CHINA TRADE - Riding Out a Storm
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The barrage of criticism from the United States about China's currency policies is at best misguided. U.S. businesses operating in China have never had it so good. But if Beijing isn't about to float the renminbi, what can it do to assuage U.S. anger?
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By Ben Dolven/SHANGHAI and David Murphy/BEIJING
Issue cover-dated October 09, 2003
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PITY THE AMERICAN businessman or woman dealing with China. Judging from the noise coming out of Washington in recent weeks, United States business is being cut a very raw deal by Beijing. China manipulated the renminbi to create a $103 billion trade surplus with Washington last year and sucked American jobs overseas. It welshed on market-opening commitments made when it joined the World Trade Organization almost two years ago and continues the wholesale piracy of foreigners' intellectual-property rights.
If that sounds like a tale of woe and misery, that's because it's meant to. But unfortunately for its authors--a mix of U.S. politicians and manufacturing interests--the bulk of the evidence points to the opposite conclusion: U.S. business never had it so good in China. Despite the real difficulties of doing business here, profits are up sharply and most U.S. companies are planning to significantly boost their investments in the coming years.
A report released by the American Chamber of Commerce in Beijing on September 25 paints a rosy picture compared to just a few years ago, when many foreign companies were shackled to domestic partners and the China market was considerably more opaque than today. According to a survey of 254 member companies by AmCham, 75% made a profit last year, with the majority of those making substantially more money than they did the previous year. A total of 42% reported that profit margins at their China operations were higher than their worldwide margins and 81% said they had plans to expand their China business. The report also notes that business conditions in China "have improved substantially over the last five years" and that this is expected to continue over the next five.
In fact, China is opening large parts of its economy at a very fast pace--especially on the trade front. "China is, roughly, three times more open than Japan. This year, for the very first time, China is going to import more than Japan does," Nicholas Lardy, an expert on China's economy at the Washington-based Institute for International Economics, told a Senate Foreign Relations Committee hearing on September 11.
But despite all this, China looks likely to emerge as U.S. trading enemy No. 1 all the way to the November 2004 U.S. elections unless there's some narrowing of the trade deficit. "Perceptions of job and income security have long been the defining issue in U.S. presidential campaigns. It's hard to believe that it will be any different this time around," Stephen Roach, chief economist at Morgan Stanley, told the U.S.-China Congressional Commission in late September.
So China will have to manage this extra degree of complication in its relationship with the U.S. over the coming months, which will feature an October meeting between U.S. President George Bush and Chinese President Hu Jintao, visits to China by U.S. Trade Representative Robert Zoellick and Commerce Secretary Donald Evans, and the first U.S. swing by Premier Wen Jiabao. What will Beijing give? Many argue that on current trends, it doesn't have to give anything. "I think they're going to give them [U.S. critics] what they've been giving them--22% export growth. Beijing is thinking: 'What more do they want from us?'" says Andy Rothman, China analyst for CLSA Asia-Pacific Markets.
But in order to smooth those upcoming meetings, China will for sure need to offer something. It certainly isn't about to float its currency. Even though capital has been flowing into the country in recent months, the spectre of capital flight remains strong in authorities' minds. The one thing that holds the country's rickety banking system together is the fact that depositors can do very little else with their money. And Beijing has enough trouble keeping tabs on corporate financial chicanery without the possibility that Chinese companies might be borrowing in foreign currency to finance business at home. That combination, unchecked in Southeast Asia for years, was what led to the Asian financial crisis.
That crisis rocked the economic strategy of the Chinese leadership and killed all talk of open capital markets in China. Jonathan Anderson, chief Asian economist at UBS in Hong Kong and a former head of the International Monetary Fund in China, recalls that when he first took up the post in Beijing in 1996 the country was aiming at making its currency fully convertible by 2001. Now such a move is at least a decade away, according to Li Yushi, vice-president of the Chinese Academy of International Trade and Economic Cooperation attached to the Ministry of Commerce. "The big difference is the Asian Crisis," says Anderson.
A more likely scenario, nearly everyone watching the situation says, is a gradual, managed widening of the trading bands for the renminbi, accompanied by equally gradual, managed opening of foreign-investment options for Chinese. Most see a widening of the renminbi band of 3%-5%, probably sometime in the next 18 months.
What would happen in that case? The truth is, not much on the trade front. Indeed, for all the hot air emanating from politicians in Washington, there's no real signal of what the renminbi's proper value is. Cliff Tan, a Singapore-based economist with Citigroup, figures that on current trends, China's global trade balance could be in balance by the middle of next year. "The major cause of China's booming exports is not an undervalued currency," Chicago-based economist David Hale told a U.S. congressional committee on September 25. "It is an upsurge of foreign direct investment which has significantly boosted China's productive capacity and managerial competence."
Meanwhile, as Chinese exports power across the Pacific, U.S. goods are shooting in the other direction. Exports to China rose by 22% in the first seven months of this year compared to a rise of only 3% to the rest of the world. More and more agricultural products are also heading to China. U.S. agricultural exports to China for the first seven months of this year were up 139% on the same period last year, according to the U.S. Department of Agriculture.
The vast trade gap between the two countries is largely a result of China's ability to undercut other developing countries, combined with America's low overall savings rate. As China's economy moves rapidly up the value chain, the U.S. will probably never again produce the kinds of consumer goods that are the bulk of China's exports. "Even if Wal-Mart had to stop buying microwave ovens, computers and shirts from China they would buy instead from Indonesia, Thailand and Mexico, not from North Carolina or Ohio," Rothman says.
Nor does China pose a threat to the global trading system. Asian exports to the country are booming--raw materials and intermediate goods that are processed for onward export, and also goods for domestic consumption. Pan-Asian exports to China more than doubled between 1995 and 2002, from $72 billion to $161 billion. Imports for domestic consumption grew from $42 billion to $79 billion while imports for reprocessing soared from $30 billion to $82 billion. Imports for reprocessing account for 51% of China's imports from East Asia, compared to 41% in 1995, Hale contends.
As a result, China is now running trade deficits with other East Asian countries, essentially buying their raw materials and components and processing them for shipment to North America and Europe, where China runs trade surpluses. On the basis of Chinese data, Hale figures the country has trade deficits of $13 billion with South Korea, $7.6 billion with Asean, $5 billion with Japan and $1.3 billion with Australia. Taiwan says its trade surplus with the mainland reached $25 billion last year. Its exports to China now exceed 13% of the island's GDP.
That's not a country with a massively undervalued currency. "If China is less able to import, that's going to be bad news," says Chen Xingdong, a Beijing-based economist with BNP Paribas.
Even if criticism of the renminbi's value is misguided, Beijing still has to deal with U.S. perceptions that it competes unfairly with American industry. There is a range of things China may use to placate detractors ahead of forthcoming meetings--particularly during Wen's U.S. trip. By early next year it will reduce export rebates from an average of 15% to 11% for manufactured goods, says Li at the Chinese Academy of International Trade and Economic Cooperation. He admits the main reason for this is so the government can save on paying out rebates to exporters, but it will lower margins for all China-based exporters and thus China can still present it as a concession to American critics.
Many argue China is likely to use typical mercantile diplomacy as well. Wen could, for instance, head to the U.S. with an announcement of a large purchase of Boeing aircraft over the coming years. China's last big airliner order went to Airbus, so many aviation industry officials figure that Boeing is in line to benefit next. Other possibilities could be new licences for American companies in insurance, or a long-awaited opening of the car-finance sector.
Li also points to recent low-level advances in the rights of private citizens and companies to hold and transfer foreign currency abroad as evidence that China is incrementally easing exchange regulations. Another possibility: a move away from the current dollar peg to link the renminbi to the currencies of its major trading partners, the U.S., Japan and European Union. This basket arrangement, which Joseph Stiglitz, former chief economist at the World Bank, advocated in Shanghai in September, would more truly reflect the value of the Chinese currency while still giving it a strong measure of stability. "This is feasible and could be done within one or two years," says Li.
In the end, though, the pressure on the renminbi comes from the growing fracas that is the U.S. election cycle. So the solution could come from that direction as well, and the best hope for China would be an upturn in the U.S. economy. "As long as the U.S. economy is weak, people are going to be looking at China," says Anderson. "But if the economy there goes into a strong recovery, then this issue could well be forgotten about again."
Sidebar box
HOW TO DEFUSE A TRADE CRISIS
China won't revalue, but may want to placate the U.S. The options for Beijing include:
• A gradual widening of renminbi trading bands
• Lowering tax rebates for Chinese exporters
• Announcing large orders for U.S. products, such as aircraft, or opening up China's markets faster |
