China's currency and trade practices
Thursday, 1 April 2010
Abdullah A. Dewan
OVER the last 60 years, China enjoyed an 8.1% gross domestic product (GDP) growth, making its 2008 aggregate output 77 times higher than that of the 1949 level when the new China was created. During 1980-2008 period, it has maintained an enviable average growth rate of 10%, became (as of 2008) the third largest economy in the world and glided into the lower middle income group with per capita gross national income of $2940 (current US $, World Bank).
In recent years much of this growth -a whooping 35% -- is attributed to its export driven manufacturing sector. Part of its 35% export growth (EXPG) is achieved by artificially letting its currency stay undervalued (pegged to the dollar) making its exports cheaper relative to its competitors, which is tantamount to export subsidy. For example, during 2001-08, net exports (= exports - imports) and the investment in building capacity in tradable sectors have accounted for over 60% of China's growth compared to 40% in the 1990s. This is much larger than the 2001-08 average of the G7 (16%), euro area (30%) and the rest of Asia (35%).
Because of these unfair currency manipulations and trade practices, China has is now facing coordinated punitive actions from nearly all industrialized economies.
China has been resisting enormous pressure from nearly all industrialised economies to revalue its currency upward. These countries argue that the undervalued Chinese renminbi is taking a big bite out of their export competitiveness. Recent estimates claim that the renminbi is undervalued by 20 to 40 per cent against the dollar. Many believe that China's accumulation of over $2.2 trillion forex reserves is by-product of its undervalued currency.
To keep the renminbi below its market value, Chinese Central Bank aggressively intervenes in the forex market -- selling renminbi and buying dollar denominated assets. It is also widely viewed that China's undervalued currency has fuelled the global financial imbalances -- one of the major sources of the current financial and economic crisis. Both the US and the European Union (EU) countries believe that unless China revalues its currency upward, the global imbalances are likely to continue.
One wonders why the world's fast growing economy manipulates its currency to keep undervalued. Harvard economist argues that China's growth would be reduced by more than two per cent if its currency were to appreciate by 25 per cent in real terms.
The question then is: How long could China maintain its high EXPG and keep its GDP growing around 10% or better while keeping its currency undervalued?
Despite being hit by the global financial crisis, China's economy still grew around 7.7% in 2009 and the 2010 growth forecast is 9.2%. Experts believe, China still has some room to expand its EXPG. In fact, China's vice commerce minister Zhong Shan recently emphasised that EXPG which is vital for China's GDP growth and job creation will continue to grow in 2010. He argued that exporting 30 million shirts involves employment of 10,000 people, thus making their families or 30,000 people well off.
Maintaining its high EXPG and expansion of market share would require a substantial price cut for its products through some combination of (1) increases in relative productivity to lower costs below that of competitors, (2) a squeeze in corporate profits, and (3) greater implicit or explicit subsidies through continued price distortions (IMF Working Paper, August 2009). However, on-going trade restrictions and anti-dumping duties (ADDs) from the EU and the US for its trade practices and currency manipulations may slow down its continued EXPG, thus hindering GDP growth as well.
Stupefied by the worst economic crisis in decades, the 27- nation EU block has launched a series of unprecedented ADDs against China of which five separate impositions were made during July and August 2009, covering a wide range of products. For example, the EU on September 24 imposed a five-year official ADDs of 39.2% and 30% on seamless steel pipes and aluminium foil respectively. There are 19 countries and regions which had recently launched 103 trade-related investigations against Chinese products.
The US-China Economic and Security Review Commission recently asserted that China's trade practices that have piled up huge surpluses causing global trade imbalances has hastened global financial crisis that started in the US 2008. The Commission claimed that even the $585 billion fiscal stimulus package that China has used to withstand the financial crisis, mainly supported more EXPG activities. China's 2008 trade surplus with the US was $268 billion.
From 2006 to 2008, imports of Chinese steel pipes increased by a massive 203%. In September 2009, the US announced to slap duties on Chinese-made tires to protect local US industry. In June last year, Europe and the US accused China for violating WTO provisions by restricting exports of essential commodities (example, bauxite, zinc, yellow phosphorus silicon, coke and other raw materials) to give Chinese manufacturers an unfair edge over their international rivals.
The US trade representative, Ron Kirk, said, "China had imposed quotas, export duties, and other costs on raw materials used in the production of steel, chemicals, and aluminum. These restrictions include minimum export prices and tariffs of up to 70%, on a range of raw materials of which it is a major producer. The US complained that China produced 336m tonnes of coke in 2008 but only 12m tonnes were allowed for export.
About a dozen Chinese products are believed to have benefited from government subsidies or are being sold in the US at less than fair value. This triggered the US. Department of Commerce to set preliminary ADDs of 14.36% on four Chinese producers or exporters of steel grating products to offset unfairly low prices (Reuters, Dec. 29). Many other exporters of other products would receive an ADD at rate of 145.18%.
The 2008 financial crisis hit China's export sector hard because of slowing demand for its products from the US and EU countries. Had China diverted more resources to its domestic consumer sector, the adverse effects of the global crisis would have been much less. That is exactly what Bangladesh and other developing countries should do - invest in products to meet domestic demand and thus insulate the economy from adverse external shocks.
China's export-oriented growth is comparable to those of Korea, Japan, and the newly industrialised Asian Tigers, which have all maintained high EXPG through increasing market shares over a sustained period. Is China being discriminated now? Yes, no or may be. However, China is striking back after the US, the EU, and other countries slapped tariffs and filed complaints about Chinese steel and commodity products to the WTO. However, to maintain its overall economic growth, China can ill afford a trade war with its most important trading partners. China must realize though, that its unfair trade practices and currency manipulations are hurting EXPG of other developing economies like Bangladesh.
China can still achieve a substantial GDP growth without resorting to currency manipulations and unfair trade practices. Much of China's past growth testify to the validity of the convergence hypothesis, which was also the basis of Japan's becoming an advanced economy. India is on track doing the same.
Implication of the convergence hypothesis is that less developed countries (such as China, Indian, Bangladesh and others) can boost their productivity (output per worker) growth rates faster than that of the advanced countries by transferring and adopting advanced technologies.
This is how it works: Advanced economies are already using these technologies and for them to grow any faster than the prevailing growth rate would require innovating new technologies -- and that do not come by easily and quickly. The graph depicts the convergence of two hypothetical economies over time -- showing how a poorer country like Bangladesh -- through faster productivity growth rate -- can glide into middle income and higher income echelon -- thereby narrowing the income gap over time and hence achieve poverty reduction.
Dr. Abdullah A. Dewan, founder of politicinomy.com, is a professor of Economics at Eastern Michigan University. He can be reached at
e-mail: adewan@emich.edu
OVER the last 60 years, China enjoyed an 8.1% gross domestic product (GDP) growth, making its 2008 aggregate output 77 times higher than that of the 1949 level when the new China was created. During 1980-2008 period, it has maintained an enviable average growth rate of 10%, became (as of 2008) the third largest economy in the world and glided into the lower middle income group with per capita gross national income of $2940 (current US $, World Bank).
In recent years much of this growth -a whooping 35% -- is attributed to its export driven manufacturing sector. Part of its 35% export growth (EXPG) is achieved by artificially letting its currency stay undervalued (pegged to the dollar) making its exports cheaper relative to its competitors, which is tantamount to export subsidy. For example, during 2001-08, net exports (= exports - imports) and the investment in building capacity in tradable sectors have accounted for over 60% of China's growth compared to 40% in the 1990s. This is much larger than the 2001-08 average of the G7 (16%), euro area (30%) and the rest of Asia (35%).
Because of these unfair currency manipulations and trade practices, China has is now facing coordinated punitive actions from nearly all industrialized economies.
China has been resisting enormous pressure from nearly all industrialised economies to revalue its currency upward. These countries argue that the undervalued Chinese renminbi is taking a big bite out of their export competitiveness. Recent estimates claim that the renminbi is undervalued by 20 to 40 per cent against the dollar. Many believe that China's accumulation of over $2.2 trillion forex reserves is by-product of its undervalued currency.
To keep the renminbi below its market value, Chinese Central Bank aggressively intervenes in the forex market -- selling renminbi and buying dollar denominated assets. It is also widely viewed that China's undervalued currency has fuelled the global financial imbalances -- one of the major sources of the current financial and economic crisis. Both the US and the European Union (EU) countries believe that unless China revalues its currency upward, the global imbalances are likely to continue.
One wonders why the world's fast growing economy manipulates its currency to keep undervalued. Harvard economist argues that China's growth would be reduced by more than two per cent if its currency were to appreciate by 25 per cent in real terms.
The question then is: How long could China maintain its high EXPG and keep its GDP growing around 10% or better while keeping its currency undervalued?
Despite being hit by the global financial crisis, China's economy still grew around 7.7% in 2009 and the 2010 growth forecast is 9.2%. Experts believe, China still has some room to expand its EXPG. In fact, China's vice commerce minister Zhong Shan recently emphasised that EXPG which is vital for China's GDP growth and job creation will continue to grow in 2010. He argued that exporting 30 million shirts involves employment of 10,000 people, thus making their families or 30,000 people well off.
Maintaining its high EXPG and expansion of market share would require a substantial price cut for its products through some combination of (1) increases in relative productivity to lower costs below that of competitors, (2) a squeeze in corporate profits, and (3) greater implicit or explicit subsidies through continued price distortions (IMF Working Paper, August 2009). However, on-going trade restrictions and anti-dumping duties (ADDs) from the EU and the US for its trade practices and currency manipulations may slow down its continued EXPG, thus hindering GDP growth as well.
Stupefied by the worst economic crisis in decades, the 27- nation EU block has launched a series of unprecedented ADDs against China of which five separate impositions were made during July and August 2009, covering a wide range of products. For example, the EU on September 24 imposed a five-year official ADDs of 39.2% and 30% on seamless steel pipes and aluminium foil respectively. There are 19 countries and regions which had recently launched 103 trade-related investigations against Chinese products.
The US-China Economic and Security Review Commission recently asserted that China's trade practices that have piled up huge surpluses causing global trade imbalances has hastened global financial crisis that started in the US 2008. The Commission claimed that even the $585 billion fiscal stimulus package that China has used to withstand the financial crisis, mainly supported more EXPG activities. China's 2008 trade surplus with the US was $268 billion.
From 2006 to 2008, imports of Chinese steel pipes increased by a massive 203%. In September 2009, the US announced to slap duties on Chinese-made tires to protect local US industry. In June last year, Europe and the US accused China for violating WTO provisions by restricting exports of essential commodities (example, bauxite, zinc, yellow phosphorus silicon, coke and other raw materials) to give Chinese manufacturers an unfair edge over their international rivals.
The US trade representative, Ron Kirk, said, "China had imposed quotas, export duties, and other costs on raw materials used in the production of steel, chemicals, and aluminum. These restrictions include minimum export prices and tariffs of up to 70%, on a range of raw materials of which it is a major producer. The US complained that China produced 336m tonnes of coke in 2008 but only 12m tonnes were allowed for export.
About a dozen Chinese products are believed to have benefited from government subsidies or are being sold in the US at less than fair value. This triggered the US. Department of Commerce to set preliminary ADDs of 14.36% on four Chinese producers or exporters of steel grating products to offset unfairly low prices (Reuters, Dec. 29). Many other exporters of other products would receive an ADD at rate of 145.18%.
The 2008 financial crisis hit China's export sector hard because of slowing demand for its products from the US and EU countries. Had China diverted more resources to its domestic consumer sector, the adverse effects of the global crisis would have been much less. That is exactly what Bangladesh and other developing countries should do - invest in products to meet domestic demand and thus insulate the economy from adverse external shocks.
China's export-oriented growth is comparable to those of Korea, Japan, and the newly industrialised Asian Tigers, which have all maintained high EXPG through increasing market shares over a sustained period. Is China being discriminated now? Yes, no or may be. However, China is striking back after the US, the EU, and other countries slapped tariffs and filed complaints about Chinese steel and commodity products to the WTO. However, to maintain its overall economic growth, China can ill afford a trade war with its most important trading partners. China must realize though, that its unfair trade practices and currency manipulations are hurting EXPG of other developing economies like Bangladesh.
China can still achieve a substantial GDP growth without resorting to currency manipulations and unfair trade practices. Much of China's past growth testify to the validity of the convergence hypothesis, which was also the basis of Japan's becoming an advanced economy. India is on track doing the same.
Implication of the convergence hypothesis is that less developed countries (such as China, Indian, Bangladesh and others) can boost their productivity (output per worker) growth rates faster than that of the advanced countries by transferring and adopting advanced technologies.
This is how it works: Advanced economies are already using these technologies and for them to grow any faster than the prevailing growth rate would require innovating new technologies -- and that do not come by easily and quickly. The graph depicts the convergence of two hypothetical economies over time -- showing how a poorer country like Bangladesh -- through faster productivity growth rate -- can glide into middle income and higher income echelon -- thereby narrowing the income gap over time and hence achieve poverty reduction.
Dr. Abdullah A. Dewan, founder of politicinomy.com, is a professor of Economics at Eastern Michigan University. He can be reached at
e-mail: adewan@emich.edu