RESEARCH: Economics and Trade REPORTS

October 2014 Trade Bulletin
Highlights of this month’s edition: Bilateral trade: Monthly U.S. trade deficit with China declines 2.2 percent but year-to-date deficit up 4.1 percent; U.S. exports to China continue to rise, while imports slow; Bilateral policy issues: Inflows and outflows of FDI in China decline amid anticorruption and antimonopoly crackdowns; Policy trends in China’s economy: The People’s Bank of China, the central bank, is injecting RMB 500 billion into China’s five largest banks on concerns over economic slowdown; the State Council introduced new measures to boost small companies; and Sector spotlight – China-India-U.S. Economic Relations: In mid-September, President Xi Jinping made his inaugural visit to New Delhi as China’s head of state. Two weeks later, India’s Prime Minister Narendra Modi traveled to Washington for the first time since taking office in May. The two visits mark an important step in the development of triangular relationship between the United States, China and India.
China Fiscal Policy Revamp Faces Hurdles
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.
The RMB’s Long Road to Internationalization
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.
The Risks of China’s Internet Companies on U.S. Stock Exchanges (with Addendum Added September 12, 2014)
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.
September 2014 Trade Bulletin
Highlights of this month's edition: Bilateral trade: U.S. cumulative deficit with China through July $8.2 billion higher than last year, on track to break record; exports outpace imports by 3 percentage points; Bilateral policy issues: U.S. business associations slam Chinese antitrust crackdown as discriminatory; Chinese applicants dominate EB-5 investor visa program; Policy trends in China’s economy: China opens hospital ownership to foreign investors; and sector spotlight – Express delivery services: After years of delays, China grants foreign companies licenses to extend domestic express package delivery services.
August 2014 Trade Bulletin
Highlights of this month’s edition Bilateral trade: The U.S. June trade deficit in goods was the highest yet this year; although the U.S. surplus in services increased in the first quarter of 2014, the overall U.S. deficit is headed for another record; Bilateral policy issues: Latest S&ED sets a timeline for BIT negotiations, few other outcomes; WTO issues a mixed ruling in China’s challenge to U.S. countervailing duties; Ralls wins a limited legal victory in battle with CFIUS; Chinese investment in U.S. real estate jumps; Microsoft under investigation by Chinese antitrust authorities; Quarterly review of China’s economy: Momentum sustained despite housing slump; surge in exports and PMI; lack of rebalancing; corporate bond boom and new private banks; Beijing deepens ties with Latin America and co-establishes BRICS bank; and Sector spotlight – China’s meat industry: U.S. companies under fire in meat safety scandal; broader questions raised about China’s food regulation and discrimination against foreign companies.
July 2014 Trade Bulletin
Highlights of this month’s edition: Bilateral trade: U.S. exports to China stage modest recovery, driven by transportation equipment; monthly goods deficit at highest level so far this year; Bilateral policy issues: State Dept official previews S&ED talking points; China disappoints at WTO ITA talks; solar dispute with China splits U.S. interest groups; 25th Tiananmen anniversary makes China business difficult for Google; China’s economy: Property slump adds to concerns of slowdown; anticorruption crackdown intensifies with SOE auditing campaign and indictment of top military official; and Sector spotlight sovereign wealth funds: China Investment Corp. under siege from Chinese auditors; adds to concerns about fund’s governance and investment strategy
The China-Russia Gas Deal: Background and Implications for the Broader Relationship
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.
June 2014 Trade Bulletin
Highlights of this month’s edition: Bilateral trade: U.S. service exports in 2013 outperformed 2012 levels; bilateral deficit expands in April due to weak U.S. exports; oil & gas a novel source of export growth; Bilateral policy issues: United States wins WTO case on large-engine autos; U.S. to impose duties on some Chinese solar panels; Alibaba files for IPO in the United States; Policy trends in China’s economy: Chinese government takes additional steps to boost growth; RMB slips further; Sector spotlight: Booming automotive trade is benefiting U.S. exports to China, but the industry claims winners and losers: U.S. auto companies and Chinese industry benefit, China-branded auto companies and U.S. auto parts makers face tough road ahead
Bitcoin's Uncertain Future in China
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.