8.3510
1982 1.8925 1996 8.3142
1983 1.9757 1997 8.2898
1984 2.3270 1998 8.2791
1985 2.9366 1999 8.2783
1986 3.4528 2000 8.2784
1987 3.7221 2001 8.2770
1988 3.7221 2002 8.2772
1989 3.7651 2003 8.2770
1990 4.7832 2004 8.2765
1991 5.3233 2005 8.0759
1992 5.5146 2006 7.8238
38
--cont Fig. 3
39
The reform of Chinese currency exchange rate

• On July. 21,2005, China decided to reform its
  exchange rate
• ??give up pegging US dollar and set consult a
  basket of currencies.
• ??Chinese currency revalue 2, from 8.2765
  yuan/us dollar to 8.11yuan /us dollar .
• ??Chinese currency exchange rate was decided
  by the central rate set by a basket of
  currencies(fluctuation 0.3)

40
Table 13 Chinese currency exchange rate change
since reform (2005.07.21 2008.04.14, selected
date)
date Exchange rate(yuan /us dollar)
2005/7/21 8.1100
2005/12/30 8.0702
2006/6/30 7.9956
2006/12/29 7.8087
2007/6/29 7.6155
2007/9/28 7.5108
2007/12/28 7.3046
2008/2/1 7.1903
2008/3/3 7.1058
2008/3/28 7.0137
2008/04/14 6.9996
41
--cont Fig.4
42
--Cont

• Since exchange rate reform, Chinese currency is
  appreciating continually with a faster speed.
• In theory, Chinese currency appreciate would
  decrease adverse balance of US trade to China.
  But in fact, this effect is very limited.
• From Jul. 21, 2005 to Mar. 28, 2008,
• 8.11yuan/us dollar ? 7.01yuan/us. Dollar,
  appreciated accumulatively by 15.7.
• But, during this period , US adverse balance
  to China has not decreased!

43
4. Finance field and capital market

• China is gradually opening Finance field and
  capital market.
• More and more USs finance institution go into
  Chinas capital market directly or indirectly by
  all ways.
• More and more USs enterprise are holding or
  controlling the shares of listed companies in
  China through capital market, or by making MA.
• -- 17 USs finance and investment
  institutions obtained the QFII.
• -- 6 USs investment companies held the
  shares of fund management companies.
• -- 25 USs enterprise are holding or
  controlling the shares of Chinas enterprises.

44
Table 14 List of USs QFII Companies in China
No. Name of QFII (USA) Date approved Rations approved (100 millions)
1 Morgan Stanley Co. International Limited 2003.06.05 4.0
2 Citigroup Global Markets Limited 2003.06.05 5.5
3 Goldman, Sachs Co. 2003.07.04 3.0
4 J.P. MORGAN Chase Bank 2003.09.30 1.5
5 Merrill Lynch International 2004.04.30 3.0
6 Lehman Brothers International 2004.07.06 2.0
7 Bill Melinda Gates Foundation 2004.07.19 1.0
8 INVESCO Asset Management Limited 2004.8.4 2.5
9 Templeton Asset Management Ltd 2004.9.14
10 Goldman Sachs Asset Management Intl. 2005.05.09 2.0
11 JF Asset Management Limited 2005.12.28 1.5
12 AIG Global Investment Corp. 2005.11.04 0.5
13 AMP Capital Investors Limited 2006.4.10 2
14. Yale University 2006.04.14 0.5
15 Morgan Stanley Investment Management Intl. 2006.07.07 2.0
16 Stanford University 2006.08.05 0.5
17 GE Asset Management Incorporated 2006.08.05 2.0
45
Table 15 USs enterprise are holding or
controlling the shares of Chinas enterprises
year USs enterprise Chinas enterprises Share() Industry
2007 The Blackstone Group ?????? 20 chemistry
2007 Synnex Group ???? gt50 network
2007 Carlyle Asia Partners II ?????? 49 Steel tube
2006 Prudential Ins. Co. ??????? 50 Real estate
2006 Anheuser-Busch Limited ????? 100 beer
2006 Best Buy ?????? 51 Home electronic
2006 Goldman Sachs Group ?????? 4.93 ???
2006 Pacific Alliance Group ????? 67.5 Childs goods
2006 FedEx ???? 50 express
2005 Carlyle Group ???? 45 Expert equip.
2005 Bank of America Corp ?????? 8.19 bank
2005 Monster ????? 45 network
2004 Morgan Stanley ???? 20 Home electronic
2004 Amazon.com ?????? 100 EC
2004 Cendant Travel Group ??????? 40 Tour service
2004 Anheuser-Busch Limited ??????? 29.6 beer
2004 PG ??(??)???? 100 consumable
2003 Kodak ???? 20 chemistry
2002 New Bridge Capital Ltd ?????? 15 bank
2002 Anheuser-Busch Limited ???? 20 beer
2002 General Motors ?????? 34 auto
2001 Emerson Electric ???????? 100 communication
2001 IDT ???????? 100 CMOS?semiconductor
2000 Ford Motor ???? 20 auto
2000 PPG ???????? 100 Charcoal product
46
--cont

• In recent 5 years, more and more Chinas
  enterprises go to overseas for listing and
  financing.
• By the end of 2007,
• 77 Chinas enterprises had been listed in
  America ,
• -- 19 companies listed in NYSE
• -- 30 companies listed in NASDQ
• -- Other 28 listed in OTC

47
--cont

• China has also held the second largest USs
  treasury bill.
• By the end of 2007, China held 346.6 billion
  USs treasury bill(government bond).
• It had 8.1 share of total USs treasury bill

48
III. Relationship of China-US Economy Trade
Problems

• 1. Basic features
• Larger complementary
• Processing trade is main part of China-US trade
• The volume of U.S. invested in China is more than
  that of China invested in U.S.
• China has become the center of world assembling,
  made in China is also made in world .
• The degree of trade imbalances remains large.
• In goods trade, China has trade surplus to US
• In services and capital investment trade,
  China has adverse trade balance to US.
• Trade surplus is in China, while profits is in
  US.

49
For example

• The report published by three researchers in UC
  showed
• Apple Company sold iPod at 299 each one. Its
  cost and profit were as following
• Sell price
  299
• Cost
• purchased main parts 73 (from
  Japan )
• purchased other parts 60 (from
  other country)
• assemble
  3 (in China !)
• Profit
  163 (in US)
• Apple Company gained 80
• Other
  83

50
2. The problems of China-US Economy Trade

• larger balance of trade, i.e. trade imbalances!
• Chinese currency exchange rate marketization
• Chinas intellectual property rights (IPR)
• Chinas safety of product
• Chinas capital market further opening
• US trade problem is being politicized
• USs export controlling over China
• USs protectionist policy on trade

51
??Prospect and Suggestions

• 1. Prospect
• a. Complex and uncertainty
• b. Chinese currency (Renminbi) will continue to
  appreciate
• c. Trade friction and disputed will still
  increase.
• d. Energy resources and environment protection
  will become new topics
• e. Trade balance (trade imbalances) of China-US
  will reduce gradually
• f. Chinas finance ,service and infrastructure
  industry will open further to world.
• g. Chinas reform and opening has its
  irreversibility!
• h. China and US economy will be face up long-term
  structural challenges.

52
2. Suggestions

• China is the worlds third largest trading
  nation.
• With the largest population with over 1.3 billion
  people and one of the worlds fastest growing
  economies
• China has the largest potential and realistic
  market
• U.S. is the second largest trade partner of China
  and the second largest export market of China .
• China is the fourth largest trade partner of U.S.

53
--cont

• The relationship of China-US economy and trade is
  and should be mutual beneficial and reciprocal
  relation in nature!
• From the view of Game theory,
• If cooperate , then both will obtain the
  benefits
• If not cooperate, then both will lose!

54
U.S. should

• a. Adjust and control excess import.
• b. Implement export free, cancel export restrict
  ions to China.
• c. Adjust trade policy and system, improve
  outdated national trade act. Further liberalize
  trade .
• d. Enlarge opening of industry and tech. market
  to other countries
• e. Not politicize the trade problems

55
China should

• Continue to adjust economic structure.
• Continue to deepen reform
• Reform and adjust national policy and system
  about distribution
• Change the relationship of consumption,
  investment and saving. Decrease saving rate.
• Further Enlarge import.
• Control export,adjust and change export policy.
• Make Renminbi exchange rate more marketable
• Further reform the financial system.
• Enhance protecting for IPR.
• Cancel some government subsidy for export
  enterprise

56
Any Questions?
57
Thank You !

• Contact Me
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