Imports & Exports

Since 1978

role of exchange rate became more important

more imports and exports needed

Imports & Exports

• 1978 – 32nd

• 1989 – 15th

• 1997 – 10th

• 2001 – 6th

• 2008 – 2nd on exports; 3rd on imports

list of countries by imports

list of countries by exports

Case 1 – devaluation of RMB

If:

RMB ↓ exports ↑ (Chinese goods are cheaper)

But:

imports ↓ (need more money to buy production costs raising)

inflation ↑

Case 1 - devaluation

What‘s driving most of China‘s inflation is food.

• food prices rose rapidly since 2006

• May 2008 – 19,9%

• April 2008 – 50% (meat)

political sensitive problem

inflationary pressure 2006-2008

Case 1 - devaluation

inflation shock on goods made in China and sold in the international market

more expensive to make products (locally and for overseas markets)

Newest Chinese Export — Inflation? (more expensive goods would be sold around the world)

Case 2 – What will be the consequences for trade of a

revaluation?

if:

RMB ↑ exports ↓ imports ↑

inflation↓

Case 2 - revaluation

• effect on the flow of trade lead to an increase in the prices of Chinese exports• effect: make them less competitive

hope that this would lead to a drop in imports from China and renewed competitiveness for US producers

not as simple as that

Case 2 - revaluation

1.

China imports = components and raw materials that are processed as final products exported to rest of the world (40% of China‘s total imports)

revaluation cheaper to import into China

effect on export prices will be lower than the amount of revaluation

Case 2 - revaluation

2.

import prices ↓ demand for imported goods ↑

Opportunity for companies selling into Chinese market

goods rely on imported components that will become cheaperprices ↓

Investments (FDI)

RMB ↓ exports ↑ FDI ↑

• Since 1978 - FDI in China has grown rapidly

• 1980ies – 1990ies: FDI inflow to China: US$ 1.5 billion a year to more than US$ 40 billion a year in 1999.

• During same period - actual use of FDI grows from about US$ 0.5 billion to more than US$ 40 billion a year.

• further surge in FDI preceded China's accession to the World Trade Organisation (WTO) in December 2001.

• by the end of 2003 China had accumulated more than 500 billion US in FDI.

FDI in China

• joint ventures• cooperative enterprises• solely foreign-owned enterprises

Sources of FDI: East Asia – Hong Kong/Macau

Distribution of FDI:• more than 80% Greenfield investments

(most of them in manufacturing industry)

FDI policies

• compulsory FDI policy

• neutral FDI policy(refunding of VAT for export)

• voluntary FDI policy(tax preference, trade facilitation)

played important role in improving level of exports

FDI in China

promote new industries:

• new high-tech industries

• advanced manufacturing

• energy conservation

• environmentally friendly sectors

Fluctuations of the RMB exchange rate

• labour productivity

• total factor productivity

• institutional factors

GDP growth rate

Labor Productivity

• Increase due to rapid urbanization

• Urbanization has also upgraded China‘s industrial structure and technology

Total Factor Productivity

• Increase due to significant improvements in incentive mechanisms and management

Institutional Factors

1. Implementation of reform and opening-up policies

2. Establishment of a market-oriented economy system

3. launch of a scientific development principle - harmonious society

4. Greater respect for the rule of law and intellectual property rights

5. Promotion of energy conservation and environment protection.

Inflation since the 1990ies – to date

especially in:

• 1994

• 1997

• 2005

• 2006 – to date

1994

• Annual inflation rate 1979-1993 under 9%• In 1994: sudden surge in price October 1994 record-setting

27,7%

Causes:• Nature of inflation was structural rather than monetary• Food price increased• Increase of rural industrial usage & bad weather

→ Output↓ → Grain price↑ Depreciation of RMB

→ Prices of imported fertilizer and feed↑ → Grain price↑

1994

Policies:

• Soft-landing policy

• Suspend the price reform, mandate the state owned enterprises and food store to increase the supply and suppress the price

• Credit plan and credit control

• Control the market prices of goods items

• Lower the economic growth rate

1997 - Asian Financial Crisis

RMB pegged to US dollar at a ratio of 8.3 (1994)

Heavy speculation from the west, that China would be forced to devalue its currency to protect the competitiveness of its exports

however: RMB‘s non-convertibility protected its value from currency speculators

Decision: maintain the peg of the currency; improving the country‘s standing in Asia

1997 - Asian Financial Crisis

convinced the Chinese government of the need to resolve the issues of its enormous financial weaknesses, such as:

• too many non-performing loans • primitive and inefficient banking system • relying heavily on trade with the United States.

since 1999 inflation ↓ reflecting tighter monetary policies and stronger measures to control food prices

2005

The July 21st Currency Reform

• PBOC revalued RMB by 2.1% against US dollar

• RMB will be traded at a eate of 8.11. to US dollar

• RMB to US dollar pegging system switched to a basket of foreign currencies

Inflation ↓ since 1997

except in 2004: 3,9%

2005: 1.8%

2006 – to date

– highest in the last decade;

– mainly affecting food and housing;

– more industries are now impacted; and

– higher in rural areas than cities

Contributors: • international economy • imbalance between supply and demand• continuing increase in material costs • excess liquidity

Inflationary pressure 2006-2008

2006 – to date

1997 - 2006 inflation: below 2% a year

2007 inflation: 4.8%

January - July 2008 inflation: 7.7% (highest point in February – 8,7%)