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| China in the Global Economy |
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January-March 2005 |
The rise of China has been the most outstanding phenomenon in the world economy over the last ten years. China has become the world’s third largest trading power, the second host-country for foreign direct investment, and the second holder of international official reserves.
The CEPII’s research has amply shown that China’s trade expansion is the result of its strong involvement in the international segmentation of production processes. China has become an assembly country and international processing activities account for 55% of its exports. Production sharing with industrialised Asian economies (Japan, Taiwan, South-Korea, Hongkong) has allowed China to diversify its exports rapidly from textiles to electronics, as industrial firms have transferred the final, labour intensive, stages of production to their affiliates on the mainland. Foreign affiliates in China account for an ever-increasing share of China’s trade (almost 60% in 2004).
This integration in Asian production networks also accounts for the rapid technological upgrading of China’s trade. The overwhelming share of China’s high-tech exports (75% in 2002) is handled by firms with foreign capital: most of China’s high-tech imports come from Asian countries (70% in 2002) and consist of parts and components. China has thus taken advantage of the globalisation process. But China’s rising importance in world markets, including in technology-intensive products, should not hide the dualism that characterises its manufacturing industries.
China's internationally competitive industries, which benefit from foreign capital and technology, remain distinct from its traditional industries. They are also largely based on assembly activities, using foreign components. In contrast, China's traditional industries are run by wholly Chinese-owned entreprises and lag significantly behind international competition.
China’s emergence has also led to the reorganisation of production in Asia and has fostered regional integration. China’s exports of final goods to the US and the EU have expanded rapidly and have given rise to large trade surpluses, while East Asian advanced economies have lost ground in Western markets and have increased their exports of intermediate goods and capital goods to China.
Overall, the rising share of China’s exports in world markets, together with the accumulation of massive foreign reserves, has harboured increasing suspicions about the potential misalignment of the Chinese currency. Since 1994, the Chinese authorities have maintained a fixed exchange rate regime against the dollar. The bilateral real exchange rate of the yuan has also been rather stable, despite rapid productivity gains and the accumulation of net foreign assets. Yet, a consistent, effective appreciation was recorded up to 2003.
In order to investigate both the hypothetical misalignment of the yuan and its global impact, the CEPII has developed a project for evaluating real exchange rate misalignments within the Group of Twenty (made up of the G7 countries and large emerging economies). It can be concluded that by the end of 2001, the yuan was indeed undervalued, a situation that has probably continued in the following years. For the time being, it has not been possible to detect Balassa-Samuelson effects in China, probably because of the structural segmentation of the labour market. As a consequence, the effective undervaluation of the yuan is rather limited (5% in 2001), when measured using Chinese data. However, if China were to behave as other major economies (the G20 countries), the yuan would have been undervalued by 16% in 2001. Moreover, the Chinese yuan appears to be especially undervalued against the US dollar, which is also a consequence of the peg on the dollar.
Pushing the analysis further, this work suggests that the dollar/euro exchange rate would have been close to equilibrium in 2003, had the yuan and other Asian currencies also been close to their equilibrium level. It also shows that the lack of adjustment in China and more generally in Asia tended to magnify the dollar overvaluation in 2001, and to a lesser extent in 2003.
The diagnosis of Chinese undervaluation is therefore controversial. The country’s exchange rate policy is under pressure, as both official and business constituencies put forward disparate arguments: overheating of the economy, ongoing catching-up that calls for real exchange-rate appreciation, “unfair” cost advantages benefiting the country, or capital controls that artificially back-up the exchange rate regime.
However, the peg on the dollar has served the country well regarding its economic performance over the last two years. China has achieved strong growth with moderate inflation, and a modest current account surplus. Furthermore, it does not suffer from overall pent-up demand. Its over-investment can better be cured by domestic demand management. The prospect of an appreciation of the real exchange rate is a long-run phenomenon that will come out of a rise in non-traded goods prices accompanying more balanced growth. Due to concerns about the pitfalls inherent in reforming its domestic financial system, however China will rightly open its capital accounts with great care. It will not consider changing the peg too soon and too abruptly. |
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BÉNASSY-QUÉRÉ, A., MIGNON, V., LAHRÈCHE-RÉVIL, A.. & DURAN-VIGNERON, P. "Burden Sharing and Exchange-Rate Misalignments within the Group of Twenty" CEPII Working Paper, N° 2004-13 September 2004
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LEMOINE, F. "China's Integration in International Production Network" In: BENDE-NABENDE, A. Ed. "International Trade, Capital Flows and Economic Development in East Asia" Aldershot : Ashgate, 2003, p. 121-149
LEMOINE, F. & ÜNAL KESENCI, D. "Assembly Trade and Technology Transfer: the Case of China" World Development, 2004, vol. 32, n°5, pp. 829-850
LEMOINE, F. & ÜNAL KESENCI, D. "Investissements étrangers et rattrapage technologique" Revue d'économie financière N°77, 2004 (Foreign Investments and Technological Catching Up)
LEMOINE, F. & ÜNAL KESENCI, D. "Trade and Technology Transfers: a Comparative Study of Turkey, India and China" CEPII Working Paper N°2003-16, November 2003
RZEPKOWSKI, B. "Speculating on the Yuan" La Lettre du CEPII N°234, May 2004
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