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AN ANALYSIS OF CHINA'S HARD CURRENCY EXPORTS: RECENT TRENDS, PRESENT PROBLEMS, AND FUTURE POTENTIAL

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1. People's Republic of China: Exports to 20 hard-currency countries, 1972-76_

2. People's Republic of China: 1976 top exports to 20 hard-currency countries__

3. People's Republic of China: Percent shares of top 25 1976 exports to 20
hand-currency countries taken by each country individually__
4. Japanese imports of crude petroleum from PRC, 1978-82, as negotiated
in the Long-Term Agreement___

I. INTRODUCTION

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In 1977, China embarked upon a foreign trade policy designed to support its economic development and to hasten the modernization of its industry, agriculture, science and technology, and national defense. To implement its foreign trade objectives, China's leadership is advocating selective use of technology imports to speed the development of critical sectors of the economy, but at the same time, is emphasizing that China will remain basically self-reliant, and adhere to a policy which excludes financing imports by a buildup of foreign debt. To pay for expanded imports, China must, therefore, expand its exports. In the near to medium term,2 one of the most important among all variables affecting China's trade prospects will, therefore, be its export performance.

The author wishes to thank Dorde Cedic and Ronald Oechsler for their assistance in preparing this paper, and Allen Lenz, whose contribution to the methodology formed the basis of this study.

There are no doubt opportunities for China to expand hard currency earnings from tourism, foreign remittances, and business ventures in Hong Kong. This paper, however, addresses merchandise exports, which are likely to be the most significant single source of future foreign exchange earnings.

2 Near-term being through 1980, and medium term extending into the early 1980's. When used throughout the paper, these terms will denote the same time frames.

II. OBJECTIVES AND METHODOLOGY

This paper presents an analysis of China's hard currency export capabilities. The objectives are twofold: first, to contribute to an understanding of China's hard currency export capacity and therefore, to future levels of trade, and second, to provide data that may be useful to other researchers in performing their own analyses. A basic assumption is that genuine growth in Chinese export capability, or change in its composition, must normally occur in relatively moderate stages. Examination of recent exports can, therefore, give an indication of the kinds of items and their likely export volumes in the years immediately ahead.

Export volumes, however, are not determined solely by ability to supply goods, but also by demand in importing countries. Analysis of China's hard currency exports using disaggregated data provides some indication of the world market demand for specific commodities, and hence, the potential effect of demand levels on export prospects.

This paper provides data covering recent exports of the People's Republic of China to 20 hard currency countries.3 This group of 20 includes all the major industrialized Western countries plus a few countries in Asia, which by virtue of geographic proximity are significant export markets for the PRC. Data presented in this paper was originally reported by each country to the United Nations and is based on the Standard International Trade Classification (SITC) system outlined by the U.N. Latest data currently available cover imports from China through yearend 1976 by all countries except Malaysia, whose imports have been estimated.

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From these data, the following data tabulations are provided:

(1) Table 1.-At the one-digit level of detail, China's exports to The Twenty hard currency countries for individual years 1972-76, showing dollar value and composition.

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(2) Table 2.-Disaggregated data at the two- and five-digit SITC levels. These data are ranked by descending 1976 total export value to The Twenty. The top 15 two-digit SITC categories are displayed, as are the top 50 five-digit categories, along with their 1974 and 1975 values. The rank occupied by each commodity in 1975 is also included in both tables, to show the degree to which commodity composition of China's exports changed between the two years.

Hereafter, often referred to as The Twenty, countries included in the group are: Australia, Austria, Belgium/Luxembourg, Canada, Denmark, Federal Republic of Germany, France, Hong Kong, Indonesia, Italy, Japan, Malaysia, Netherlands, Norway, Singapore, Sweden, Switzerland, United Kingdom, and United States.

It is noteworthy that unlike trade of other communist countries, China's trade has been dominated by trade with noncommunist partners.

The terminology and data disaggregations used in this paper, i.e., one-digit SITC-section, two-digit SITC-division, five-digit SITC=item, follows the definitions stated in the "Standard International Trade Classification, Revised," Statistical Office of the United Nations, New York, 1961.

Malaysian data was available from Malaysian Government sources in the publications, "Supplement: Preliminary Figures of External Trade for the Period January to December 1976," Department of Statistics, Malaysia. Only totals and one-digit di aggregations for yearend 1976 were given. The percentage change from 1975 to 1976 for each one-digit SITC group was applied to the 1975 value of all commodities comprising that group. The total was adjusted likewise, i.e., the percentage change in total Malaysian imports from the People's Republic of China was applied to the comparable 1975 value. For reasons of consistency, 1975 data used was from, "Supplement: Preliminary Figures of External Trade for the Period January to December, 1975," Department of Statistics, Malaysia.

7 The SITC (1961) system defines and uses 56 two-digit product division classifications and 1,312 five-digit (unique level) item classifications. The list of commodities at the five-digit level may at times include fourdigit categories if the most disaggregated level reported is the four-digit item. The attempt in this data presentation is to display the top 50 unique level export commodities.

(3) Table 3.-For each of the top 25 1976 five-digit exports to The Twenty, the share of each commodity absorbed by The Twenty importing countries individually.

The one-digit data display broadly distinguishes exports by disaggregating them into 10 categories. From these, it is possible to make some generalizations about the degree to which Chinese export capability is concentrated in raw materials, semiprocessed goods, and finished manufactures. The two-digit disaggregation provides an additional level of detail, where breakdowns are somewhat akin to industries.

The five-digit disaggregation is the finest level of detail available from United Nations data. Ranking the top 50 individual hard currency earning commodities is useful in assessing the diversity of the export composition. Five-digit item data can also be used to identify commodities that might be import sensitive and that could be subject to varying degrees of price fluctuation, depending upon world market conditions.

Lastly, showing the country destinations for the top five-digit commodities distinguishes market concentration, and highlights the degree of dependence a particular export commodity has on economic conditions in importing countries. Concentration of sales in only a few of The Twenty countries would tend to make export capabilities sensitive to economic conditions in the importing country and, conceivably, could also make sales dependent on political relations between China and a specific importing country. This type of export market shares presentation is particularly relevant to China, where many items are exported in substantial quantity to only a very few

countries.

III. LIMITATIONS OF METHODOLOGY

There are always significant limitations on the use of historical data in predicting future trends. Even though the recent past may be a good indicator of the near to medium term, it has obvious faults. For example, while there is little likelihood, even for a planned economy, of very large year-to-year changes in the general composition of items that can be offered for export, importing countries' demands, particularly for crude materials, fuels, and semi-processed goods, may fluctuate. Thus, not only Chinese supply but world market conditions are important in projecting future exports, a factor which has been significantly relevant to many items in China's export

structure.

Additionally, projections of future capabilities obviously cannot rely solely on historical data, but need to make use of available. supporting information on conditions in the domestic economy, domestic policy changes, trends in economic relations with importing countries, special trade agreements, et cetera. Last, it is important to maintain a perspective on what effects the rising tide of protectionism among most of China's hard currency trading partners may have on China's near to medium term hard currency earning capability.

Beyond general problems concerning the use of historical data, the reader should be aware of limitations specific to data in this study. These are: (1) that Chinese hard currency exports to The Twenty countries in this paper do not represent total Chinese hard

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currency capability, (2) that data used herein has about an 18-month time lag, (3) that data is denoted only in terms of dollar value and not volume, and (4) that data is reported by most of The Twenty importing countries on a CIF (Cost, Insurance, Freight) basis, rather than on an FOB (Free on Board) basis. Each of these limitations is discussed in greater detail below.

Exports from the People's Republic of China to the sample of 20 countries used in this paper do not reflect total Chinese hard currency exports in any one year. The 20 countries comprising the sample were chosen because in all cases they import from the People's Republic of China on a hard currency basis. China's non-Communist trading partners in South Asia, the Near East, Africa, and Latin America, which are by and large LDC's, were excluded from the sample. These countries do not necessarily conduct their trade with China in hard currencies; while some exchanges may go beyond bilaterial clearing arrangements, there is not sufficient data for purpose of analysis in this paper to determine the value of this hard currency trade. Similarly, Communist countries are excluded from our sample, since as a rule China's trade with these countries is conducted primarily through bilateral clearing accounts and not on a hard currency basis.

Using data estimates of China's total exports to all non-Communist countries between 1971 and 1976, exports to the 20 countries comprised about 80 percent of that total. Furthermore, to the extent that some trade with other non-Communist countries may be conducted through bilateral clearing accounts, exports to the 20 countries would account for an even larger share of China's non-Communist exports.

An additional argument supporting use of the 20 countries as a proxy for estimating China's future hard currency earnings capabilities lies in the fact that the 20 countries used in this paper probably represent the largest potential for future expansion of hard currency earnings. The group includes not only the major part of the Industrialized West but also the largest Asian markets for Chinese goods. Other non-Communist countries, generally LDC's, not included in the 20 countries probably are not major potential hard currency export markets since they are generally facing debt and trade deficit problems of their own.

The second limitation of data in this paper is that the most recent data available, disaggregated to the detail presented, covers Chinese exports to the 20 countries only through yearend 1976. Similar 1977 data will not be available until mid-1978.10 In making analyses of future Chinese export capabilities employing the technique used herein, there will inevitably be a lag of at least 6 months between the period covered by the data and its availability.

Another limitation of the data is that it has been available to this author only in dollar values and not in volume terms. Hence, it does not provide information concerning volume trends in exports, which

Estimates are found in: China: International Trade, 1976-77, Central Intelligence Agency, National Foreign Assessment Center. Publication No. ER 77-10674, November 1977.

At the time of writing, 1976 data was actually available for only nineteen of the twenty countries. Malaysian data had to be estimated. See footnote 5.

10 This paper will be updated as soon as 1977 data are available. The update should be completed by December 1978, and may be obtained from the author, c/o Office of East-West Policy and Planning, Bureau of East-West Trade, Industry and Trade Administration, U.S. Department of Commerce, Washington, D.C. 20230.

is often significant to an understanding of basic export capabilities. For the purposes of this paper-an examination of China's ability to earn hard currency-this limitation is somewhat secondary, since our primary concern is with actual dollar value hard currency earnings from whatever source they are derived, that is, volume or price increases.

Finally, most of the 20 countries, when reporting their imports from other countries, have done so on a CIF (cost, insurance, freight) basis." This has relatively minor consequence when analyzing China's exports to the 20 countries, since the greater percentage of these exports are shipped to countries within close geographic proximity. In comparing Chinese exports on a CIF basis to data adjusted to FOB (free on board),12 total export earnings recorded CIF have been judged to be inflated by about 6 percent. This percentage, of course, varies considerably among destinations and commodities. For example, the sum total of China's exports to Sweden, when reported CIF are judged as 16 percent higher than if they had been reported FOB. The same comparison for Hong Kong yields virtually no difference between the two reporting methods. Likewise, different commodities shipped to the same country will also incur varying charges that will result in differences between CIF and FOB reports.

IV. ANALYSIS OF EXPORT COMPOSITION

Having presented the analytical framework and its limitations, the commodity composition of China's hard currency exports to the 20 countries can now be examined. The first part of the analysis provides some general highlights about China's hard currency export trade-its broad makeup, major importing countries and a limited comparison of Chinese export composition and volume with that of other Communist countries. Following this overview, a systematic examination of the four major categories of China's exports (food, textile fibers/fabrics, petroleum, finished manufactures) is provided. Analyses are based on the top two-digit SITC product divisions that comprise each of the major categories and also include an examination of the top export items at the five-digit SITC level of disaggregation.

A. Data Highlights

China's exports to the 20 countries, disaggregated at the one-digit SITC level of detail, appear in Table 1. From this table we note the following:

At $5 billion, 1976 exports to the 20 countries were about 140 percent greater than the 1972 level.

At nearly $3 billion, China's exports of primary products (SITC 0-4) accounted for 58 percent of the total and were the largest group of commodities exported to the 20 countries in 1976. Nearly one-half of these exports were food and live animal items (SITC 0).

Exports of intermediate products (SITC 5-6) were the next largest group, and at nearly $1.4 billion contributed 28 percent

11 Australia, Canada, and the United States report their imports FOB (Free On Board).

12 Aggregated data adjusted to FOB can be found in; China: International Trade, 1976-77, Central Intelligence Agency, National Foreign Assessment Center. Publication No. ER 77-10674, November, 1977. Adjustments in this publication are, however, only judgmental and are not based on empirical analysis.

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