Sunday, April 11, 2010

China's Trade Deficit and International Investment

Just as international pressure was increasing to get the Chinese to revalue its currency (and thus increase the price of goods valued in yuan), the Chinese announced a trade deficit.  Elaine Kurtenbach, China's $7.24B March trade deficit 1st in 6 years, AP News reported in Yahoo News, April 10, 2010; Chris Hogg, China Reports Rare Trade Deficit, BBC News Online, April 10, 2010. According to the AP report,
The $7.24 billion trade deficit in March reported Saturday by China's customs administration was China's first since a $2.26 billion deficit in April 2004. Though expected, it was significantly bigger than many economists had forecast. It follows four straight months of narrowing trade surpluses.
The return to deficit after many years of surplus comes as China is being pressured to let the value of its currency rise against the dollar — a key source of friction with the U.S. and other trading partners.
Elaine Kurtenbach, China's $7.24B March trade deficit 1st in 6 years, supra. The BBC Report noted the connection between the deficit and the acquisition of raw materials necessary to fuel China's production driven economy:
Officials blame the $7.2bn (£4.7bn) deficit on rising volumes and prices of the raw materials the country needs to import to power its economy.
The officials, who announced the figures at an economic conference in Hainan, say the deficit is likely to be a short-term phenomenon. 
The deficit for March was China's first since a $2.3bn deficit in April 2004. . . .
A vice minister of commerce told the BBC the growth in imports was due to the huge amounts of iron ore, copper, crude oil and coal that were needed to power the Chinese economy. Prices for these raw materials have been rising steadily.
Meanwhile exports, while improving, were still weak, especially to key markets like the US and Europe.
Senior Chinese politicians have said it could take three years for exports to reach the levels they were at before the global economic crisis began.
 Chris Hogg, China Reports Rare Trade Deficit, supra.  The Chinese have suggested this deficit as answer enough to calls for yuan revaluation.  "Chinese trade officials, however, pointed to the deficit and the absence of full-throttle recovery in the global economy as reasons to keep the yuan stable. Appreciating the currency, they argue, would hurt China's already hard-pressed exporters and add more uncertainty to the world economic outlook."  Elaine Kurtenbach, China's $7.24B March trade deficit 1st in 6 years, supra.  Moreover, the suggestion is being made that, for purposes of media and public consumption at least (and thus the management of popular opinion and belief), that the deficit is actually the fault of importing countries whose own damaged economies are causing probems. 

"We are still very much concerned. Global demand is still weak and protectionism is rising," Chinese Vice Commerce Minister Yi Xiaozhun said at a regional conference, the Boao Forum for Asia, on Saturday.
In a separate statement, the Commerce Ministry said that the deficit shows that "the decisive factor that affects the trade balance is not the exchange rate, it's the relationship between market supply and demand and other factors." 
Id.  And the Americans, now more solicitous borrowers, have been careful to acvoid upsetting a lender that can be prickly when challenged.  "Some U.S. lawmakers have pushed for President Barack Obama to have China declared a currency manipulator in a Treasury Department report that was due out this month. In a conciliatory gesture, Washington postponed the report ahead of a visit by President Hu Jintao to the U.S. to attend a nuclear conference. Following a brief stopover in Beijing by Treasury Secretary Timothy Geithner for talks with a top Chinese official, Wang Qishan, many expect Beijing to allow at least a modest change in the yuan's value."  Id.

There is more behind the story than the fortuitous deficit announced int he course of hard negotiations over Chinese policy with respect to its currency.  Two in particular stand out.  One is that the deficit announcement can serve as a further impetus to the Go Global (走出去) strategy.  See,  Stefan Albrecht, Ingo Beyer von Morgenstern, and Xiaoyu Xia,  China's High-Tech Companies Go Global, Forbes, July 7, 2008.  Even a few years ago, the idea was that such outbound investment might be necessary but was also costly, in terms of lower margins.  
 While technology businesses are in the vanguard of China's foray into global markets, a company wishing to follow pioneers such as the computer maker Lenovo and the telecom giant Huawei must judge whether its operations and management capabilities are strong enough to absorb the shock of higher costs. A strong domestic position, capable talent management, and a detailed understanding of target markets are elements of a thoughtful globalization strategy. Our study also shows that companies must have the strength and patience to endure a short-term decline in margins.
Id.  But note that those effects appeared most pronounced in consumer oriented economic sectors.  There is little talk of those sectors with respect to the current deficit.  Instead, the deficit  seems (again quite fortuitously) to strengthen the view that control of raw materials are the key to Chinese economic stability.  This is something that has become well known over the last half decade. 
At the sharp end of China’s presence in Africa are its state-owned enterprises involved in resource extraction and infrastructure development. They are products of the CCP’s decision to transform moribund state institutions into state-directed multinational firms able to compete against the best of the established international corporations. This ‘going out’ policy, formally launched in 2001, is supported by Beijing’s astute ‘no conditions’ diplomacy as well as billions of dollars in foreign reserves, which have allowed companies like PetroChina, ZTC or Jiangsu International to gain a foothold in markets in a short period.  
Chris Alden, Dan Large and Ricardo Soares de Oliveira, China Returns to Africa,  Real Instituto Elcano, WP 51/2008 - 11/12/2008. Indeed, by 2004 it was understood that China's thrist for raw materials was having a strong effect "The construction frenzy that is crowning China's cities with skyscrapers and laying the works for modern industry has transformed it from a minor consumer of raw materials into a country that -- according to its official statistics -- absorbed roughly half the world's cement production last year, one-third of its steel, one-fifth of its aluminum and nearly one-fourth of its copper. Last year China eclipsed Japan to become the world's second-largest importer of oil after the United States."  Peter S. Goodman, Booming China Devouring Raw Materials, Washington Post, May 21, 2004.  As a consequence the deficit announcement might be understood as strengthening the case for greater concentration by Chinese forms in the raw materials sector abroad. Expect to see a greater effort by the Chinese state owned sector, including its sovereign wealth fund, to more aggressively seek control over key parts of the extractive sector.  Expect also a greater push by authorities to channel outbound private investment into industries that control raw materials.  For the Chinese, this will mean less of a dependence on others for raw materials.  For the rest of the world it might mean greater difficulty in obtaining raw materials from a market that will be controlled by the Chinese state sector for the service of its economic policy.  For China this may be a good thing and indeed a vindication of its policies of sovereign investing, the use of private markets for the advancement of public policy objectives.  For the rest, the implications may be less welcome.

The second is related to the first.  It is not clear that the trade deficit takes into account the size and concentration of Chinese outbound investment.  To the extent that the trade deficit is caused by exports from Chinese controlled entities abroad, it is not clear what the trade deficit shows, other than that a portion of the deficit is being paid by China to itself.  This issue has been one that has been discussed in connection with the argument over the effect of the U.S. trade deficit.  See, e.g.,  James Burke, U.S. investment in china worsens trade Deficit—U.S. firms build export-oriented production baseMay 2000 Briefing Paper #93, Economic Policy Institute, May 1, 2000 ( download the Acrobat PDF version of this paper.).  To this extent, in any case, one might wonder whether the trade deficit announced has a greater importance as a means to effect and justify economic policy--the protection of the yuan's value, and the deepening of a sector focused "Go Global" policy--than it suggests anything structurally interesting about the Chinese economy, at least for the moment.

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