Transcript Lec4 Trade Policy and Foreign Direct Investment

PubPol 751-001
The Chinese Economy
and Economic Policy
Lecture 4
Dr Liu Yunhua
Shops in Shanghai, 2009
Lecture 4 Trade Policy and
Foreign Direct
Investment
4.1 Trade Policy Reform
4.2 Trade Relations
4.3 FDI in China: Role, Pattern and Trend
4.4 FDI Policy and Prospects
4.1 Trade Policy Reform
Trade Performance of China
China has transformed into a global trading
power in thirty six years.
Exports increased by 240 times, with an
average annual growth rate of 16.4%.
In 2009, China became the world largest
exporting country. Total exports in 2014
reached US$2343 billion.
China’s trade development, US$ billion
2014 Exports accounted for about one fourth of the GDP,
played a very important role in employment since the
labor intensive nature of the exports.
Total Trade
Exports
Imports
Balance
1978
20.64
9.75
10.89
-1.14
1980
38.14
18.12
20.02
-1.90
1985
69.60
27.35
42.25
-14.90
1990
115.44
62.09
53.35
8.74
1995
280.86
148.78
132.08
16.70
2000
474.29
249.20
225.09
24.11
2005
1421.91
761.95
659.95
102.00
2010
2974.00
1577.80
1396.20
181.60
2013
4160.00
2209.60
1950.40
259.20
2014
4303.17
2342.78
1960.39
382.39
WTO data: Leading trade nations and regions,
2013, US$, Billion
Exports
Imports
1
China
2,210
1
United States
2,273
2
United States
1,575
2
China
1,950
3
Germany
1,493
3
Germany
1,233
4
United Kingdom
840
4
United Kingdom
782
5
Japan
697
5
Japan
766
6
France
578
6
France
659
7
South Korea
557
7
South Korea
514
8
Netherlands
551
8
Netherlands
477
9
Russia
515
9
Canada
471
10
Italy
474
10
India
467
5
Trade Performance of China
China’s basis of trade
Abundant labor
Abundant land
Abundant natural resources
Large scale production base
Large scale market
Comparative advantage lies in labor
intensive manufacturing goods.
China’s trade pattern: Manufactured counts 95%
of exports.
Total
Primary
US$100m Goods
As of total
%
Manufactur
ed
As of total,
%
1980
181.2
91.1
50.3
90.1
49.7
1985
273.5
138.3
50.6
135.2
49.4
1990
620.9
158.9
25.6
462.1
74.4
1996
1510.5
219.3
14.5
1291.2
85.5
1998
1837.1
204.9
11.2
1632.2
88.8
2000
2492.0
254.6
10.2
2237.4
89.8
2006
9689.4
529.2
5.5
9160.2
94.5
2010
15777.5
816.8
5.2
14960.7
94.8
2012
20487.1
1005.5
4.9
19481.5
95.0
2013
22090.0
1072.7
4.86
21017.4
95.1
China’s major exports, US$ billion
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Mechanical and Electrical Products
High and New-tech Products
Automatic Data Processing Machines
Telephone Sets
Garments, Knitted or Crocheted
Garments(Excluding Knitwear and Crochet)
Rolled Steel
Furniture
Plastic Articles
Parts of Motor Vehicles
Parts for Auto Data Processing Equipment
Ships
Diode and Semi Conductors
Petroleum Products Refined
Electrical Apparatus for Switching or Protecting
Aquatic and Seawater Products
Insulated Wire or Cable
Static Converters
Rubber Tyres
Cotton Cloth
2012
2013
1179
601
185
82
77
55
51
48
31
25
29
36
24
21
19
18
16
15
15
13
1264
660
182
97
86
61
53
51
35
29
28
25
25
24
21
19
18
17
16
15
China’s major imports, US$ billion
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Mechanical and Electrical Products
High and New-tech Products
Crude Oil
Iron Ore
Motor Vehicles
Soybean
Petroleum Products Refined
Automatic Data Processing Machines
Coal and Lignite
Copper and Copper Alloys
Parts of Motor Vehicles
Aircraft
Copper Ores
Rolled Steel
Pharmaceutical Products
Paper Pulp
Machine Tools
Polyethylene in primary Forms
Logs
Ethylene Glycol
2012
2013
783
507
221
96
47
35
33
37
29
32
23
16
17
18
14
11
14
8
7
8
840
558
220
106
49
38
32
31
29
29
25
21
20
17
16
11
10
10
9
9
Two main shifts can be observed in
China’s 30 years trade development:
Exports have shifted mainly to
manufactured goods.
China now has heavily involved in intraindustry trade in mechanical, electronic,
and high tech products.
Energy and iron ore are turning into
important imports.
Evolution of the openness
of Chinese economy: 2005
trade/GDP reached 64%
Trade Policy Reform
Trade liberalization
Exchange rate policy
WTO Entry (2001)
Export subsidy
Trade Policy Reform: Trade Liberalization
China’s trade was completely planned and
controlled by the central government
before 1978.
Initial liberalization of the trade was to
allow SOEs to plan their exports and
imports but need the approval of the
central government.
Both tariff and quota system were used for
trade restriction.
Full free trade permission was given to
firms only after China’s WTO entry in 2001.
1985
293.66 2001
827.70
1986
345.28 2002
827.70
1987
372.21 2003
827.70
The Chinese currency,
RMB, is not a freely
convertible market
currency.
1988
372.21 2004
827.68
1989
376.51 2005
819.17
1990
478.32 2006
797.18
1991
532.33 2007
760.40
1992
551.46 2008
694.51
1994, RMB pegged to
US dollars at the rate
of US$1=8.3.
1993
576.20 2009
683.10
1994 861.87 2010
676.95
1995
835.10 2011
645.88
1996
831.42 2012
631.25
2005, RMB started a
managed floating
mechanism.
1997
828.98 2013
619.32
1998
827.91 2014
614.28
1999
827.83 2015
2000
827.84 2016
Trade Policy Reform:
Exchange rate policy
Historical trend of Exchange rate of RMB
Yuan/US$
On 21 July 2005, China declared RMB on a
managed floating mechanism.
Trade Policy Reform: WTO Entry
December 11, 2001, China became a formal
member of WTO.
The negotiation lasted for 13 years.
The main agreements include:
China could maintain an average tariff level of
9%.
Automobile industry tariff reduced to 25% in
five years.
Open market entry of financial service,
insurance, telecommunication, retailing
industry, and some others in five years.
Trade Policy Reform: Export subsidy
China had adopted an export production
subsidy and export tax rebate policy for a
long time.
WASHINGTON, Nov. 29 2009: Bowing to
American pressure on the eve of high-level
talks to reduce economic tensions, China
agreed Thursday to terminate a dozen
different subsidies and tax rebates that
promote its own exports and discourage
imports of steel, wood products,
information technology and other goods.
A few questions regarding China’s trade
development
Why could China’s exports increase with a high
growth rate in more than thirty years?
How did China quickly transit its exports from a
lower level to manufacturing dominant?
What does it mean when China has more intraindustry trade in machinery-electronic, and hightech industries?
What is the meaning of 64% reliance of Chinese
economy on the world?
4.2 Trade Relations
2014 China’s Exports and Imports with Major Countries and
Regions, 100 million yuan
Country or region
Exports
Increase
over 2013
(%)
Imports
Increase
over 2013
(%)
European Union
22787
8.3
15031
9.7
United States
24328
6.4
9764
3.1
ASEAN
16712
10.3
12794
3.3
Hong Kong, China
22307
-6.6
792
-21.5
Japan
9187
-1.4
10027
-0.5
Republic of Korea
6162
8.9
11677
2.8
Taiwan, China
2843
12.7
9337
-3.9
Russia
3297
7.2
2555
3.7
India
3331
10.7
1005
-4.6
Source: China Statistical Communique 2015
China’s Trade Relations
Trade Relation with U.S.:
China had maintained a large
and increasing trade surplus
with U.S. for a long time.
U.S. accused China’s unfair
trade in currency manipulation
and export subsidy.
China accused U.S. restriction
of high tech products export to
China.
There is also a serious problem
in trade stats disputes.
2010-2014
US trade
with China
US$billion
Imports
364.9
Balance
2010
Exports
91.9
2011
104.1
399.3
-295.2
2012
110.5
425.6
-315.1
2013
121.7
440.4
-318.7
2014
123.6
466.7
-343.0
-273.0
US and China trade volume
comparison, US$ trillion
China’s Trade Relations
Trade Relation with EU and Japan:
With EU, more on labor intensive industry
jobs.
With Japan, similarly on jobs, and in
agricultural products. But Japan gets more
advantage in exporting to China.
Job losses
of
developed
economies
in
manufacturi
ng sector
during
1990-2012.
UK is 50%,
US, Japan,
France are
above 25%.
22
Chinese New Year
By PAUL KRUGMAN
Published an article: December 31, 2009
It’s the season when pundits traditionally
make predictions about the year ahead.
Mine concerns international economics: I
predict that 2010 will be the year of China.
And not in a good way.
Question: Can balanced trade with China
solve EU’s job loss problem?
China’s Trade Relations
Trade Relation with ASEAN:
ASEAN is China’s third largest market after
US and EU. 2014 China’s export to ASEAN
reached US&272 billion.
ASEAN FTA with China: competition and
complementarity.
Singapore in a good position, while other
members will meet more competition in
manufacturing sector from China.
What are the opportunities for East Asian
economies in China’s market?
The integration of the Chinese economy with
the regional Asian economies is speeding up
during the past decade in trade and in
investment.
China is now the largest market and supplier
for most of the Asian economies.
A soft landed and transitional Chinese
economy will expand the mutual beneficiary
between China and the region.
25
Policy changes for industrial structure
promotion
A high growth Chinese economy will
enhance further market demand capacity
for this region.
Transition of Chinese economy will
expand the demand for the regional
products.
Appreciation of RMB, labor cost increase
all have the effects of spillover to the
regional economies.
China’s trade with this region has three
clear features
The trade volume grows faster than
China’s total trade.
Most of the economies has a trade
surplus with China.
The trade of China with the economies of
this region is very highly complementary.
Australia’s top five trade partners 2001-2010
Australia
2001
2010
Exports, total
63442
211836
1. Japan
12212
40082
2. China, People's Rep. of
3904
53122
3. Korea, Rep. of
4929
18833
4. India
1243
15033
5. United States
6126
8464
66863
214153
5866
39837
12269
23597
3. Japan
8666
18398
4. Singapore
2257
10779
5. Germany
3795
10613
Imports, total
1. China, People's Rep. of
2. United States
Source: Frank Bingham, Trade Competitiveness & Advocacy Branch, [email protected]
Philippines’s top five trade partners 2001-2010
Philippines
2001
2010
32155
56988
1. United States
8994
7724
2. Japan
5057
7355
793
10939
4. Hong Kong, China
1580
4357
5. Singapore
2308
7608
Imports, total
33059
74304
1. Japan
6633
10682
2. United States
6412
7529
3. Singapore
2073
7093
975
10316
2082
3683
Exports, total
3. China, People's Rep. of
4. China, People's Rep. of
5. Korea, Re. of
Vietnam’s top five trade partners 2001-2010
Vietnam
2001
2010
Exports, total
15029
67994
1. United States
1065
14444
2. Japan
2510
7432
3. China, People's Rep. of
1417
6337
4. Australia
1042
2868
5. Singapore
1044
1458
16218
95826
1. China, People's Rep. of
1606
25433
2. Singapore
2478
8126
3. Japan
2183
8996
4. Korea, Rep. of
1887
7169
792
6430
Imports, total
5. Thailand
Asian countries trade with China in million US$
2001-2010
2001
2010
2001
Australia
2010
Singapore
Exports
3904
53122
1
Exports
36496
1
Imports
5866
39837
1
Imports
33666
3
Korea
Thailand
Exports
18190
125476
1
Exports
2863
21479
1
Imports
13303
75692
1
Imports
3711
24528
2
Japan
Vietnam
Exports
30948
149626
1
Exports
1417
6337
3
Imports
57780
153369
1
Imports
1606
25433
1
Indonesia
Philippines
Exports
2201
15693
2
Exports
793
10939
1
Imports
1843
20424
2
Imports
975
10316
1
Exports
3821
45796
1
Imports
3804
26199
2
Malaysia
Data source: ADB bank report.
Discussion questions for trade
policy:
1. What are the main characteristics in China’s
trade patterns and what are the current
factors explaining the trade pattern of China?
2. What are the main goals in China’s trade
policy regarding the exchange rate control
and export subsidy?
3. In what sense is the trade relation between
China and U.S. considered the world most
important economic relationship?
4.3 FDI in China: The Role, Pattern
and Trend
The Role of FDI in
Chinese economy
FDI inflow 1991-2014, US$ billion
1991
11.554
2003
56.140
1992
19.203
2004
64.072
FDI was one of the
strongest growth drivers
for Chinese economy.
1993
38.960
2005
63.805
1994
43.213
2006
67.076
1995
48.133
2007
78.339
1996
54.805
2008
95.253
It generated 15% of GDP
in 2002, 20.5% tax
payment, and 6.2%
employment.
1997
64.408
2009
91.804
1998
58.557
2010
108.821
1999
52.659
2011
117.698
2000
59.356
2012
113.294
2001
49.672
2013
118.721
2002
55.011
2014
119.560
FDI in China: The Role, Pattern and Trend
FDI has made a profound impact on
China’s economy in the areas of
Technology
Management
Marketing
Work ethics
Efficiency
Shanghai Jan, 2009
The Pattern and Trend of FDI in Chinese
economy
FDI was the predominant form of
China’s access of global capital.
Large proportion of China’s FDI inflows
are in manufacturing industry.
Most of the FDI inflows are from East
Asian economies.
Hong Kong is the main source of FDI in
China, US$ billion
60
50
40
30
20
10
Top 10 Origins of FDI, 2005
Country/Region of Origin
Amount Invested (US$)
1. Hong Kong
2. Virgin Islands
3. Japan
$17.95 billion
$9.02 billion
$6.53 billion
4. South Korea
5. United States
6. Singapore
7. Taiwan
$5.17 billion
$3.06 billion
$2.20 billion
$2.15 billion
8. Cayman Islands
$1.95 billion
9. Germany
10.Western Samoa
$1.53 billion
$1.35 billion
The form of FDI
The sectors of FDI 1991-1995
The sectors of FDI 1996-2000
The sectors of FDI 2014
Sector
Total
Utilized Increase
Increase Actually
Value
Enterprises over 2013
over 2013
(100 million
(%)
(%)
USD)
23778
4.4
1195.6
1.7
719
-5.0
15.2
-15.4
5178
-20.4
399.4
-12.3
Production and Supply of Electricity, Gas and Water
208
4.0
22.0
-9.3
Transport, Storage, Post and Telecommunication Services
376
-6.2
44.6
5.7
Information Transmission, Computer Services and Software
981
23.2
27.6
-4.4
7978
8.6
94.6
-17.8
446
-15.9
346.3
20.2
3963
18.0
124.9
20.5
181
9.0
7.2
9.3
Agriculture, Forestry, Animal Husbandry and Fishing
Manufacturing
Wholesales & Retail Trade
Real Estate
Leasing and Business Services
Services to Households and Other Services
Case study: CapitaLand in China
The total market
capitalisation of the
nine public listed
entities in the Group,
net of common
holdings, is S$20.5
billion as at 30
December 2011.
The Group manages
S$60.3 billion of real
estate assets.
CapitaLand entered China market in 1994. By
2011, CapitaLand’s asset in China reached 34%
of their total, covering properties of offices,
shopping malls, commercial complexes,
residential homes.
Regional presence of CapitaLand in China
GROWING THE RAFFLES CITY FRANCHISE IN
CHINA
CapitaLand has a portfolio of nine Raffles City
developments in Singapore and China. Eight of
the nine Raffles City developments are in China
– with two already operational, two slated to
commence operations in 2012 and the
remaining under various stages of development.
The current eight Raffles City projects are in
Shanghai, Beijing, Chengdu, Hangzhou,
Ningbo, Shenzhen and Chongqing.
In the business plan of Raffles City for Shanghai
and Ningbo, the function design is different
according to their difference in percentage of
middle class people.
Shanghai Raffles City targets more on middle
class shopping need, while Ningbo’s function is
more on family service since the neighboring
area is of residential families.
CapitaLand expanded its Raffles City footprint to
Chongqing in 2011, making it the eighth of
such mixed developments in China. CapitaLand,
together with CapitaMalls Aisa (CMA) and
Singbridge Holdings (a unit of Temasek
Holdings) will jointly develop the magnificent
Chao Tian Men site into a landmark
development featuring a shopping mall and eight
towers for residential, office, serviced residence
and hotel use. The project is designed by star
architect Mosche Safdie and is slated for
completion in phases from 2017.
Shopping Malls completed in China
Weifang
Chongqing
Changsha
Nanchang
Foshan
Quanzhou
Chengdu
Maoming
Zhangzhou
Mianyang
Zhanjiang
Zibo
Dalian
Tianjin
Chongqing
Zhaoqing
Deyang
Yibin
Dongquan
Chengdu
Yiyang
Yangzhou
Xinxiang
Kunshan
Harbin
Beijing
Anyang
Zhengzhou
Questions:
• Why is the expansion of CapitaLand
in China so successful?
• What are the regional characteristics
of CapitaLand presence in China?
4.4 FDI Policy and Prospects
Recent policies relevant to Foreign Invested
Enterprises (FIEs) (1)
Labor contract law, and the Law on the
Arbitration of Labor and Personnel Disputes
are in pipeline.
Discontinuation of FIE representative offices
The Anti-monopoly Law.
The tax unification.
Policy and Investment Environment
Recent policies relevant to Foreign
Invested Enterprises (2)
Special treatment and privileges to FDI
related firms are phasing out.
Realizing the WTO member
commitments, restrictions and special
requirements to FIEs are also removed.
Policy and Investment Environment
The regulations and procedures for
FIEs
Although there is central government
passed law for FDIs companies, which
has been revised and improved
constantly during the past two decades,
local governments still have their way to
add special requirements or give special
treatments.
Policy and Investment Environment
The key success factors for Joint Ventures
Top management commitment
Solid feasibility study and pre-departure
training
A good local partner
Building mutual trust
Effective human resource management
Patience and perseverance
Effective use of intermediaries of Chinese
origin
Brand image
Policy and Investment Environment
The potential trouble spots
Conflicts in goals
Incompatible management skills
and quality
Conflicts on many details
Policy and Investment Environment
Some common mistakes made by
foreign companies in the past
Underestimate the extent of
competition in China market
Provide less advanced products and
keep a slower pace of upgrading
Send in less experienced expatriate
executives
Policy and Investment Environment
Adaptation in FDI
From join ventures to wholly
foreign-owned enterprises
Influencing policies and public
acceptance
Localization of foreign operations
Policy and Investment Environment
Perspectives for FIEs (1)
The policy environment in China is
moving toward a normally regulated
business environment.
Phasing out of the special treatment
toward FDI, however, does not mean any
negative movement, since in the past FDI
firms got special treatment, and they
bore the starting cost and risk too. Today
they got the advantage as earlier movers
Policy and Investment Environment
Perspectives for FIEs (2)
Invisible privileges to FDI are
however still existent.
The dynamic nature of Chinese
economy is still providing numerous
investment opportunities, but is
more competitive than before.
Prospects of and Challenges to FDI
in China
BEIJING, June 22, 2012 (Xinhua) -- So far, 490
out of the world top 500 companies have
invested in China and established more than
1,600 R&D centers and regional
headquarters.
They are the main carriers of FDI to China
and the major force for globalization in
reshuffling the world production locations.
Prospects of and Challenges to FDI in China
Key factor in multinationals’ decision to
invest in China
 Huge market
92%
 Low-cost and abundant labor supply
84%
 Large profit margins
71%
 Displaying superior technology
50%
 Having market shares in earlier stage 37%
 Prolonging product lifecycles
33%
 Knowing the market
24%
 Part of company’s global strategies
19%
Prospects of and Challenges to FDI in China
Stages of Entering the China Market (1)
Market exploration (1980s) : Representative
offices, sale of products, setup joint
ventures: success and failures both exist.
Comparing German’s VW-Shanghai joint
venture and US-Beijing Jeep’s failure, Japan
Auto Venture in China, we can see the role of
trust, attitude, foresight, and generousness.
Prospects of and Challenges to FDI in China
Stages of Entering the China Market (2)
Fully fledged FDI environment after 2000:
Opened markets in previous restricted ones,
finance, telecommunications.
More aggressive strategies and expansion
(1990s): strategic investment decisions made
by many multinationals, Coca-Cola, Kodak,
McDonals, Whirlpool, Peugeot.
Prospects of and Challenges to FDI in China
Multinationals market shares and dominantion
in industries (1)
Motor car industry: FDI dominant. VW took 70% in
early years, now still has 30%, others are Buick by
Shanghai GM, Dongfeng-Nissan by Japan.
Telecommunications: domestic dominant, TCL. FDIs
in mobile phone, big three, Motorola, Nokia, and
Ericsson, over 80% market share in 1999.
Telecommunications equipment: Multinationals
dominant.
Drinks: Coca-Cola and Pepsi.
Prospects of and Challenges to FDI in China
Multinationals market shares and domination
in industries (2)
Films and printing: battle between Kodak and Fuji.
Household appliances: domestic dominated by Haier
in fridge, TV sets by Changhong.
Household chemicals: P&G dominates the market
with 50% market share.
Retail: Carrefour entered in 1995, sales reached
US$1.33 billion in 2003, while Wal-Mart entered in
1996, but more use China as supplier for other
markets, in 2003 US415 billion exported by Wal-Mart.
Auto, transport
Financial services
Real Estate
Others
Prospects of and Challenges to FDI in China
What will be the new areas and roles that
FDI can play in the future in Chinese
economy?
The areas that are not successfully
developed in China’s reform.
Mostly, they are the service sectors and
not traditional production sectors.
Medical service, education, financial
service, retails, and other services.
Hong Kong Chinese University sets up an hospital in China: One of the
objectives of this project is to build a world class hospital in the southern
part of China. The hospital is managed by senior staff of the University of
Hong Kong. The majority of manpower is from mainland China.
This project hopes to act as a role model to improve the medical
services in China. Building of the hospital cost 4 billion RMB. There will
be 2000 beds, of which 60% are for public patients and 40% for private
patients.
Discussion questions for FDI policy:
1. What are the major issues of concern
lead to failure, success or
unsatisfactory performance of a
foreign enterprise in China?
2. What are risks and advantages of
multinationals in investing in China?
3. In what areas can FDIs continue to
contribute to Chinese economy, and
why?
End