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In the News Today: Shanghai Stock Exchange Brief History: the Shanghai Exchange Opened in 1990 and Was Initially Limited to a Ha

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In the News Today: Shanghai Stock Exchange Brief History: the Shanghai Exchange Opened in 1990 and Was Initially Limited to a Ha In the news today: Shanghai Stock Exchange Brief History: The Shanghai exchange opened in 1990 and was initially limited to a handful of state owned enterprises. Two types of shares were used (note that “dual track” was a common feature in many reform policies) A Shares: In RMB, for domestic investors B Shares: In US$, for foreign investors The RMB is still not freely convertible on the capital account. This means that private Chinese investors cannot invest in foreign securities. The Shanghai market has become hot, and appears to have “bubbled” in late 2007. April 17 (Bloomberg) -- China’s stocks fell the most in more than a week, led by commodities producers, after raw material prices tumbled and Premier Wen Jiabao said the economic recovery lacks a solid foundation. The gauge has gained 38 percent this year, lagging behind only Peru among the 88 primary stock gauges tracked by Bloomberg globally. Stocks have rallied on optimism the government’s 4 trillion yuan ($585 billion) stimulus package and record new lending will spur a recovery in the world’s third-largest economy amid the global recession. History:Pre 1949 Trade as exploitation - Opium Wars and Treaty Ports During the 1800s, trade brought China some new products: o Opium and Tobacco o But also sweet potatoes (twice the caloric value per hectare than rice or wheat), and machinery These experiences, plus the importation of Marxist/Leninist ideology made fertile ground from the Maoist war of liberation Planning under Mao (1949-late 70s) Suppression of markets and private property Trade as a necessary evil: Objective for trade is import technology needed for industrialization. Oil was exported to earn the foreign exchange needed to import technology. Great Leap Forward: horrible example of the failure of planning, limitations on trade, and lack of guidance from the price system. Grain was exported at a time of extreme famines in parts of China. The death toll is estimated to be between 20-30 million. Early Reform (1978-1992): Started from a point where potential gains and losses from trade were immense Potential Gains from Trade Opening o Productivity gains from specialization according to comparative advantage (switch workers from production of steel to the production of textiles) o Productivity gains from adoption of new technology and knowledge transfers (from foreign joint ventures) o Productivity gains from taking advantage of scale economies o Consumer gains from appearance of new products, greater product variety, and increased competition Potential Dangers from Trade Opening o Losers from trade according to comparative advantage (recall Heckscher-Ohlin Theory and the Factor Price Equalization Theorem) o “Spiritual Pollution” from foreign ideology (e.g. Christians and Hollywood) o World Price shocks Gradualism: “Crossing the river by stepping on stones” Dual Track o State and market prices o State and non state production o Special economic zones (SEZ): “One Country – Two Systems” The “Air Lock” was use to both gradually open up to trade while still insulating the domestic economy from trade shocks (rapid change in prices and employment) o Foreign Trading Companies: All trade was funneled through (intitially) 12 government trading monopolies that were linked with the central plan o The RMB (ren min bi) was fixed (at an overvalued exchange rate) and was not convertible. This means that any foreign currency could only officially be exchanged at the set rate. Ownership of foreign currency was not allowed. Gradual Devaluation (about 70% in real terms) o 1981: 1.5RMB=$1 o 1994: 8.27RMB=$1 o RMB is not convertible Gradual Demonopolization of the right to trade. The number of companies allowed to trade (foreign trade companies) was increased. These companies were linked to the government (not privately owned). Tariffs o Increased tariffs in the early 1980s: This is called the “tariffication of non tariff trade barriers”, and is a step required before eventually membership in the WTO. o After 1985, tariffs gradually were reduced in preparation for membership in the WTO (2001) Trade in the late 1980s and early 1990s Naughton concludes that by the late 1980s Chinese imports and exports had changed from the old “export oil so that we can buy heavy industrial technology”, to a system that “overwhelmingly” corresponds to trade according to comparative advantage as determined in the Heckscher Ohlin model. Chinese is abundant in labor and began exporting products of labor intensive industry (clothing, shoes, toys). Arable land is scarce in China and China began importing (in Naughton’s phrase), goods that were “land substitutes” (fertilizer, synthetic materials). China’s Imports From the US (1989-1995) Note the increase in Chinese imports of fertilizer. China’s Exports to the US (1989-1995) Note the decline in petroleum exports and increase in clothing and toy related exports. Think about comparative advantage, the Heckscher Ohlin theory, factor price equalization, the gains from trade, and the redistribution of income that comes along with trade opening. Naughton quotes the following summary statistics. Naughton notes that until the mid 1980s, the largest category of Chinese exports was petroleum. Extractive (ag. and oil)exports as % Labor intensive exports as % or of total exports total exports 1984 49% 37% 1994 15% 54% Recent Trends China’s Imports From the US (1997-2007) Fun Trivia Question: During 2007 “aerospace products and parts” was the largest category of US exports to China. The (close) second largest category was a. Oilseeds and grains b. Resin and synthetic rubber c. Computer equipment d. Waste and scrap Go through this table and identify areas where the US has a comparative advantage. China’s Exports to the US (1997-2007) One more trivia question: In 1997 the top 5 categories of Chinese exports to the US were 1. Miscellaneous Manufactured equipment 2. Footwear 3. Apparel 4. Audio and Video Equipment 5. Computer Equipment In 2007 which of the above was now #1? Note that these numbers are not what you first think. Suppose China imported all the components of a Television from Japan, assembled TVs in one of its special economic zones, and then exported the assembled TV to the US. The trade numbers would show a big increase in both the imports and exports for China and a decrease in trade between Japan and the US. Tariffs and Membership into the WTO Mr. Zhu Rong Ji took over the leadership in China in 1992. He was a focused economic reformer but battled strong vested interests within China. He pushed for WTO membership, despite local opposition. China’s membership in WTO would give their exporters freer access to the markets of developed countries. I think he also saw the domestic gains from introducing more competition with foreign firms. One result is that Chinese tariff rates are low for a developing country. China Tariff Profile Exchange Rate Policy After a decade of fixing their exchange rate at 8.27RMB/$, China switched to an “unofficial crawling peg” in September of 2005. They allowed the RMB to gradually appreciate against the US $ from 9/2005 to 6/2008. It has been fixed at around 6.8RMB/US$ since then. Note that while the RMB appreciated agains the US $ from September, 2005 to June 2008. It has been frixed at around 6.8RMB per US$. The EU is now China’s largest trading partner. As the Euro lost value (in US $ terms) over the last year, the RMB appreciated against the EURO. Some Results Macroeconomic Indicators Note the emergence of a significant current account surplus in China and that has coincided with an accumulation of Chinese foreign exchange reserves. Is the RMB undervalued? Recall PPP and the Law of One Price Big Mac Index Next: China’s Exchange Rate Policies and Recent Controversies. .
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