China in the World Economy China in the World Economy, autumn 2021 Questions from last time •1) Name some reasons why China launched the Belt and Road Initiative. Questions from last time •1) Name some reasons why China launched the Belt and Road Initiative. •2) Name some more reasons why China launched the Belt and Road Initiative. • Questions from last time •1) Name some reasons why China launched the Belt and Road Initiative. •2) Name some more reasons why China launched the Belt and Road Initiative. •3) What are „memoranda of understanding“ and „cooperation agreements“? • Questions from last time •1) Name some reasons why China launched the Belt and Road Initiative. •2) Name some more reasons why China launched the Belt and Road Initiative. •3) What are „memoranda of understanding“ and „cooperation agreements“? •4) How are Belt and Road projects financed? Questions from last time •1) Name some reasons why China launched the Belt and Road Initiative. •2) Name some more reasons why China launched the Belt and Road Initiative. •3) What are „memoranda of understanding“ and „cooperation agreements“? •4) How are Belt and Road projects financed? •5) How do financing conditions compare to concessional development lending (World Bank etc.) and commercial loans? • Questions from last time •6) What type of projects are typically financed via BRI? Questions from last time •6) What type of projects are typically financed via BRI? •7) What leads developing countries to join BRI? Questions from last time •6) What type of projects are typically financed via BRI? •7) What leads developing countries to join BRI? •8) Name some important partner countries and explain why they may be important for China. Questions from last time •6) What type of projects are typically financed via BRI? •7) What leads developing countries to join BRI? •8) Name some important partner countries and explain why they may be important for China. •9) Can the Chinese navy use a port leased by Sri Lanka to a Chinese company? Today •The Belt and Road Initiative in Europe Today •The Belt and Road Initiative in Europe • •Summary and extension of topics we have discussed •> joining together what you already know, adding new angles and details • •Main focus – opening to international trade and foreign investment • BRI in European Union member states • Obsah obrázku mapa Popis byl vytvořen automaticky BRI in European Union member states •Hungary, Italy, Greece •Countries frustrated by EU leadership •Facing economic decline, or insufficient convergence with core states •Eastern member states – disappointed by their unequal relationship with Germany • BRI in European Union member states •Main problem for BRI: EU law •Regulates competition and rules for public procurement BRI in European Union member states •Main problem for BRI: EU law •Regulates competition and rules for public procurement •> need for transparent tenders •> it is not possible to do a backroom deal with a Chinese bank BRI in European Union member states •Main problem for BRI: EU law •Regulates competition and rules for public procurement •> need for transparent tenders •> it is not possible to do a backroom deal with a Chinese bank •Competition law – state guarantees would be seen as giving Chinese SOEs and banks and unfair advantage over competition > it cannot be done BRI in European Union member states •Also – EU states are relatively rich BRI in European Union member states •Also – EU states are relatively rich •+ have access to EU funds + to private lending • BRI in European Union member states •Also – EU states are relatively rich •+ have access to EU funds + to private lending •> they have their own funding and don‘t need China‘s money •> they are higher on Maslow‘s pyramid and care about things like the environment or potential political interference • BRI in European Union member states •Also – better institutions and less corruption • BRI in European Union member states •China underestimated all of this •> their offers are often unacceptable • BRI in European Union member states •China underestimated all of this •> their offers are often unacceptable •> overall, the Belt and Road project is a failure in Europe, without the EU even having to have some strategy against it • BRI in European Union member states •When Chinese companies do successfully win construction contracts, its under European rules: •1) Based on a public tender • BRI in European Union member states •When Chinese companies do successfully win construction contracts, its under European rules: •1) Based on a public tender •2) Financed by European resources •> do debts, no collateral, no ownership of the infrastructure for the Chinese BRI in European Union member states •When Chinese companies do successfully win construction contracts, its under European rules: •1) Based on a public tender •2) Financed by European resources •> do debts, no collateral, no ownership of the infrastructure for the Chinese •3) No guarantees and obligatory renegotiation of prices •> China‘s companies must behave like any other company without any special regime • The BRI in Europe •China‘s big plan – building a railway from the port of Piraeus through Hungary to Germany • The BRI in Europe Obsah obrázku mapa Popis byl vytvořen automaticky The BRI in Europe •China‘s big plan – building a railway from the port of Piraeus through Hungary to Germany •Only the Hungarians decided to jump on this bandwagon •Like many BRI projects, it is probably too expensive and is never gong to pay for itself > skepticism in most EU states • China‘s opening revisited • • China‘s opening revisited •1978 – all trade handled by special FTCs – 12 foreign trade companies = FTCs • • China‘s opening revisited •1978 – all trade handled by special FTCs – 12 foreign trade companies = FTCs •Low tariffs and overvalued exchange rate •Why? • • China‘s opening revisited •1978 – all trade handled by special FTCs – 12 foreign trade companies = FTCs •Low tariffs and overvalued exchange rate •Why? •Because they were not necessary – the state controlled all the flows of goods without a need for a competitive exchange rate or protective tariff wall • • China‘s opening revisited •Two simultaneous processes (dual-track reform): China‘s opening revisited •Two simultaneous processes (dual-track reform): •1) Reform and gradually open up the statist system > ordinary trade •- inland provinces China‘s opening revisited •Two simultaneous processes (dual-track reform): •1) Reform and gradually open up the statist system > ordinary trade •- inland provinces •2) Create special rules for foreign companies to process goods in China – completely outside the old system China‘s opening revisited •Two simultaneous processes (dual-track reform): •1) Reform and gradually open up the statist system > ordinary trade •- inland provinces •2) Create special rules for foreign companies to process goods in China – completely outside the old system > export processing •- coastal provinces China‘s opening revisited •Two simultaneous processes (dual-track reform): •1) Reform and gradually open up the statist system > ordinary trade •- inland provinces •2) Create special rules for foreign companies to process goods in China – completely outside the old system > export processing •- coastal provinces • •These two coexist to this day! Ordinary trade •Number of monopoly FTCs increased – from 12 to several thousands Ordinary trade •Number of monopoly FTCs increased – from 12 to several thousands •But all of them were, at least officially, SOEs! Ordinary trade •Number of monopoly FTCs increased – from 12 to several thousands •But all of them were, at least officially, SOEs! •The FTC system was only completely abolished in 2004, after entering the WTO! Ordinary trade •Liberalized prices – the foreign trade companies were encouraged to make money instead of fulfilling a plan Ordinary trade •Liberalized prices – the foreign trade companies were encouraged to make money instead of fulfilling a plan •Before – artificial prices totally detached from the world market, trade guided by state direction •After reform – „export and import whatever is profitable in your business area“ Ordinary trade •Liberalized prices – the foreign trade companies were encouraged to make money instead of fulfilling a plan •Before – artificial prices totally detached from the world market, trade guided by state direction •After reform – „export and import whatever is profitable in your business area“ •> give the central government a part of the foreign exchange, keep the rest as use it to do more business Ordinary trade •„Canalization“ – if you wanted to import something and you did not have the license to do it, you had to persuade one of the monopoly SOEs to do it for you Ordinary trade •„Canalization“ – if you wanted to import something and you did not have the license to do it, you had to persuade one of the monopoly SOEs to do it for you •> even TVEs and other small companies de facto could take part in trade, but a part of the profit went to the SOEs • Ordinary trade •„Canalization“ – if you wanted to import something and you did not have the license to do it, you had to persuade one of the monopoly SOEs to do it for you •> even TVEs and other small companies de facto could take part in trade, but a part of the profit went to the SOEs •> FTCs as middlemen • Ordinary trade •Gradual establishment of a tariff wall Ordinary trade •Gradual establishment of a tariff wall •By 1994, the average tariff stood at 43% - similar to protectionist Global South countries such as Brazil Ordinary trade •Gradual establishment of a tariff wall •By 1994, the average tariff stood at 43% - similar to protectionist Global South countries such as Brazil •Increasing tariffs as a by-product of liberalization! • Ordinary trade •Gradual establishment of a tariff wall •By 1994, the average tariff stood at 43% - similar to protectionist Global South countries such as Brazil •Increasing tariffs as a by-product of liberalization! • •After entering the WTO, it was lowered again to circa 10 % Ordinary trade •Gradual devaluation of the RMB USD to RMB Ordinary trade •Gradual devaluation of the RMB •Separate foreign exchange market – foreign trade companies could exchange money and ignore the official rate Ordinary trade •Gradual devaluation of the RMB •Separate foreign exchange market – foreign trade companies could exchange money and ignore the official rate •> two exchange rates – the official one and the one used between the companies •Fix and floating at the same time (kind of) Ordinary trade •Gradual devaluation of the RMB •Separate foreign exchange market – foreign trade companies could exchange money and ignore the official rate •> two exchange rates – the official one and the one used between the companies •Fix and floating at the same time (kind of) •Which one was lower? RMB to UDS Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate USD to RMB Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate •= „Let‘s respect the collective wisdom of the market“ Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate •= „Let‘s respect the collective wisdom of the market“ •The rate was competitive and led to a more or less balanced trade Ordinary trade •Main devaluation – 1994 – official rate set and fixed at the previous unofficial rate •= „Let‘s respect the collective wisdom of the market“ •The rate was competitive and led to a more or less balanced trade •Under floating, the rate would appreciate because of growing exports •= as China became more competitive, the rate should have gone up Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 USD to RMB Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 •+ „real depreciation“ •The price level in China rose more slowly than in the US and most other capitalist countries Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 •+ „real depreciation“ •The price level in China rose more slowly than in the US and most other capitalist countries •> Chinese goods became relatively cheaper Real appreciation / depreciation • •If your exchange rate is stable AND you have lower inflation than a partner country, your currency is undergoing a real depreciation Real appreciation / depreciation • •If your exchange rate is stable AND you have lower inflation than a partner country, your currency is undergoing a real depreciation •> your goods become more competitive > you export more •As if you devalued the currency USD to RMB Ordinary trade •But China artificially kept the rate at the 1994 level all the way until 2005 •+ real depreciation •> undervaluation, huge trade surpluses! Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions •Yeah, I know, the balance of payments stuff is back! L Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions •> every FTC could access foreign exchange whenever they wished, with no regulation – if it was for trade •= liberalization Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions •> every FTC could access foreign exchange whenever they wished, with no regulation – if it was for trade •= liberalization •Plans to also abolish capital controls = to make the RMB convertible for financial account transactions Ordinary trade •The 1994 reform was connected with making the RMB convertible for current account transactions •> every FTC could access foreign exchange whenever they wished, with no regulation – if it was for trade •= liberalization •Plans to also abolish capital controls = to make the RMB convertible for financial account transactions •Abandoned because of the 1997 Asian Financial crisis Export processing • Export processing •Special economic zones adjacent to HK and TW Export processing •Special economic zones adjacent to HK and TW •The largest and most important one – Shenzhen – right next to Honk Kong Obsah obrázku mapa Popis byl vytvořen automaticky Obsah obrázku exteriér, obloha, tráva, den Popis byl vytvořen automaticky Obsah obrázku exteriér, obloha, strom, město Popis byl vytvořen automaticky Export processing •Special economic zones adjacent to HK and TW •The largest and most important one – Shenzhen – right next to Honk Kong •FDI was allowed in these zones Export processing •Special economic zones adjacent to HK and TW •The largest and most important one – Shenzhen – right next to Honk Kong •FDI was allowed in these zones •Most importantly – foreign companies could bring goods in and out duty free, with no tariffs or taxes or FTC middlemen Export processing •Special economic zones adjacent to HK and TW •The largest and most important one – Shenzhen – right next to Honk Kong •FDI was allowed in these zones •Most importantly – foreign companies could bring goods in and out duty free, with no tariffs or taxes or FTC middlemen •> they could operate outside the confines of the heavily regulated „ordinary trade“ Export processing •Processing of products – Chinese companies, including small TVEs, did simple, labor-intensive tasks for foreign companies •The products were then re-exported Export processing •Not necessarily connected to investment! •- in principle, the foreign company could just send its inputs to China and than take the final product back Export processing •Not necessarily connected to investment! •- in principle, the foreign company could just send its inputs to China and than take the final product back •In mid-1980s, this „export processing“ expanded out of the special zones into the entire coastal region of China •= small private companies and TVEs could take part in its • Export processing •Not necessarily connected to investment! •- in principle, the foreign company could just send its inputs to China and than take the final product back •In mid-1980s, this „export processing“ expanded out of the special zones into the entire coastal region of China •= small private companies and TVEs could take part in its • •FDI itself was not allowed outside the special zones Obsah obrázku mapa Popis byl vytvořen automaticky Export processing •What emerged was a triangular pattern of trade • Export processing •What emerged was a triangular pattern of trade •= China imports inputs from HK, Taiwan, South Korea or Japan •These inputs are finished and then exported – to the US or the EU • Export processing •What emerged was a triangular pattern of trade •= China imports inputs from HK, Taiwan, South Korea or Japan •These inputs are finished and then exported – to the US or the EU • •Trade surplus with Western countries, trade deficit with small highly developed Asian states! Export processing •What emerged was a triangular pattern of trade •= China imports inputs from HK, Taiwan, South Korea or Japan •These inputs are finished and then exported – to the US or the EU • •Trade surplus with Western countries, trade deficit with small highly developed Asian states! • •Survives to this day, even though the specifics have changed! Triangular trade Obsah obrázku stůl Popis byl vytvořen automaticky Triangular trade Obsah obrázku stůl Popis byl vytvořen automaticky Imports •1) Raw materials •2) Agricultural products – grain etc. •3) Capital intensive products – steel, chemicals, machinery •4) Technologically advanced products – chips Imports •1) Raw materials •2) Agricultural products – grain etc. • • • •First two – result of lack of natural resources and fertile land + successful countries often import this > no problem Imports •1) Raw materials •2) Agricultural products – grain etc. •3) Capital intensive products – steel, chemicals, machinery •4) Technologically advanced products – chips • •First two – result of lack of natural resources and fertile land + successful countries often import this > no problem •Second two > result of backwardness Imports •1) Raw materials •2) Agricultural products – grain etc. •3) Capital intensive products – steel, chemicals, machinery •4) Technologically advanced products – chips • •First two – result of lack of natural resources and fertile land + successful countries often import this > no problem •Second two > result of backwardness > China became self-sufficient in 3), now it is chasing self-sufficiency in 4) Geographical shifts •Industrialization progresses not only in level of sophistication, but also shifts to new locations with lower labor costs • Geographical shifts •Industrialization progresses not only in level of sophistication, but also shifts to new locations with lower labor costs •The frontier keeps moving • • Geographical shifts •Industrialization progresses not only in level of sophistication, but also shifts to new locations with lower labor costs •The frontier keeps moving •1980s – Guangdong as a „fifth Asian tiger“ •Main focus – textile, shoes, sport gear • • Obsah obrázku mapa Popis byl vytvořen automaticky Obsah obrázku mapa Popis byl vytvořen automaticky Geographical shifts •1990s – industrialization of Shanghai and the lower Yangtze •= China‘s traditional economic and demographic heart • Obsah obrázku mapa Popis byl vytvořen automaticky Obsah obrázku mapa Popis byl vytvořen automaticky Geographical shifts •1990s – industrialization of Shanghai and the lower Yangtze •= China‘s traditional economic and demographic heart •At first also textile, by 2000 – switch to Electronics! • • Geographical shifts •Around 2010 – some industry moves deeper inland, into places like Chongqing or Sichuan • Obsah obrázku mapa Popis byl vytvořen automaticky Obsah obrázku mapa Popis byl vytvořen automaticky Obsah obrázku stůl Popis byl vytvořen automaticky Geographical shifts •Previous frontier retains its wealth, more labor-intensive jobs move on somewhere else Geographical shifts •Previous frontier retains its wealth, more labor-intensive jobs move on somewhere else •The previously industrialized area moves towards very technologically advanced parts of production •Or towards services – marketing, finance, RaD Geographical shifts •Same process has happened in Europe over centuries – a previous center of industry never loses its wealth (northern Italy, Netherlands) • Foreign direct investment •By the early 1990s, direct access for foreign investors was expanded • • Foreign direct investment •By the early 1990s, direct access for foreign investors was expanded •> growth of FDI, new influx of new FDI from America and Europe • • Foreign direct investment •By the early 1990s, direct access for foreign investors was expanded •> growth of FDI, new influx of FDI from America and Europe •Attempts to attract investors – permanently low taxes for „foreign investment enterprises“ – FIEs •Tax holidays, free land…. • • • Foreign direct investment •By the early 1990s, direct access for foreign investors was expanded •> growth of FDI, new influx of FDI from America and Europe •Attempts to attract investors – permanently low taxes for „foreign investment enterprises“ – FIEs •Tax holidays, free land…. • •> FIEs were treated better than private domestic firms! • • Foreign direct investment Foreign direct investment •Source countries – most importantly US, Taiwan, Korea, Japan • • Foreign direct investment •Source countries – most importantly US, Taiwan, Korea, Japan •Often routed through Honk Kong or tax havens (British Virgin Islands) • Foreign direct investment •Source countries – most importantly US, Taiwan, Korea, Japan •Often routed through Honk Kong or tax havens (British Virgin Islands) • •Largest single investor – Samsung •Typical example of triangular trade – brings in chips from Korea, exports completed phones overseas • • Foreign direct investment •What did investors bring in? •Savings, foreign exchange, technology, management and marketing know how • • Foreign direct investment •What did investors bring in? •Savings, foreign exchange, technology, management and marketing know how •= they knew how to sell products in rich countries, had contacts and established supply chains overseas • • Foreign direct investment •Technology was not decisive at first, it grew in importance as China became more advanced Foreign direct investment •Technology was not decisive at first, it grew in importance as China became more advanced •Technology transfer – not driven merely by compulsory joint-ventures, but also by strategy of the foreign companies Foreign direct investment •Technology was not decisive at first, it grew in importance as China became more advanced •Technology transfer – not driven merely by compulsory joint-ventures, but also by strategy of the foreign companies •- they often decided to teach local companies how to make inputs so they did not have to import them Foreign direct investment •Technology was not decisive at first, it grew in importance as China became more advanced •Technology transfer – not driven merely by compulsory joint-ventures, but also by strategy of the foreign companies •- they often decided to teach local companies how to make inputs so they did not have to import them •Flow of workers between domestic and foreign firms spread knowledge •= typical „spillover effect“ Foreign direct investment •As time went on, FDI became less important as a source of investment and foreign currencies •Because China has a very high rate of savings and also acquired a trade surplus Foreign exchange reserves Foreign direct investment •As time went on, FDI became less important as a source of investment and foreign currencies •Because China has a very high rate of savings and also acquired a trade surplus •After circa 2000, technology became the main objective for attempting to attract FDI Foreign direct investment •At the same time – the role of FIEs in the economy decreased • Foreign direct investment •At the same time – the role of FIEs in the economy decreased •China does not need them so much anymore •> fewer advantages, more taxes • Ordinary trade and export processing •In the 1980s, they were completely different Ordinary trade and export processing •In the 1980s, they were completely different •Overtime, as the hinterland liberalizes, they converge closer together •Special zones are not THAT special anymore Ordinary trade and export processing •In the 1980s, they were completely different •Overtime, as the hinterland liberalizes, they converge closer together •Special zones are not THAT special anymore •Export processing is in a relative decline as a share of exports Ordinary trade and export processing •More and more stuff is being produced by Chinese domestic companies •Special rules and privileges for coastal provinces are being eroded - they are not needed anymore Ordinary trade and export processing •More and more stuff is being produced by Chinese domestic companies •Special rules and privileges for coastal provinces are being eroded - they are not needed anymore • •But the division has never been completely abandoned! •In the 2010s, China launched a new special economic zone in Shanghai meant to attract FDI into services • Return to industrial policy •Around 2005, China was the world‘s largest exporter of advanced technology products •But remained confined into low-value added parts of the supply chain Return to industrial policy •> industrial policies such as Made in China 2015 seek to redress this problem •> desire to put China at the center of global value chains •„We will not play second fiddle to foreign capitalists“ Outgoing Chinese FDI •China has the potential to become the world‘s largest foreign investor • Outgoing Chinese FDI •China has the potential to become the world‘s largest foreign investor •It has an unusually high rate of savings •It also still has quite a large trade surplus • Outgoing Chinese FDI •China has the potential to become the world‘s largest foreign investor •It has an unusually high rate of savings •It also still has quite a large trade surplus • •> lots of money that can be converted into dollars and invested abroad • Outgoing Chinese FDI •By 2005, the party-state realized that they have too much foreign exchange on their hands Outgoing Chinese FDI •By 2005, the party-state realized that they have too much foreign exchange on their hands •Keeping money as exchange means you are not investing them in any productive way Outgoing Chinese FDI •By 2005, the party-state realized that they have too much foreign exchange on their hands •Keeping money as exchange means you are not investing them in any productive way •They started to create incentives for companies to invest abroad Outgoing Chinese FDI •By 2005, the party-state realized that they have too much foreign exchange on their hands •Keeping money as exchange means you are not investing them in any productive way •They started to create incentives for companies to invest abroad •Sovereign wealth funds •BRI FDI Portfolio investment •= short term, more speculative than FDI •Officially – tightly regulated by capital controls Portfolio investment •= short term, more speculative than FDI •Officially – tightly regulated by capital controls •Chinese nationals are avoiding these controls by masquerading these speculative flows as something else •= they say that they want to pay for foreign goods, but actually use this transaction to shift money abroad and invest them Portfolio investment •= short term, more speculative than FDI •Officially – tightly regulated by capital controls •Chinese nationals are avoiding these controls by masquerading these speculative flows as something else •= they say that they want to pay for foreign goods, but actually use this transaction to shift money abroad and invest them •It seems that are very large and unstable flows of speculative investment in and out of China All other = speculative flows Foreign exchange reserves One final graph Next time - seminar •Each group has 10 minutes to present the findings of their paper •+ 5 minutes for discussion • Final essay •Shorter •Alternative topic Looking ahead •