• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

S. Sethuraman

CHINA'S rapid growth — close to double digit this year — is worrying economic planners who hope to achieve balanced development, reduce wide income disparities between the urban and rural areas, and absorb the unemployed millions.

An investment boom keeps the Chinese economy growing at 9-10 per cent. China's explosive trade growth alarms the US which takes in over a quarter of the country's exports. As it grapples with the economy's overheating and soaring demands for energy (coal and oil), iron-ore, steel, nonferrous metals and other basic commodities, China is also under intense pressure from the Bush Administration to revalue its currency, remnibi, preferably letting it float freely, and open up its market to bring down the imbalance which mounted to $103 billion in 2002. China also ran a surplus of $50 billion with the EU, its largest trading partner.

China continues to attract the maximum foreign direct investment which was a little over $40 billion in the first nine months of 2003. Trade is also on a high growth path though imports are rising faster than exports. This can reduce both trade and current account surpluses. The two-way trade turnover is expected to touch $800 billion this year.

US manufacturers and Congressmen have joined the chorus condemning China's "currency manipulation" and market barriers, and contend that Beijing has given itself an unfair advantage by keeping the renminbi undervalued by 30-40 per cent. China has continued to keep its currency pegged to the dollar at 8.28 since l994.

China is being held responsible for the loss of manufacturing jobs in the US caused by its low-cost exports, resulting in a huge negative balance of $103 billion which contributed significantly to the US' current account deficit of some $500 billion last year.

The data for August again showed a monthly surplus of $11.1 billion for China. Pressured by Congress and domestic lobbies, the Administration has been demanding that China revalue its currency, end "piracy" of intellectual property rights and fulfil commitments under the WTO agreements.

Threats of such counter-measures as stiff penalties on Chinese imports and raising the "unfair trade practices" before the WTO dispute settlement mechanism are being held out. There has been a flurry of high-level visits to China by the US Trade Representative, Mr Robert Zoellick, the Treasury Secretary, Mr John Snow, and the Commerce Secretary, Mr Don Evans, who have delivered blunt warnings of retaliatory action if China fails to respond to American concerns.

The US President, Mr George Bush, himself had raised the currency issue with the Chinese President, Mr Hu Jintao, during the APEC Summit at Bangkok, and the two had agreed on a technical study into the problem.

It is unlikely that China will allow things to become worse, and has already indicated its intention to buy Boeing aircraft and engines, and equipment from General Electric and other American manufacturers for its domestic aviation industry.

China is also like to send a trade mission to Washington to discuss what it can import and narrow the trade gap. It has already taken a few steps to liberalise foreign exchange releases, and has reduced the rebate against the value-added taxes given for exporters.

China has also agreed to move gradually towards currency flexibility and a more flexible exchange rate system so as not to create avoidable disruptions to the economy and destabilisation of its banks carrying massive bad loans.

Beijing with all its caution should appear to be taking more initiatives to assuage American feelings. The US' political relations with China are on an even keel with Washington relying on Beijing in weaning away North Korea from its nuclear weapon programme. China would not like a build-up of tensions over trade issues, given its own momentum of integration with the world economy.

Washington will, however, want a quicker response from Beijing by increasing imports of US agricultural and manufactured products. This will help to rein in protectionist pressures in the Congress and satisfy domestic interests in the run-up to the Presidential elections next year.

China's stance on exchange rate that any hasty step will destabilise its economy, given the weaknesses of the state-owned enterprises, is broadly supported by international economists as well as its Asian trading partners who would have to bear the impact of any revaluation of the Chinese currency.

In testimony before a subcommittee of the US House of Representatives Foreign Affairs Committee, senior economists Morris Goldstein and Nicholas R Hardy from the Institute of International Economics said that their estimate was that the Chinese currency is undervalued, and it would be in the interests of China, the US and the global community if it was revalued by, say, 15 to 25 per cent and pegged to a basket of three currencies (dollar, euro and yen) with a wider band for fluctuation as determined by the market forces.

They said if the renminbi was not allowed to rise in value, it would be difficult to obtain a broader realignment of key exchange rates — especially Taiwan and Korea — in Asia and elsewhere needed for a correction in the global payments imbalances.

Chinese authorities understandably do not contemplate lifting of capital controls (while liberalising restrictions on outward bound investment and tourism), given the weakness of the banking sector and the problems of state-owned enterprises. But the economists point out that such revaluation would have only a limited effect on the US trade imbalance.

Out of an estimated loss of $40 billion in China's total trade turnover from the revaluation, it will only mean a reduction of $10 billion in trade deficit for the US.

Thus, while the effect of revaluation on the overall US current account is not likely to be large, it could catalyse upvaluation of the Taiwan dollar and the Korean won. The cumulative effect of the Asian currency changes on the US current account deficit could be much larger than the $10 billion reduction in the US' bilateral deficit with China.

China has now become a vast manufacturing powerhouse in Asia importing components from other Asian countries and exporting value-added assembled products to the US, EU and the rest of the world.

A bulk of these exports is done by foreign firms which re-located their production to China taking advantage of its vast market as well as other advantages such as low-cost labour.

While China has significant trade surpluses with both the US and the EU, it runs trade deficits with many Asian countries and overall, its trade surplus was only $30 billion in 2002. Intra-Asian trade has risen appreciably in recent years, and China has emerged a major market for other East and South-East Asian countries.

Analysts note that China, well on the way to becoming Asia's economic giant, is not only tending to become a benign power for its neighbours but also somewhat eroding the supreme dominance of the region by the US.

(The author is a former Chief News Editor of PTI.)

Article E-Mail :: Comment :: Syndication

Stories in this Section
Sustaining the good show

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line