Changing China

from Commentaries:

Imagine when China runs a trade deficit

If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.

Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit -- and, by implication, U.S. consumers?

Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow -- or shrink less than -- exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.

If China's trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.

It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.

In the same way, one cannot just look at China's large imports number and jump to the conclusion that China is a big end-user of the world's goods. China's imports accounted for a third of its gross domestic product last year, versus about 17 percent in the U.S. during the same period. But this is because a lot of what China imports, such as computer parts, eventually finds its way abroad.

from Commentaries:

U.S.-China trade spat more about cars than tyres

Why are the U.S. and China trading blows about something as mundane as car tyres at a time when the world is trying to avoid slipping back into trade protectionism? It's not purely about the $1 billion worth of tyres China sells to the U.S. every year. It has more to do with the $100 billion of automotive vehicles, parts and engines America buys from abroad. China is worried about the direction of U.S policy. Beijing fears that the administration may find ways to thwart China's future plans to ship vehicles to America. China may not yet export cars to America, but it already exports a growing number of parts. Cars are in the pipeline. A recent spate of bids from Chinese companies such as Geely for failing U.S. and European auto brands have shown that it has the ambition to be the next Japan or Korea. Auto sales are the only bright spot in U.S. consumer spending due to the Treasury-financed "cash for clunkers" program. Fears about stimulus dollars leaking abroad are one of the reasons the U.S. trade unions have been aggressively pushing for anti-dumping tariffs. The worry is that the U.S. has imposed the tariffs under a law designed to protect domestic U.S. producers from being damaged by a sudden surge in imports from China. Determining whether this has occurred is a bureaucratic exercise in which experts determine whether such damage is occurring and propose remedies. But there is a political circuit breaker -- the president has discretion in whether to implement remedies. At least four similar, so-called Section 421 petitions were filed during the presidency of George W. Bush, according to the international trade commentator, Scott Lincicome, but none were approved. In this case, Obama came down on the side of the union. This has raised fears in Beijing that there will be more cases in coming months. The Chinese side seems to fear that Obama is bending too much to domestic constituencies such as union and producer interests. Washington needs to be careful about this. Since it wants to export its way out of recession, it should not agitate China, which is potentially a major purchaser of U.S. exports. China does not want the Obama presidency to set a precedent by discriminating against Chinese goods at this time. Moreover, it is concerned that other countries might follow suit and start to target Chinese goods as well. Its reliance on exports is potentially the big weak link among China's recovery. That's why Beijing, which has limited its protest mostly to words in recent years for fear of more retaliation, quickly spun into action this time. China's counterpunch is equally forceful. It is launching an anti-dumping investigation into imports of U.S. chicken products and vehicles. The idea is presumably to raise the political cost for Obama of taking his pen out of his pocket every time a Section 421 case, which specifically targets China, is presented for his signature. During the first half of this year, 89 percent of China's chicken imports came from America, representing a fifth of all U.S. chicken exports. In comparison, tyres account for just 0.4 percent of the value of goods what China sells to America each year and 0.07 percent of China's total exports. While it is no secret that America subsidises its agriculture industry, China also spares no effort in helping exporters and putting up import barriers to protect domestic manufacturers. For example, China agreed in August to stop some discriminatory charges it imposed on imported U.S. auto parts after a World Trade Organization ruling from September 1. After chicken, U.S. soybeans might be the next target. As much as 40 percent of China's soybean imports came from America last year. And this year, China's soybean imports increased by 28 percent. The last time China took retaliatory measures was during the "garlic trade war" against Japan and South Korea in 2000-2001. Washington and Beijing have vowed to cooperate in seeking to revive global economic growth, but the dispute over tyres has laid bare the two countries' continued friction over trade. This could spill into the G20 summit later this month and Obama's scheduled visit to China in November. In previous meetings between the top leaders of the two countries, mostly the U.S. lectured and China listened. Now Beijing is more outspoken about expressing its own concerns and many at home are calling for more tit-for-tat policies. It remains to be seen how the U.S. will react to a more assertive China.

Supply Push?

This is almost certainly not what Chinese policy makers had in mind when they started encouraging exporters to explore the domestic market to help make up for a drop in Western demand: sex toy makers opening flagship stores in Beijing.

But as an article and a video by my colleagues Ben Blanchard and Kitty Bu explore, that is just one of the side-effects the global slowdown is having on the world’s most populous country.

With factory owners looking to tap the local market to soak up excess capacity now that the export market is less reliable, many are setting up their own local brand names and retail outlets.

In the case of many products, like clothing and electronics, that does not necessarily portend any significant change in habits or lifestyle.

But in other areas, companies’ efforts to build up demand for their goods in the home market will themselves increasingly serve to shape tastes and lifestyles.

It’s not just firms like Sweet Secrets, which says it holds the country’s first registered trademark for a sex toy company.

An array of products previously sent straight overseas has been popping up on shelves in many of Beijing’s markets over the past several months, exposing especially young shoppers to a new set of possibilities.

from India Insight:

India, China take a measure of each other at border row talks

China and India are sitting down for another round of talks this week on their unsettled border, a nearly 50-year festering row that in recent months seems to have gotten worse.

China's Vice Foreign Minister Dai Bingguo and India's National Security Adviser M.K. Narayanan are unlikely to announce any agreement on the 3,500 km border, even a small one, but their talks this week may well signal how they intend to move forward on a relationship marked by a  deep, deep "trust deficit", as former Indian intelligence chief B. Raman puts it.

While the entire Himalayan border is disputed, including the Aksai Chin area, it is the row over large parts of India's Arunachal Pradesh in the eastern stretch of the mountains that has strained ties in recent months.

The Chinese, says Raman,  are demanding that at least the Tawang tract of Arunachal Pradesh, if not the whole of it, should be transferred to it.  They are apparently adamant that if that doesn't happen, there won't be any border settlement, he says.

India's position is that there can't be a transfer of populated areas in any border settlement. Tawang is a populated area, its citizens are Indians, New Delhi says.

So firmly have the Chinese dug their heels in, that they refused to endorse an Asian Development Bank  irrigation project in Arunachal Pradesh in June on grounds that it was its territory. Last month, India's Foreign Minister S. M. Krishna confirmed to parliament in a question-answer session media reports about the Chinese objection to the project which appeared to have stung India.

China, Taiwan hold talks — hello?

Police should have brought sandwiches and sodas to the park outside a Taipei hotel where Taiwan negotiators and counterparts from old foe China held talks. Hardly anyone demonstrated against the mid-April meeting.

What’s more, over the weekend, as the two sides met more formally in China to sign agreements on trade and finance, Taiwan TV viewers watched news about swine flu in Mexico and the United States or celebrity scandal reruns. Monday morning newspapers’ editorials barely raised the usual spectre of Taiwan sacrificing its democratic self-rule to Communist China in exchange for lucrative trade deals.

What a change. Last year as the administration of China-friendly Taiwan President Ma Ying-jeou began meeting with Beijing after a decade of frozen relations marked by occasional war threats, Taiwan’s China-hostile opposition thundered against what they saw as a sell-out to Beijing and led massive demonstrations during the second round of talks, in Taipei.

Does anyone care anymore? The short answer is “yes”, but many people have accepted the idea that China, which has threatened to use force to end Taiwan’s self-rule, can talk with Taiwan on non-political issues such as trade without rattling the political status quo.

“The third round of talks is just part of a process,” said Wu Chia-jung, 23, a law student at National Taipei University. “I approve of this method of dialogue. Taiwan is in a weak position. No one wants to fight.”

The latest, muted reaction also shows that Ma’s government has learned basic public relations skills, including recent newspaper and TV ads spelling out the economic benefits of closer relations with China.

“They’ve certainly done a better job of communicating with the public,” said Taipei-based political risk analyst Raymond Wu. “It’s a start. It’s something they didn’t do last time.”

Snapshots of a China in flux

Not so many weeks ago, selecting a name for this newly rechristened blog would have been a snap.

The ideas came pouring in, with variations centered on the rising might of China’s economic powerhouse, fresh from memories of Beijing’s triumphant hosting of the Olympic Games and following years of double-digit economic growth that have made China the world’s third-largest economy after the United States and Japan.

How quickly the picture can change. Now, business confidence is plunging and even government forecasters are warning about the risks of social unrest from rising unemployment as the export sector wilts. The government has rushed out a $585 billion stimulus program in hopes of keeping GDP from slipping below 8 percent, but private economists think even that may be overly optimistic.

The image of an ascendant China has not entirely lost its currency, of course, but the sudden, sharp slowdown in economic growth from its breathtaking pace of 13 percent — albeit still the fastest of any major economy — favoured a more neutral moniker for our China blog. And So we selected “Changing China,” which more accurately encompasses the rapid swings of fortune in this mighty nation of 1.3 billion people.

We invite readers to engage with us on the many issues touching today’s China, with snapshots that will be addressed in blog entries by dozens of Reuters reporters and editors in Beijing, Shanghai, Hong Kong, Taipei and elsewhere. These issues will include, but won’t be limited to, the income gap between urban and rural workers, the policy tug of war over efforts to maintain sufficient economic growth while also making progress on cleaning up an environment ravaged by single-minded pursuit of profits. It will also touch on prospects for continued opening and reforms, on intellectual property rights as well as real estate and other market stimulus plans. There will be light-hearted anecdotes that focus on quirky observations of lifestyles, sports, entertainment. The list is nearly endless, because practically every aspect of life in China is in flux.

We hope this blog will introduce perspectives and viewpoints that may not make it into our regular Reuters news stories but which nonetheless will maintain the sense of balance, fairness and objectivity you can expect from Reuters. We invite you to engage in this dialogue, with comments, opinions, suggestions and other feedback.

So join us in capturing the events that have put this vast nation in transition.