Galbraith China Hot Money Slides

Is China Really Running a Trade Surplus? James K. Galbraith Professor Lyndon B. Johnson School of Public Affairs The University of Texas at Austin Austin, Texas

Sara Hsu Adjunct Professor of Economics St. Edwards University Austin, Texas

Li Jianjun Professor of Economics Central University of Finance and Economics Beijing, China December 30, 2007 The University of Texas Inequality Project UTIP Working Paper 45

This is my wife’s uncle. He was America desk officer for Zhou En-Lai in 1971.

A Puzzle: Rising Chinese Unit Export Values

Table One: Export Unit Value (In US Dollars) Export Unit Value (Our Calculations) Export Unit Value (Official Statistics) Manufacturing Export Unit Value (Our Calculations)

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

0.51

0.47

0.47

0.46

0.46

0.45

0.46

0.56

0.66

0.79

1.00

0.05

0.06

0.07

0.08

0.10

0.08

0.60

0.70

0.76

N/A

N/A

0.40

0.38

0.39

0.39

0.39

0.38

0.40

0.49

0.59

0.72

0.97

Table Two: Export Volumes and Total Exports Attributable to Volume Gain (in Billions of Current US Dollars)

2002 2003 2004 2005 2006

Exports of Goods and Services 365.4 485.0 655.8 836.9 981.0

Exports of Goods and Services at Unchanged Unit Values 365.4 398.4 457.1 490.2 452.4

Difference1 0 86.6 198.7 346.7 528.6

Source: World Bank WDI and authors’ calculations

Table Five: Sector Unit Value Representation in Total Dollar Value per Exported Unit, by SITC Code (in US Dollars)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Total trade 0.51 0.52 0.51 0.47 0.47 0.46 0.46 0.45 0.46 0.56 0.66

0 Food and live animals 0.04 0.04 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.02 0.02

2 Crude materials, inedible, except fuels 0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

3 Mineral fuels, lubricants and related materials 0.02 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.02

4 Animal and vegetable oils, fats and waxes 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

5 Chemicals and related products, n.e.s. 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.03 0.03

6 Manufactured goods 0.10 0.11 0.10 0.09 0.08 0.08 0.08 0.07 0.08 0.09 0.11

Source: OECD Data and authors’ calculations

7 Machinery and transport equipment 0.09 0.11 0.12 0.11 0.13 0.14 0.15 0.16 0.18 0.24 0.30

8 M iscellaneous manufactured articles 0.21 0.19 0.19 0.18 0.18 0.17 0.16 0.15 0.14 0.16 0.18

Table Fourteen: Change in Unit Value, Year on Year, by Sector (in Percentages)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Total trade 3% -3% -7% 1% -2% 0% -3% 3% 21% 18%

0 Food and live animals -17% -2% -17% -4% -9% -8% -5% -4% 8% -6%

2 Crude materials, inedible, except fuels -11% -12% -20% -16% 2% -11% -15% -12% 3% 2%

3 Mineral fuels, lubricants and related materials 10% 6% -10% -26% -17% 32% -2% -16% 18% 14%

4 Animal and vegetable oils, fats and waxes -23% -21% 32% -52% -61% -31% -13% -26% 6% 12%

5 Chemicals and related products, n.e.s. 22% -7% -12% 1% -8% -9% 1% -4% 15% 18%

6 Manufactured goods 17% -16% -7% -5% -6% 0% -6% 1% 17% 28%

7 Machinery and transport equipment 20% 7% -5% 15% 8% 10% 5% 12% 33% 25%

8 Miscellaneous manufactured articles -8% -1% -4% 0% -5% -7% -8% -3% 12% 9%

Table Fifteen: Export Unit Values of ASEAN Countries1 (in US Dollars)

Indonesia Philippines Singapore Thailand

1996 109 146 120 127

1997 104 134 112 122

1998 81 105 97 107

1999 65 121 96 102

2000 100 100 100 100

2001 90 84 93 102

2002 96 77 91 97

Source: UN Comtrade Yearbook 2005

2003 103 79 90 105

2004 120 77 93 118

2005 81 N/A 96 130

Is it Price Increases?

Table Sixteen: U.S Import Price Indices (from World1) by Commodity Category

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Food and Beverages live and animals tobacco 96 86 93 87 95 87 111 88 105 91 103 93 108 97 103 98 103 100 100 101 95 103 99 103 101 104 112 107 117 109

Crude materials, inedible, except fuels 82 86 91 102 111 106 103 92 101 97 90 95 108 126 134

Mineral fuels, lubricants and related materials 63 60 48 56 59 80 61 38 83 106 61 95 108 141 202

Chemicals and related Manuproducts, factured n.e.s. goods 96 91 97 90 96 90 104 98 106 104 105 98 101 99 97 94 98 97 101 100 97 92 98 94 101 98 110 110 115 114

Source: BLS Data2

Machinery and transport equipment 105 106 108 110 112 110 105 102 100 99 98 96 95 95 94

Commodities Misc. and tranmanufactured sactions, articles n.e.s. 98 100 122 101 136 102 137 104 138 103 133 103 110 101 105 101 104 100 95 99 99 99 114 100 139 101 157 101 171

Table Eighteen: Japanese Imports from World, Unit Price Index on Yen Basis, (2000 average=100)

991 992 993 994 995 996 997 998 999 000 001 002 003 004 005 006

All Foodstuffs com& modities feedstuffs Textiles 118 122 116 111 120 110 100 109 98 94 107 99 94 106 98 103 119 106 111 123 113 105 123 118 96 108 107 100 100 100 102 110 103 101 113 103 100 116 100 104 124 99 118 127 100 137 135 105

Metals & related products 125 114 93 95 100 102 112 108 94 100 101 100 102 125 153 216

Wood, lumber & Petroleum, Chemicals Machinery related coal & & related & Other products natural gas products equipment goods 110 99 103 143 116 115 88 94 139 110 141 73 90 125 100 125 62 95 117 97 117 63 104 110 100 131 80 102 115 107 133 92 111 119 113 111 73 108 122 117 107 71 98 108 105 100 100 100 100 100 104 107 105 97 106 107 105 105 93 107 104 112 110 85 103 111 124 115 80 104 113 172 124 78 109 132 216 139 81 120

Source: Statistics Bureau, Ministry of Internal Affairs, Japan and authors’ calculations1

Table Seventeen: EU15 Unit Price Index (2000 = 100), Imports from China (excl HK)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Food and live animals chiefly Beverag for es and food tobacco 88 67 92 75 97 94 96 97 96 96 100 100 100 100 98 92 87 83 82 75 85 75 94 77

Crude materials, inedible except fuels 81 85 93 94 90 100 103 91 84 90 97 97

Mineral fuels, lubricants and related materials 87 96 103 102 92 100 127 112 127 261 217 187

Animal and vegetable oils, fats and waxes 82 99 119 125 105 100 98 83 78 84 94 90

Chemical s and related Manuproducts, factured n.e.s. goods 99 87 101 89 103 95 98 92 94 89 100 100 99 101 91 94 82 84 78 83 82 85 83 89

Source: Eurostat Online and authors’ calculations1

Machinery and transport equipment 92 92 95 91 90 100 100 97 88 88 88 89

Misc. manuTotal factured All articles products 77 83 81 86 89 93 88 90 88 89 100 100 99 100 93 95 82 85 78 84 79 84 85 88

Table Three: ASEAN Share in World Exports1 (Percentages)

ASEAN Share in World Exports

1998

1999

2000

2001

2002

2003

2004

2005

4.8%

5.1%

5.6%

5.2%

5.2%

4.0%

5.4%

5.4%

Source: UNCTAD Statistics Database

Is it the Processing Trade?

Table Four: Import Unit Values (into China) (in USD)

Import Unit Values Manufacturing Import Unit Values

1996 0.47

1997 0.38

1998 0.38

1999 0.36

2000 0.36

2001 0.38

2002 0.38

2003 0.43

2004 0.45

0.74

0.52

0.54

0.47

0.43

0.52

0.55

0.59

0.61

Source: OECD Data and authors’ calculations

Is it a Rising Wage Bill?

Table Six: Wage to Output Ratio (in Percentages) 1996 13%

1997 12%

1998 11%

1999 11%

2000 11%

2001 11%

2002

2003

11%

Source: China Data Center and authors’ calculations

11%

2004 11%

2005 11%

2006 11%

Is it Quality Improvement?

Table Twenty-Two: Top Twenty Subcategories (within SITC 6 through 8) for Change in Share due to Value Change1

SITC 6 through 8, 3-digit level category 752 Automatic data processing machines, n.e.s. 764 Telecommunication equipment, n.e.s.; & parts, n.e.s. 759 Parts, accessories for machines of groups 751, 752 845 Articles of apparel, of textile fabrics, n.e.s. 894 Baby carriages, toys, games & sporting goods 776 Cathode valves & tubes; diodes; integrated circuits 763 Sound recorders or reproducers; television record. 851 Footwear 778 Electrical machinery & apparatus, n.e.s. 842 Women's clothing, of textile fabrics 821 Furniture & parts; bedding & similar stuffed furni. 841 Men's clothing of textile fabrics, not knitted 893 Articles, n.e.s., of plastics 772 Apparatus for electrical circuits; board, panels 658 Made-up articles, of textile materials, n.e.s. 699 Manufactures of base metal, n.e.s. 848 Articles of apparel, clothing access., excluding textile 653 Fabrics, woven, of man-made fabrics 871 Optical instruments & apparatus, n.e.s. 771 Electric power machinery, and parts thereof

Change in Share due to Value Change, 2002-4 11% 8% 5% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 2% 1% 1% 1% 1% 1% 1%

Source: OECD Data and authors’ calculations

To calculate this, we look at the change in the unit value, relative to the average, from 2002-4 relative to the original percentage of total value in 2002. This gave us a percentage that presents the unit-value change component of the shift in share toward the sector. 1

Well, maybe it’s capital inflow, channeled through the current account to evade capital control, facilitated by the legalization of dollar accounts held by Chinese firms in China at the end of 2002 and incentivized by interest differentials and expectations of an RMB appreciation. Could that be it?

Table Eleven: RMB Less Dollar Yields

Avg 3-month Chinese Repo less US Treasury Avg 3-month CHIBOR less USD LIBOR

1998

1999

2000

2001

2002

2003

2004

2005

2006

1.96

-1.17

-3.4

-0.83

0.54

1.59

1.35

-1.44

-2.41

2.23

0.95

-2.46

0.03

1.6

1.66

1.71

-0.77

-2.57

Source: CEIC, US Treasury Statistics, British Bankers Association

Table Twelve: Non-Deliverable Forward Premium (Percentage of Spot)

Source: Ma and McCauley (2007, p. 16)

Table Thirteen: Foreign Exchange Transactions within China (in 100 Million Units) Overall Turnover (in USD)

2001 2002 2003 2004

750.3 971.9 1511.3 2090.4

USD Trading Volume

741.3 951.1 1478.2 2044.1

HKD Trading Volume

30.6 108.8 186.3 244.9

JPY Trading Volume

613.9 730.8 761.6 1349.6

Source: People’s Bank of China

EURO Trading Volume

N/A 1.1 3.0 1.9

Table Nine: Capital inflows under varying assumptions of unit value increase (in USD) Percentage of Increase from 2002

2003

2004

2005

2006

30%

26.0

59.6

104.0.

158.6

60%

52.0

119.2

208.0

317.2

90%

77.9

178.9

312.1

475.8

100%

86.6

198.7

346.7

528.6

Source: OECD, WDI and CEIC Data and authors’ calculations

If so, how big are the disguised inflows and what difference would they make to the trade balance?

Table Ten: Effect of estimated capital inflows disguised as current account on Balance of Trade (in Current billions of US Dollars) Balance of Trade Adjusted for Maximum Value (100%) of Hot Money Inflows

Exports of Goods and Services

Exports of Goods and Services at Constant Unit Values

Difference (Max Hot Money Inflows)

Imports of Goods and Services

Balance of Trade

Balance of Trade Adjusted for Minimum Value (30%) of Hot Money Inflows

1998

207

207

0

164

44

44

44

1999

221

221

0

190,

31

31

31

2000

280

280

0

251

29

29

29

2001

299

299

0

271

28

28

28

2002

365

365

0

328

37

37

37

2003

485

398

87

449

36

10

-51

2004

656

457

199

607

49

-10

-149

2005

837

490

347

712

125

21

-222

2006

981

452

529

878

103

-55

-425

Source: WDI and authors’ calculations

Finally, where did they go?

Table Seven: Gross Capital Formation (In Current US Dollars or Percentages where indicated)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

GDP (billions of current US$) 856.1 952.7 1,019.5 1,083.3 1,198.5 1,324.8 1,453.8 1,641.0 1,931.7 2,243.9 2,668.1

Gross capital formation (billions of current US$) 346.2 361.5 378.2 398.0 420.9 480.5 550.5 676.1 835.7 971.0 1,085.8

Percentage change in gross capital formation 4% 5% 5% 6% 14% 15% 23% 24% 16% 12%

Source: WDI and authors’ calculations

Percentage change in gross capital formation adjusted for min hot money inflows

Percentage change in gross capital formation adjusted for max hot money inflows

4% 5% 5% 6% 14% 15% 18% 19% 12% 7%

4% 5% 5% 6% 14% 15% 7% 8% -2% -11%

Table Eight: Beijing Real Estate Statistics (in Million Yuan)

2000 2001 2002 2003 2004 2005 2006

Real Estate Industry Operating Income -1862 -1046 -1026 895.9 8661.1 6184.4 11053

Real Estate Industry Total Profits -1303 -215.3 -587.1 1743.3 10701 8131 14959

Source: CEIC

Investment in Office Buildings 4521.9 7199.3 9732.6 14275 18789 19617 21674

Commercial Buildings Sold 424.84 1245.8 2595.3 5177.9 5883.4 12085 16256