China and US: Situation and Problems in Economy & Trade

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 US’s 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, China’s current President Hu Jin-tao met with President George W. Bush in Bangkok

13. -- cont’ （21）On Dec. 7-10, 2003, China’s 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 Thirdeconomic 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.

17. Table 2 International Comparison (2)(2005)

18. Table 3 International Comparison(3)(2005)

19. Table 4 China’s some index ranks in world （1978－2005）

20. Table 5 International Comparison of Per capita national income units：U.S. Dollar

21. Table 6 International Comparison of GDPUnits: billion U.S. dollar

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 unit：billion Source: China customs - customs statistics

25. Table 8 the trade between China and main trade partner（2005－2007） unit：billion

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 China:1986-2007

28. --cont’

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）

33. ---cont’ The basic aim is to produce in China and sell in China globalization strategy In 2002 and 2003, the U.S. enterprise’s 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）China’s invest to U.S. China’s outward FDI is relatively small! Table 11 China’s non-finance FDI to North America （2003-2006） unit：million U.S. dollar. By the end of Jun. 2007，China’s FDI to U.S. had only $1.036 billion!

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）

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(fluctuation0.3％)

40. Table 13 Chinese currency exchange rate change since reform（2005.07.21 — 2008.04.14, selected date）

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 Chinahas not decreased!

43. 4. Finance field and capital market China is gradually opening Finance field and capital market. More and more US’s finance institution go into China’s capital market directly or indirectly by all ways. More and more US’s enterprise are holding or controlling the shares of listed companies in China through capital market, or by making M&A. -- 17 US’s finance and investment institutions obtained the QFII. -- 6 US’s investment companies held the shares of fund management companies. -- 25 US’s enterprise are holding or controlling the shares of China’s enterprises.

44. Table 14 List of US’s QFII Companies in China

45. Table 15 US’s enterprise are holding or controlling the shares of China’s enterprises

46. --cont’ In recent 5 years, more and more China’s enterprises go to overseas for listing and financing. By the end of 2007， 77 China’s 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 US’s treasury bill. By the end of 2007, China held $346.6 billion US’s treasury bill(government bond). It had 8.1% share of total US’s 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 China’s intellectual property rights (IPR) China’s safety of product China’s capital market: further opening US: trade problem is being politicized US’s export controlling over China US’s protectionist policy on trade