China is encouraging its entrepreneurs to invest in Brazil ...



By Jennifer Lee, Autumn, 2004

I) China: Going Global

Since China’s economy began flourishing foreign direct investments (FDI) have poured into China. As capital comes into China from other countries, China has begun doing the same towards Latin American, Eastern Europe as well as buying infrastructure in the US. In 2002 when China National Offshore Oil Company paid $585 million to Spanish oil company Repsol-YPF for its Indonesian oil and gas asset, this made headline news. Another large purchase that made headline news was when China’s largest white good make, the Haier Group, bought the Greenwich Savings Bank in midtown Manhattan. Konka Electornic Group sent up a factory in Mexico and has begun distributing TV into the US market. Chinese electronic companies such as TCL has created television production joint ventures in India and Vietnam while other companies have expanded production bases to Turkey as well. While these purchases received much attention, they are rather small in comparison to multi-billion dollar transaction made by many U.S. companies. However these purchases signal to the world that China is attempting to go Global.

The chart below shows how since the mid 1980’s China has been increasing her foreign direct investment. While FDI outward has been increased, in 2001 China only made up .4% of the FDI made globally while the US continues to lead at 21.1%. One can also see the US has been slightly decreasing their FDI while the EU has been increasing their FDI.

World Foreign Direct Investment Outward Stock by Home Country, China and Selected Countries[1]

| | |1990 |1995 |2000 |2001 |

| | | | | | |

|World | |100% |100% |100% |100% |

| | | | | | |

|Developed countries| |94.7% |90.3% |87.3% |87.8% |

| | | | | | |

|EU | | | | | |

|France | |46.4% |45.3% |51.7% |52.5% |

|Germany | |7.0% |7.2% |7.1% |7.9% |

|Ireland | |8.6% |9% |7.7% |7.8% |

|Netherlands | |0.2% |.2% |.3% |.4% |

|UK | |6.2% |6% |5.1% |5% |

| | |13.3% |10.7% |14.8% |14.4% |

|Canada | | | | | |

| | |4.9% |4.1% |3.7% |3.7% |

|US | | | | | |

| | |25% |24.5% |21.3% |21.1% |

|Mexico | | | | | |

| | |0% |.1% |.1% |.2% |

|Japan | | | | | |

| | |11.7% |8.4% |4.6% |4.6% |

|China | | | | | |

| | |.1% |.6% |.4% |.4% |

|Taiwan | | | | | |

| | |.7% |.9% |.8% |.8% |

|Singapore | | | | | |

| | |.5% |1.2% |.9% |1% |

| | | | | | |

| | | | | | |

According to Allan Zhang, a senior Asian economist at PricewaterhouseCoopers’ China’s overseas investments is driven by four specific factors.

1. Exporting Out:

After all the economic reform China has increased its production capacity especially in household items such as, electrical appliance manufacturing, textiles and clothing, motorcycles, bicycles, machinery, chemicals and building materials. However China’s domestic market is not consuming enough in comparison to what is being produces. Therefore, China’s corporate executive sees overseas expansion as a way to “export out” the excess.

2. Demand for Natural Resource:

As China’s economy continues to grow and consumption of materials continues to increase, China’s demand for natural resource has increased as well. Natural resources such as timber, rubber, oil and gas have increased in demand to the point where China can no longer be self-sufficient and has become dependent upon foreign supplies, particularly in the energy sector.

3. Unemployment Problem:

With the state owned enterprises laying off working coupled with the millions of migrant workers coming from the countryside, unemployment has become a big problem.

4. Belief that Globalization is unstoppable:

President Jiang Zemin and other Chinese leadership believe that globalization is unstoppable and the only way for China to continue to be competitive is to join in. In addition, now that China has become a member of the WTO, the Chinese government believes that increased access to foreign markets is integral.[2]

China’s overseas investments are largely focuses in areas like natural resources exploration, industrial processing, transportation, engineering contracting and labor services, research and development and agriculture. According to Allan Zhang, “natural resource exploration accounts for the largest chunk of overall investments. China National Petroleum Corp signed an agreement with Russia to construct a 2,400 km oil pipeline linking the Angarsk Oil Field in Irkutsk in Siberia with Daqing in northern China, with total investment of $700 million. China has also invested $1.2 billion towards iron ore and aluminum exploration in Australia. And in May 2002, Petro China spent $262 million to acquire Devon Energy Corporation in Indonesia.”[3]

While most of China’s FDI has gone to other Asian States (APEC and ASEAN), then the EU and North America consecutively, China has taken favor in investing in less developed areas, such as the Commonwealth of Independent States, Africa and Latin America. The reason being according to Allan Zhang is that they “enjoy some advantages such as more advanced technological acumen, better business management skills, easier access to capital- over their counter parts in these countries.”

China is attempting to become a shareholder of the Inter-American Development Bank (IDB). The IDB’s aim is to provide financial aid and technical assistance for Latin American economies to promote their development. If China becomes a shareholder, it will further increase economic relationship with Latin America. Currently there are two ways China can gain entry. One, if the IDB decides it needs to raise more capital, thus it will admit more shareholders or if new members take over shares from existing members. The later seems to be the best way China will gain entry because shares are becoming available as former Yugoslavia has been divided into different nation states. For example Bosnia-Herzegovina has given up their shares while Serbia-Montenegro has not yet made a decision.[4]

Currently Brazil is China’s largest trading partner in Latin America, with Mexico and Chile at second and third. Sino-Brazilian trade includes aviation, space technology, mining, information technology, agriculture and manufacturing. According to Chris Hernandez

Both countries began negotiations on technology exchanges on the use of alcohol as fueling internal combustion engines. These negotiations could entail equipment, alcohol technology and production claims Brazilian Development, Industry and Foreign Trade Minister Sergio Amaral. He also stated that Brazil and China would proceed to negotiate on formalizing joint-venture investments to assemble Brazilian Embraer aircraft in China. The Vice Minister of the State Development Planning Commission of China, Zang Guobao, expressed emphasis of Brazil’s importance as a rising country and again said that bilateral trade cooperation has become closer.[5]

According to the China Daily, Bilateral trade between China and Brazil in 2004 has increased 200 % since 2000 totaling $7 billion. China’s need for iron has resulted in the Cia Vale do Rio Doce (CVRD), the world’s largest iron ore miner desire to expand into China. Cia Vale do Rio Doce’s president Agnelli stated his wish to seem more partners in China so that they could make a bigger impact on the world’s fastest growing market. Currently CVRD has already signed contracts to deliver 6 million more tons of iron ore and other minerals to China than in 2003, totaling 35 million tons valued at $1billion. When Agnelli was asked if he was concerned about the possibility of a decline in China’s market (it cannot be expected that China will continue to grow at 9% a year), he stated, “our contracts with China are long-term ones.” In return China has also increased their investment in Brazil with CVRD. Shanghai based Baosteel signed a $2.5 billion contract early this year with CVRD to establish a steel plant in Brazil’s St.Louis. In addition, Brazilian members called for an improvement in agricultural trade. Currently Brazil is the world’s largest meat and soybean exporter.[6] This would help feed China’s extremely large population and increase their caloric intake. Furthermore, soybean is a large part of the Chinese diet.

In addition China has been strengthening its relationship with Venezuela largely for its oil. President Hugo Chavez f Venezuela looks favorably towards gaining a better relationship with China, especially since it has a strained relationship with the U.S., thus looking to other foreign countries would prove to be beneficial. Chinese firms already have fuel and reactive gold mine in Venezuela and except to received an estimated $500 million in investments from China within the next couple of years.

Charles Tang, a Chinese entrepreneur who is president of the Brazil-China chamber of Commerce and Industry stated in the Daily Times, “China is very interested in areas where they can obtain the products they need.”[7]

II) China’s Position in World Trade-Charts

China’s Shares in World Merchandise Trade[8]

| |1999 (%) |2000 (%) |2001 (%) |

|Merchandise Trade | | | |

|Export | | | |

|Import |3.6 |3.9 |4.3 |

| |2.9 |3.4 |3.8 |

|Agriculture | | | |

|Export | | | |

|Import |2.6 |2.9 |3.0 |

| |2.4 |3.2 |3.4 |

|Food | | | |

|Export | | | |

|Import |2.7 |3.1 |3.3 |

| |1.4 |1.9 |2.1 |

|Manufactures | | | |

|Export | | | |

|Import |4.1 |4.7 |5.3 |

| |3.0 |3.5 |4.1 |

| | | | |

As China’s economy has been booming, it has become a significant growth force in world trade. In 1990 China’s share of world good exports was 1.8% however, as it continued to increase, by 2001 it exports rise to 4.3%, ranking it the 6th largest exporter. Imports have also risen from 1.5% in 1990 to 3.8% in 2001 also making it the 6th largest importer in the world. It is likely that in 2004 China is now above the 6th position in both export and imports. China owes much of their trade expansion to manufacture goods. In 2001, 88.6% of their exports were manufactures. Below is a chart of rankings in 2001 of the leading exporters and importers in world merchandise trade from the WTO International Trade Statistics.

Leading Exporters In World Merchandise Trade in 2001

Rank Exporters $ Bn Value % Share

1 United States 731 11.9

2 Germany 571 9.3

3 Japan 404 6.6

4 France 322 5.2

5 UK 273 4.4

6 China 266 4.3

7 Canada 260 4.2

8 Italy 241 3.9

9 Netherlands 230 3.7

10 Hong Kong 191 3.1

Leading Importers in World Merchandise Trade 2001

Rank Exporters $ Bn Value % Share

1 United States 1,180 18.3

2 Germany 493 7.7

3 Japan 349 5.4

4 UK 332 5.2

5 France 325.8 5.1

6 China 244 3.8

7 Italy 233 3.6

8 Canada 227 3.5

9 Netherlands 207 3.2

10 Hong Kong 202 3.1

The Following charts below tell the top ten commodities China imports from the World and the top then that China exports.

China’s Top Imports from the World ($ million)

|Commodity Description |2002 |2003 |

|Electrical machinery & Equip |73,255 |103,953 |

|Power Generation Equip |52,152 |71,500 |

|Mineral fuel & oil |19,322 |29,272 |

|Iron & Steel |16,011 |25,597 |

|Optical & medical equip |13,478 |25,137 |

|Plastics & articles thereof |17,380 |21,032 |

|Inorganic & organic chemicals |13,105 |18,736 |

|Vehicle & parts other than rail | | |

|Ore, slag & ash |6,479 |11,814 |

|Copper & articles thereof | | |

| |4,280 |7,172 |

| |5,667 |7,165 |

One may observe that what China imports from the world are largely equipment parts (that usually get exported back out once assembled) and natural resources. As China continues to industrialize, the need for more energy and oil continues to grow. What China imports are largely more for factories, industries and businesses as opposed to consumer goods such as clothing, bedding etc.

China’s Top Exports to the World ($ million)

|Commodity Description |2002 |2003 |

|Electrical Machinery & Equip |65,119 |88,978 |

|Power generation equip |50,815 |83,468 |

|Apparel |36,570 |45,759 |

|Toys & Games |11,601 |13,279 |

|Footwear & Parts thereof |11,090 |12,955 |

|Furniture & Bedding |9,856 |12,895 |

|Iron & steel |9,571 |12,864 |

|Mineral fuel & oil |8,372 |11,110 |

|Inorganic & organic chemicals |8,589 |10,735 |

|Optical & medical equip | | |

| |7,367 |10,564 |

What most of the World imports from China are consumer goods. Items that a everyday person could go into a store or a mall to purchase i.e. electronic goods and footwear.

Currently the US, EU and Japan all run trade deficits with China. However the US has the largest deficit by far. As of 2003, China made up approximately 1/5 of the US trade deficit. While China has trade surpluses with the US, EU and Japan, it runs trade deficits with other Asian nations where China gets most of her raw material.

China has trade deficits with ASEAN countries the past few years. November 29, 2004 China and the ASEAN pushed towards a China-ASEAN free-trade area (FTA). This new alliance will further increase economic integration among the region. The establishment of a free trade area has been estimated to boost the development of the region, with 1.7 billion consumers, to about $1.8 trillion in GDP and $1.2 trillion in trade value. China and the ASEAN will be signing a series of agreements. The first of which started the process is the “Agreement on Trading in Goods of the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China. This agreement is set to begin on July 1, 2005. According to , the plan is to gradually reduce or cancel tariff on 7,000 kinds of products. China has already agreed to a zero-tariff agreement on fruits with Thailand. These new series of agreements apply to the ASEAN + 3. The ASEAN includes Brunei, Indonesia, Malaysia, Singapore, Thailand, The Philippines, Vietnam, Laos and Cambodia. The “+3” includes China, Japan and South Korea. China and ASEAN are also going to sign the ASEAN-China Plan of Action to Implement the Joint Declaration on Strategic Partnership for Peace and Prosperity. China and the ASEAN have already signed a “Memorandum of Understanding on Transport Co-operation.” Progress has already been made in this sector. A few examples are the construction of the Laos section of the Kunming-Bangkok Highway; the navigation channel improvement project on the upper Mekong River; the feasibility study of the missing link of the Trans-Asian Railway inside Cambodia; and the fact that direct flights are now in service between major cities in China and ASEAN countries.[9]

III) US and China’s Trade Relationship

With China’s phenomenal growth rate, most of its trade is done with the US besides its fellow Asia states. China exports far more to the US than it imports from the US. According to statistics from the US Census Bureau, the US has a trade deficit of $114 billion with China. The US is now faced with a huge federal debt. Alan Greenspan, the federal reserve Chairman of the US stated

The United States current account deficit, which encompasses annual trade as well as the balance of financial flows, has gone from zero in 1990 to nearly $600 billion this year. The United States' accumulated debt to foreign investors is $2.6 trillion, or 23 percent of the annual output of the economy. But where foreign investors in the 1990's poured trillions of dollars into American stocks and corporate acquisitions, investment from abroad now comes mostly from foreign central banks and goes heavily to buying Treasury securities that finance the federal deficit.[10]

China has invested their trade surplus in holding US Treasury Bonds. As of last August 2003, figured provided by Asia Times claimed China’s holdings of US Treasury bonds rose to another record US $122.5 billion, less than Japan’s but far greater than any other countries. Together Japan and China hold 41.9 % of the $1.3472 trillion debt the US Government owes the world. One might begin to question why foreign countries such as China and Japan continue to hold these US Treasury Bonds that ultimately have been largely going towards financing the US war against Iraq.

I will focus on China in particular since it is the concentration of this paper. If cashed in its US bonds, the Yuan would appreciate extremely fast. The People’s Bank would have an extremely difficult time trying to control the surplus circulation of the Yuan. Ultimately this would result in inflation as was seen in the mid 1990’s. Inflation would damage the Chinese economy and cause the prices of Chinese goods to increase, which would hurt China’s export industries. China did/does not support the war in Iraq. Since the war, the dollar has decreased in value and bonds are producing low yields. Many economists have suggested that China follow in the Russian footsteps as Russia has diversified and withdrew from savings in simply US dollars. Last year the People Bank of China ended its monopoly on imports and exports of gold and created the Shanghai gold exchange. Furthermore, many Chinese commercial banks are seeking to launch personal gold investment businesses. Michael R Presis an economists states “The way forward for China’s central banks and savers in the coming year is to diversify out of their huge dollar holding and move back its currency by gold.”[11] An alternative for China would be to invest in the euro. China’s trade with the European Union continues to increase year after year. Furthermore, the euro has continued to increase and yields are more promising than those offered by investing its savings in the US market.

Many predict that the size of China’s economy would surpass that of the U.S, which leads to fear that China could be a potential security threat. As Thomas L.McNaugher explained it appeared that the “sleeping dragon” had awaken, ready to assert its dominance.[12] Many in Washington view China as a threat. Often one may here the phrase “taming the Dragon” which is a reference towards the US belief that it needs to “tame” China. As President Clinton stated “ China is the world’s largest populous state, the fastest growing major economy and a permanent member of the United Nations Security Council.”[13] China is not only here to stay, but here to grow stronger. Thomas L. McNaugher suggests, “rising powers, especially one with China’s proud past, recent growth rates, and enormous potential, have every reason to resist agreements that reflect current power relationships in hopes of negotiating from a stronger position down the road.”[14]

Some predict that the next major war the US will go into will be against China. While I have yet to decide my position on the issue, it would be interesting to see what would happen if the US placed a trade embargo on China and vice versa. Below are two charts that break down the top 10 things the US exports to China and the top ten commodities the US imports from China.

Top US Exports to China, 2003 ($ million)

|Commodity Description |2002 |2003 |

|Electrical Machinery & Equip |3,950 |4,782 |

|Power Generation Equip |4,109 |4,639 |

|Oil Seeds & oleaginous fruits |917 |2,877 |

|Air & Spacecraft |3,428 |2,451 |

|Medical Equipment |1,258 |1,594 |

|Plastics & Articles thereof |995 |1,247 |

|Iron & Steel |591 |1,213 |

|Organic Chemicals |619 |1,105 |

|Cotton |153 |769 |

|Copper |319 |652 |

When looking at the chart above, one must take into account that much of the electrical machinery and equipment as well as the power generation equipment exported to China are sent in pieces for the Chinese to assemble and send back to the U.S., which is also reflected by the chart below. From 2002 to 2003 China increased its need for cotton, cooper, organic chemical, fruits, plastics and medical equipment. The amount spent in exports of Air and Spacecraft has decreased. This is probably due to China’s increasing relations in with Latin America (i.e. Brazil) that are also able to provide this commodity Furthermore it is possible to predict that in 2004 the amount China spends on imports for iron and steel from America would be less due to China’s new relations with Brazil’s Cia Vale do Rio Doce (CVRD), the world’s largest ore miner. In addition, if one looks at China’s international trade as a whole, China only draws trade deficits in the commodities of agriculture and fuel. While the US provides China with wheat grains and fruit, agriculture as well as fuel is not among the top things that China relies upon from the US. One can infer then, that China imports those commodities from other countries. However something such as medical equipment, it is plausible to say that would be hard for China to receive, unless from the EU because the U.S. is the most advanced in the medical field.

Top US Imports from China, 2003 ($ million)[15]

|Commodity Description |2002 |2003 |

|Power Generation Equip |21,070 |31,039 |

|Electrical Machinery & Equip |25408 |30,034 |

|Toys & Games |15,491 |17,399 |

|Furniture |11,255 |13,670 |

|Footwear & parts thereof |10,763 |11,144 |

|Apparel |7,473 |9,156 |

|Leather & travel goods |4,782 |5,440 |

|Plastics & articles |4,144 |4,779 |

|Iron & steel |3,094 |3,855 |

|Medical instruments |2,874 |3,386 |

Electronic and electrical consumer goods, as well as toys, furniture, footwear, bedding, apparel, and a variety of other low technology consumer goods largely dominate US imports from China. Most of what American’s need in their household, and common necessities other than food are provided by China. From 2002 to 2003, the US increased imports in all ten of these commodities. This can be a possible sign of the United States’ increasing dependence on these goods from China.

Based on these facts, and being an American consumer, I think the US would suffer more from an embargo by China than vice versa. It appears the commodities China needs from the US, can be replaced by increasing trade relations with Latin America, the European Union and the Middle East. However the commodities and quantity of the commodities needed from China by the US does not seem replaceable by another nation state. It is possible that other Asian states such as Taiwan and Korea could replace the goods produced by China however, the mass quantity may not be available.

In addition, if the US does place an embargo on China, it would be interesting to see how other nations would react. It seem that after the US went into the war with Iraq it has done nothing but isolate itself from many alliances. In my opinion it seems unlikely that others would follow the US in an embargo against China especially if it is over the U.S. fear of losing its hegemonic position. On the contrary, China has been furthering relations with other nations. Besides the developing nations in Latin America, Africa and Eastern Europe, China also has been increasing its trade with the EU year after year. China largest trading partners are within its own region. It is possible that other Asian states, such as those in the ASEAN would feel compelled to stop exports to the U.S. because of their alliance with China. Thus minus Taiwan and Japan, the US would not receive much from Asia (this is all hypothetical). The chart below shows China’s trade partners in six continents in 2003.

China’s trade with Partners in 6 Continents[16]

|Continent |Total (In million US Dollars) |

|Asia |179.9 |

|Europe |57.671 |

|N.America |50.233 |

|L.America |8.616 |

|Africa |7.071 |

|Oceania |5.833 |

The chart depicts China’s dependency predominately from Asian nations for its trade. It trade worth is approximately three times as much as the 2nd largest trading partner the EU. One can conclude while, the goods China receives from the U.S. are important, it would completely devastate China. Lastly, the simple fact that the US has the largest trade deficit with China represents U.S. dependence on Chinese goods and not vice versa.

Hopefully, US and China do not ever need to reach this point. As senior economist Joseph P Quinlan states “The greatest danger of the US China trade front is that while many in Washington view China as a ‘strategic competitor,’ American businesses have increasingly embraces the mainland as a ‘strategic partner.’ This divergence represents a dangerous disconnect that must be reconciled in short order.”[17]

-----------------------

[1] China’s World Trade and Investment: An overview

page 29

[2] Allan Zhang “Going Abroad-China’s Corporations Go Global” page 2



[3] Allan Zhang “Going Abroad-China’s Corporations Go Global” page 3

[4] People’s Daily Online “China Petitioning for stake in IDB”

[5] Chris Hernandez “Brazil World Trade” EDGE final paper

[6] China Daily “Forum firms up China-Brazil Trade ties”



[7] Chris Hernandez “Brazil World Trade” EDGE final paper

[8] China’s World Trade and Investment: An overview page 9

[9]

[10] Alan Greenspan; New York Times

[11] Michael R Presis “What Snow in Bejing means;” Asia Times Sept 19 2002

[12] McNaugher, Thomas. “China Cross Talk” page 155

[13] Clinton, William “China Cross Talk” page 135

[14] McNaugher, Thomas. “China Cross Talk” page 159

[15]

[16] en/doc/2003-07/26/content_249508.htm

[17] economist Joseph P Quinlan

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