Research: Economics and Trade

Research
Key Points: Since its last overhaul in 1994, China’s flawed fiscal system has muddled through. Local debt, slowing revenue, and greater spending obligations are now spurring a new round of reform under President Xi Jinping; By eliminating the so-called “business tax,” Beijing is allowing services companies to enjoy the same tax deductions and rebates manufacturers do. The government may also establish a price-based tax on coal and a recurring tax on property; The government ultimately seeks to rebalance the economy. Fiscal reform could boost services, prevent housing bubbles, redistribute income, and reduce pollution. But it will be difficult to implement in China’s segmented economy and authoritarian system; The central government has a clear vision for improving budget flexibility and transparency. Yet it remains ambivalent about how to share revenue, spending responsibilities, and borrowing authority with local governments.
Research
Key Points• Chinese authorities have used Hong Kong’s position as a global financial center to promote the use of the RMB abroad. Hong Kong is the oldest and largest market for offshore RMB transactions, and will remain so despite the emergence of several other offshore contenders. • To date, RMB internationalization efforts have involved three main channels: offshore RMB deposit accounts and bonds, use of the RMB for cross-border trade settlement, and establishment of RMB swap lines between the People’s Bank of China and other central banks. • Despite growth in onshore and offshore use, the RMB cannot become a true international currency until Chinese authorities liberalize China’s capital account, allowing for unrestrained movement of financial flows.
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In May 2014, Alibaba, China’s leading e-commerce website, filed for a U.S.-based initial public offering (IPO) in what is expected to be one of the largest in U.S. history. The highly anticipated IPO will be just one in a recent wave of Chinese Internet companies launching IPOs in the United States. The trend has raised some misgivings among U.S. regulators about the corporate structures of these companies. To bypass Chinese government restrictions on foreign investment in the Internet sector, Chinese Internet companies use a complex and highly risky mechanism known as a Variable Interest Entity (VIE). An addendum was added to this paper on September 12, 2014.
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On May 21, China signed a 30-year, $400 billion gas supply deal with Russia. The agreement concluded a decade of protracted negotiations, and coincided with an escalation of the Ukraine crisis in Europe. This paper examines the conditions, motives, and implications of the deal. It begins by looking at China’s energy needs and gas import strategy, as well as Russia’s Asia pivot. It then analyzes the key points of contention – the price, shipping route, and payment and investment conditions – and whether or not these were resolved in China’s favor. Section 3 places the deal in the context of Sino-Russian relations, in terms of geopolitics, economic ties, and a maturing energy partnership. The paper closes with implications for the United States, Europe, and Japan.
Research
China’s economic, diplomatic, and security relations with Caribbean countries are growing under Chinese President Xi Jinping, who appears to have elevated the region on Beijing’s foreign policy agenda. Economic opportunities and diplomatic concerns – namely competition with Taiwan for diplomatic recognition – drive Beijing’s involvement in the region. There are many opportunities for the United States to benefit from China’s economic engagement in the Caribbean. However, among Caribbean countries, the narrative that the United States has neglected the region while China has embraced it is pervasive. While this message is misleading (current U.S. trade and diplomatic ties with the region are more robust than those of China), its persistence could limit the effectiveness of U.S. policy in the Caribbean.
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Bitcoin is changing the way the world thinks about money, and its impact is growing, especially in the United States. The driving force behind Bitcoin’s explosive growth in 2013 was the entry of the Chinese market, while Bitcoin’s subsequent slump in 2014 is largely derived from prohibitive measures issued by China’s central bank. If Chinese authorities continue their crackdown on Bitcoin, the global market and, by extension, the U.S. market, may be severely impacted.
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This paper provides an overview and assess key points of China’s 2014 Government Work Report’s plans for financial system liberalization, fiscal reform, administrative reform, environmental regulation, urbanization and rural land reform, and healthcare reform.
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The U.S. trade deficit with China continues to grow but at a slower rate. A key reason for this is the boom in U.S. automotive and aerospace shipments to China. As China becomes more affluent and urbanized, ordinary Chinese are driving more cars and traveling more by frequently by air. China’s future demand, however, could be affected by pollution, traffic bottlenecks, and other factors. U.S. companies must also contend with China’s industrial policy, which tilts the playing field toward domestic industry. In the long run, technology transfer and off-shoring could erode U.S. competitiveness and take business away from U.S. plants.
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This paper looks at China's foreign exchange reserves and holdings of U.S. Treasuries, and examines China’s efforts to diversify its investments