Import/Export Economics of China

With 1/5th of the world’s population, China is the most populous country in the world. As of the 2010 Census the population of China (including SAR’s and Taiwan) was 1. 37 billion persons (Census Bureau). In November of 2010 the census reported 1. 27 billion people – this makes the annual growth rate . 57% as compared to the world population growth rate of over 1. 1% during the same period (Census Bureau). This is far removed from the China of the 1990’s where the growth rate over 8 years was 12. 4%.

Population control has been a concern since the 1950’s and was mandated later in the 1970’s through the One Child policy. The population distribution is heavily in the east of China as represented below where 1 black dot equals 5000 people: (Noll). The density in the east is likely the result of the ease of trading along coastal zones; however, there are larger factors at play. Much of China’s land is comprised of the Gobi Desert as well as the Himalayas. To put this in perspective 90% of the population live in 30% of China’s land area (AAG Center for Global Education ).

Despite its size, the population of China has managed a relatively high literacy rate. Of those age 15 and older 92. 2% can read and write (Central Intelligence Agency). This is likely the result of the expansion of the education budget – 3 times the old percentage of GDP (while also bearing in mind a rising GDP). Since 1998 the number of colleges has doubled and the number of students quintupled (Chen). This is of course necessary as more than 60% of high school graduates in China now attend a university, up from 20% in the ‘80’s.

This puts the enrollment numbers somewhere near 5 million with a graduation rate nearing 97% – though there is no available breakdown of this figure (Chen). With such high graduation rates there is difficulty for the graduates to find local jobs; in fact the most recent numbers suggest that 10% of college graduates cannot find jobs, as compared to the 4. 1% urban jobless rate in China (Si). This leaves a large available educated work force. Over the past 40 years China has worked diligently to open its closed centrally planned system to a market-oriented global economy.

The result has been one of decentralization, increased state enterprise autonomy, and foreign trade that has led to China being the world’s largest exporter in 2010 (Central Intelligence Agency). All said this brings China’s national income to $26. 4 trillion dollars, up from $21 trillion in 2008 (World Bank). Per capita the GDP breaks down to $8,400, up 16% from two years ago (Central Intelligence Agency). While there have been strong improvements in GDP this does not translate to money in pockets, rather the income distribution in China is worsening.

“China already is showing levels of inequality comparable to the Philippines and Russia and is far less egalitarian than Japan, the U. S. , and even Eastern Europe, according to Li Shi, an authority on income distribution trends at Beijing Normal University. Official figures show rural incomes are less than one-third those in cities, with the top 10 percent of urban Chinese earning about 23 times that of the poorest 10 percent—a ratio that is almost certainly understated” (Roberts). The Gini coefficient, used to guage income distribution, worsened from . 3 25 years ago to .

5 today – poverty researchers recognize . 4 and above as socially destabilizing (Roberts). Traditionally the two most important sectors for China have been agriculture and industry, together comprising 70% of the labor force and 60% of GDP; however, in 2011 agriculture was bringing in only 10% of the GDP – primarily through rice, wheat and tobacco. There has been a large increase in the service and technology sectors over the past decade related to the overall welfare of the country (Primary – Agriculture, Secondary – Service, Tertiary – Industry) (Central Intelligence Agency). (Census Bureau).

There are few that can compare with China when it comes to sheer economic growth. Their Gross National Product (GNP – the measure of output for all citizens regardless of location) has blossomed from less than $1 trillion in 1985 to more than $10 trillion in 2010 (Central Intelligence Agency). When combined with the strong trade surpluses over the past decade it becomes impossible to ignore the positive changes that strategic change has brought on: (World Bank). In keeping with China’s plans to become a dominant player in the world market they are also planning the dominance of the yuan, their currency.

“The US dollar is the currency of the world, but that dominance could begin to erode if China has its way. In recent years, China has stepped up an ambitious plan to increase the circulation of yuan outside the mainland and persuade trading partners to use it to invoice or settle transactions. And it is aggressively building a market for yuan-denominated debt. If all goes according to plan, the yuan could become one of the world's reserve currencies as soon as 2015” (Tan). There are innumerable factors that will play into the strength of the yuan, not the least of which is inflation.

While recently at a more controllable rate – 5. 4% for 2011 – there have been serious fluctuations over that past decade that might raise doubt in consumers’ minds (Central Intelligence Agency). The strength of the yuan has been in the news quite a bit recently, especially where currency control is concerned. “A decade ago, following the Asian Financial Crisis of 1997-98, trading partners pressured China to float its currency. China did peg its currency to the dollar, but at a rate that is changed periodically in very small increments by China's central bank rather than being allowed to float in an open market” (Carey).

The result has been difficult for trading partners of China due to the value of their currency vs. yuan. Chinese consumers are on the whole unable to purchase international products due to high exchange rates, which lend to the trade deficit for the trading partners. This does however leave China in a fine position as an exporter as it keeps the value of its good artificially low vs. the global market. China’s top 15 trading partners are as follows: All data posted in USD $10,000 (Yearbook).

While there are many different trade agreements between the United States and China – 5 signed last November – the largest, a Free Trade Agreement (FTA), is still a ways off. An FTA would release all tariffs, quotas, and other barriers to trade – a strong potential boost to both economies. However, the significant differences between the two economies in the past have led to disputes both socially and politically. For many years we have maintained Most Favored Nation trade status, all the while raising concerns about child labor and working conditions.

Before considering coming to a large-scope agreement like a FTA there would need to consensus on human rights. Until such time as an FTA can come into being there will be exchange controls. Though the past decade has seen a liberalization of China’s foreign exchange there are still controls in place. The controls are managed by The National Development and Reform Commission (NDRC), People's Bank of China (PBOC), and State Administration of Foreign Exchange (SAFE); each one specializes in an aspect of trade – macro-economic strategy, credit and loan policy, and foreign currency, respectively.

As previously mentioned, the lack of a currency floating at market value has had an impact on the ability of other countries to export to China – all current account items. “Current account items are transactional items, including payments and receipts with respect to trading of goods, provision of services and other normal fund transfers, that occur in the ordinary course of business. At present, businesses are allowed to convert foreign exchanges freely in current account items” (FAITC). Capital accounts are another story.

Currently all loans, direct investment, and securities that provide any sort of revenue derived from capital accounts by Chinese entities must be repatriated in China. These exchange policies have a direct impact to the level Foreign Direct Investment (FDI). “Since China opened its economy to foreign investment in 1979, it has become the second largest Foreign Direct Investment (FDI) destination in the world after USA” (Liu). The greatest percentage of FDI has been flowing into the secondary sector (Manufacturing), traditionally a higher tech sector than the primary (Agriculture).

"The focus is to optimize the foreign investment structure, push forward technology innovation and industrial upgrading," the NDRC said (Xin). This sort of investment is the foundation of growth for those sectors. Along with the direct investment comes the knowledge and expertise that the investing company holds. By focusing on manufacturing there is the measureable drive to see a tech expansion in the country. “China has been remarkably successful in designing industrial policies, joint venture requirements and technology transfer pressures to use FDI to create indigenous national champions” (Moran).

FDI has been a boon to China, allowing rapid technological increase in an already strong manufacturing/industrial sector. China’s exchange control and investment are just part of the picture. To get a feel for the trading dynamic it is important to understand the import controls as well. China uses a classification system for imports – permitted, restricted and prohibited. While most goods fall in the permitted category there are some that fall into strict quotas or licenses as managed by the Ministry of Commerce (MOFCOM).

With most goods permitted it stands that most goods have import tariffs. Since joining the World Trade Organization (WTO) in 2001the average tariff rate has dropped from 15. 3% in 2000 to 9. 8% in 2009 (FAITC). Along with tariffs, all imports are subject to inspection/verification as well certain packaging/labeling requirements; if these are not met the goods will be refused entry into China. The loosening of restrictions on who can import as well as tariffs by the government is making China more attractive each year.