Monday, December 19, 2011

Chinese Economy Target of International Trade War

Tianlun Jian

The global economic crisis has hit many people hard, affecting people’s daily life in many countries. As more countries face job losses, company bankruptcies, and stagnant sales, trade disputes become commonplace. The current decline in purchasing power has triggered an escalating trade war in the international arena, with China being the major target.

During the past two to three decades, exports have played an increasing role in China’s economic development, accounting for about one-third of its Gross Domestic Product (GDP). According to many experts, China has essentially become a manufacturer for the world.

In the past several years, many European countries, the United States, and Japan have protested China’s policies, such as dumping, currency undervaluation, and export subsidies. They have repeatedly urged China to raise the value of its currency, which had been pegged to the U.S. dollar for a decade and was widely considered to be undervalued by as much as 40 percent in 2005.

Under international pressure, the People’s Bank of China, the central bank, decided to switch its exchange rates from a dollar-pegged system to a currency-basket system. In July 2005, the yuan started a managed float, appreciating slowly against the U.S. dollar, which has been declining since early 2002 due to huge U.S. deficits.

However, the yuan was again pegged to the declining dollar in July 2008. The yuan started to depreciate against all major currencies along with the U.S. dollar during the past year, allowing Chinese exporters a greater advantage in the global competition.

Consequently, China has received more complaints from its trading partners this year. Between January and August, 17 countries had trade disputes with China on its export policies, including dumping, subsidies, and currency undervaluation.

Promoting exports has been China’s development policy since its economic reform in 1978. The Chinese regime has been using export subsidies and currency undervaluation to open up its international markets. Recently, the global economic recession has highlighted the stress that these Chinese policies have caused for other countries.

The resistance and complaints from other countries may damage the prospects of China’s exports, which have already declined significantly over the past year due to the global recession. In September, China’s exports declined by over 15 percent compared to the previous year. This trend is expected to continue.
The Shanghai Securities News of Sept. 29, 2009, listed 70 large publicly traded companies in China. All of these companies have at least 60 percent of their revenue from exports. As a result, these companies and their business partners may be largely influenced by the slowdown in exports.

Related sectors, such as transportation companies, ports, airlines, and the like may also be affected. If products cannot be exported, they will be sold in China instead, causing extra inventories and more competition, particularly for goods already in excess supply.

The poor prospects for its exports may impact the Chinese economy in the following four ways:
• The slide in China’s exports is expected to continue until the end of this year or possibly extend into the next year.
• Since the exports have composed a large fraction of China’s GDP (around 30 percent) in the last 5 to 10 years, the drop in exports would also negatively affect the GDP. China’s current account surplus reached its peak in 2007, accounting for 11 percent of its GDP at that time and subsequently declining to 9.8 percent last year. It is expected to further decline to about 6 percent in 2009. (The International Monetary Fund projected 7.8 percent, and the World Bank calculated 5.6 percent.)
• The shares of the Chinese companies that rely heavily on exports may fall. The data from the Shanghai Stock Exchange showed that from the end of July to the end of October, the Shanghai Securities Composite Index dropped from 3,500 to 3,100, while the Dow Jones Industrial Average rose from approximately 9,500 to around 9,800 during the same period. This may have been a result of the reduction in exports.
• Greater competition for the domestic market and oversupply will continue to exert downward pressure on domestic prices in China. Prices for industrial and agricultural goods in China have already entered decline since the end of 2008.
Tianlun Jian, Ph.D., writes regularly on the Chinese economy.

This article was first published on The Epoch Times, Nov. 7, 2009.