Lecture Five China and World Economy

1. Lecture FiveChina and World Economy Xingmin Yin School of Economics

2. China’s Embrace of Globalization, by Lee Branstetter and Nicolas Lardy • China and World Economy, by Barry Naughton

3. Introduction • The move to freer trade prior to WTO accession • The opening to FDI prior to WTO accession • China’s WTO accession agreement and its implication • China’s liberalization in the service sector • The structure of China’s exports • China’s exchange rate regime: the need for further change • China’s impact on the world • Conclusions

4. 1. Introduction • China’s progressive opening to foreign trade and investment in the years since 1978. These reforms led China’s foreign trade to soar from $21 billion in 1978 to the world largest trade economy in 2009/10. • Accession to the WTO market an important watershed of Chinese policy. • The impact of China’s integration into the world economy.

5. 2. The Move to Freer Trade Prior to WTO Accession • The pre-reform trade regime • Trade liberalization • The export-processing regime • China’s porous protectionism in the 1990s Discussion • Foreign exchange reform and tax policy Discussion • International versus intra-national trade

6. One Country, Two Systems • By the mid-1980s, China had two trade regimes- a very open one for foreign firms and domestic enterprises engaged in export processing and a more restrictive trade regime for all other enterprises. • Problems for a dualistic trade regime: trade diversion, and a large part of the Chinese economy could remain effectively protected from foreign competition. • “Leakage ” of goods and components into the domestic economy via the export-processing regime, of smuggling……

7. Devaluation of RMB • The authorities devalued the official exchange rate in stages, from RMB 1.5 to the dollar in 1981 to 8.7 in 1994. • Following a modest appreciation, the government effectively fixed the exchange rate at RMB 8.28 to the dollar in 1995, a rate that was not changed until the summer of 2005.

8. 3. The Opening to FDI Prior to WTO Accession • Liberalization of foreign direct investment • A new Law on Joint Ventures was passed in 1979, providing a basic framework under which foreign firms were allowed to operate. • SEZs • Open cities • Export and technology development zones • “export-oriented” projects and “technologically advanced ”projects……

9. The Rise, Fall, Rise of FDI Since 1989 • Amount of FDI • Sources of FDI • Figures 16.2 -16.6 • A dramatic change in the Chinese operating environment for FDI business. • Domestic demand for goods……

10. Did Trade and FDI Drive Growth in the 1990s? • As foreign producers have been allowed steadily greater freedom to operate in the Chinese market, this competitive pressure has intensified, increasing the likelihood that market share gains are concentrated in the most efficient firms. • The ability to import technology embodied in the capital goods and components has certainly contributed to output expansion.

11. 4. China’s WTO Accession Agreement and its Implication • China chose to unilaterally liberalize its economy. • China agreed to a set of conditions that were far more stringent that terms under which other developing countries had acceded. I certain aspects China’s liberalization commitments exceed those of advanced industrialized countries. • The competition will also promote a more rapid and more healthy development of China’s national economy.

12. A trade in manufactures • FDI in the manufacturing sector • Agricultural trade • A double standards for China? • WTO accession: a whatershed, not a sea change

13. Some predicted that China would incur significant restructuring costs in meeting its WTO commitments. • There was a tendency for these studies to overestimate the impact of WTO accession. • The combination of China’s pre-WTO and post-WTO reforms is making it arguably the most open large developing economy. • Different tariff rates for developing countries……

14. China’s FDI regime is one of the most open and welcoming of any country in the world, and China has made liberalization commitments in all of the service industries covered by the WTO General Agreement on Trade and Services. • China has also made relatively strong commitments to liberalize financial and telecommunication services.

15. 5. China’s Liberalization in the Service Sector • By 2004, China had phased out all geographic, ownership, and most other types of restrictions on wholesaling and retailing, and related distribution services. • China agreed to substantially open its market in banking, insurance, securities, fund management, and other financial services. • Telecommunication services. • International comparison……

16. 6. The Structure of China’s Exports • More discussions • How to measure the capital-intensive products? • The impact of global production chain to China’s exports.

17. 7. China’s Exchange Rate Regime: the Need for Further Change • Is Chinas’ currency undervalued? If so, what is the appropriate Chinese response? What difference would this response make to China’s global trade balance? • What is the evidence for the judgment that the currency is undervalued in recent years? • The U.S. policy of encouraging China to liberalize its capital account and adopt a floating exchange rate system, Is it a long term objective?

18. In the short and medium run, a convertible currency with a floating exchange rate is a risky option for China, Why? • What comments on following judgments: an acceleration of the pace of appreciation of the RMB is desirable, both to improve the authorities’ control over monetary policy and to contribute to a reduction in global economic imbalances.

19. 8. China’s Impact on the World • Locomotive engine for Asian growth; • A reallocation of assembly activity from other East Asian countries to China; • Sino-US trade pattern; • Export displacement; • On net, the advanced Asian economies benefit from Chinese growth, while the ASEAN countries lose, Is it true?

20. 9. Conclusions • Liberalization of trade and FDI regimes; • China’s embrace of globalization has increased the degree of competition in the product markets…… • The impact of China’s opening of its service sector to FDI…… • The currency regime.