Trade Liberalization & Exchange rate policy in China

1. Trade Liberalization & Exchange rate policy in China Hisanobu Otsubo

2. 1.Population • China has the largest population in the world Source: UN stat Unit: million

3. 2.GDP • China is the 4th largest economy in the world (2007). • The scale of the Chinese economy is 1/4 of the U.S. Source: IMF Unit: billion USD

4. 3.GDP per capita • Now, China is the 4th largest economy • But, in terms of GDP per capita, China is still in LDC level. • Per capita GDP in China is about 1/20 of the U.S. Source: IMF Unit: USD

5. 4.GDP Growth (IMF’s estimate) • IMF estimates that China will be the second largest economy by 2010 . Source: IMF Unit: billion USD China Japan Germany U.K

6. 5. Trade(Export) • China is now the second largest exporter in the world. • Increasing trade has been the driving force of China’s economic growth. Merchandise Export in 2007 Source: WTO Unit: Billion USD

7. 6. Trade Liberalization Process 1(FTC reform) In communist era, trade was conducted by only 10Foreign Trade Companies (FTCs) (Trade was monopolized by central government) 1978: The reform started 11 years 1989: The government gave trade license to 4,000 FTCs in order to encourage the competition among FTCs by 1989 4 years 1993: The government allowedprivate commercial firms to conduct foreign trade freely. (almost completed liberalization)

8. 7. Trade Liberalization Process 2 (FDI) 1978: The reform started Initially, China pursued ISI policy. The government did not encourage the FDI. 8 years 1986: China opened 14 coastal cities for FDI 2 years 1988: China opened 140 coastal cities for FDI 4 years 1992: FDI was opened to almost all foreign investors. China allowed the foreign investors to own the real estate in urban cities, which accelerated the FDI inflow.

9. 8. Characteristics of China’s liberalization approach • China’s reform process is very incremental. • China advanced the liberalization process gradually and deliberately. • It is different from the former Soviet Union countries’ “Big Bang” approach GDP growth rate after reform in China GDP growth rate after reform in Russia China did not experienced the negative growth Russia experienced the negative growth Source: WDI

10. 9.China’s Exports • As a result of the reform, China’s export increased dramatically since 1978. Source: WTO Unit: billion USD Joined WTO Private companies start trade FTCs increased to 4,000 Open 140 coastal cities

11. 10. Problems – RMB exchange rate • The U.S and advanced countries criticize that RMB has been depreciated in order to maintain price competitiveness of made in China products. • Now China is under international pressure for revaluation. RMB % RMB rate (right scale) China current acct balance (%GDP left scale) China’s trade surplus is growing Trade balance in U.S is deteriorating Source: WDI U.S current acct balance (left scale)

12. 11 Recommendation • China should keep incremental approach • Because • - China has many domestic problems to be solved • ex) Economic disparities between rural side and urban • Environment – sustainable growth • Ethnic problems • - Chinese economy is still vulnerable to the external shock • ex) Low per-capita GDP - it need further poverty reduction efforts. • In the future, the revaluation of RMB should be undertaken • But simultaneously, Chinese government has to solve the domestic problems.

13. 12 Reference: Economic disparities • The economic development gap between Shanghai (coastal area) and Chinzou (inland area) is 10 times.

14. 13 Reference: CO2 emission • China is the world second largest source of CO2 emission. Unit: Million Ton Source: OECD Environmental Data Compendium 2004