TABLE A-6.-PRC TRADE WITH NONSOCIALIST COUNTRIES, 1961-1974 1-Continued 1 Exports are valued on an f.o.b. basis, and imports, on a c.i.f. basis. Components do not always add 2 Less than $500,000. 3 Preliminary. Sources: Robert F. Dernberger, "Prospects for Trade between China and the United States," in APPENDIX B METHODOLOGY AND DATA USED IN ESTIMATING "NORMALIZED" FLOWS OF UNITED STATES-PRC TRADE The Methodology The "normalized" volume of PRC exports to the United States during a given year may be derived by first estimating the values of major categories of Chinese commodities that would have been exported to the United States under normal trading relations and then aggregating the "normalized" values of these categories. Suppose X is a category of commodities, and XPRC-Iw represents the value of X exported by the PRC to the industralized countries of the West during a given year and XPRC-ALL, the value of X exported by the PRC to all countries in the world during the same year. By dividing XPRC-Iw by XPRC-ALL, the fraction may be taken to represent the probability the PRC export of X went to the industrialized West, given an export of X by the PRC, i.e., P (XPRC-IW). Symbolically, we have Assume that XALL-IW is the value of X imported by the industrialized West from all countries during a given year and XALL-US, the value of X imported by the United States from all countries. The ratio of XALL-US to XALL-IW may be interpreted as the probability the importer was the United States, given an import of X by the Industrialized West, i.e., P(XUS/Iw). Symbolically, we have Statistically speaking, if P(XPRC-IW) and P(Xus/Iw) were independent, P(XPRC-US), the hypothesized probability that the importer could have been the United States given an export of X by the PRC may be assumed to be P(XPRC-US) = P(XPRC-IW) · P(XUS/IW) (3) The assumption of statistical independence may be taken to mean the absence of trade barriers such as trade embargoes, differential tariffs, quotas, tiered pricing systems, and transport cost differences. The hypothesized probability of P(XPRC-US) thus derived also may be considered as the share of the United States in PRC exports of X, which could be expected if trade relations between the two countries are normalized. The "normalized" value of X exported by the PRC to the United States during a given year may be derived by multiplying the actual value of X exported by the PRC to all countries in that year by the "normalized" share of the United States, i.e., Xprc-all. P(XPRC-US). The same procedure may be applied to other categories of commodities which conceivably could have been exported by the PRC to the United States under normalized conditions. The "normalized" volume of PRC imports from the United States may be derived in a similar manner. Suppose Y is a category of commodities, and YIW-PRC represents the value of Y imported by the PRC from the industrialized West during a given year and YALL-PRC, the value of Y imported by the PRC from all countries during the same year. The ratio of YIW-PRC to YALL-F ALL-PRC may be interpreted as the probability the PRC import of Y came from the industrialized West, given an import of Y by the PRC, i.e., P(YIW-PRC). Symbolically, we have Likewise, the ratio of the value of Y exported by the United States during a given year to the value of Y exported by the industrialized West during the same year may be regarded as the probability the exporter was the United States, given an export of Y from the industrialized West, i.e., P(YUS/IW). Assuming YUS-ALL and YIW-ALL stand for the value of the export of Y from the United States and the industrialized West, respectively, to all countries, we have If P(YIW-PRC) and P(YUS/IW) were independent, the hypothesized probability that the exporter could have been the United States, given an import of Y by the PRC, i.e., P(YUS-PRC), may be derived as P(YUB-PRC) = P(YIW-PRC).P(YUS/IW) (6) The measure may be taken to represent the U.S. share in PRC imports of Y under normalized conditions. The "normalized value of Y imported by the PRC from the United States during a given year can be obtained by multiplying the actual value of Y imported by the PRC from all countries in that year by the "normalized" share of the United States, i.e., YALL-PRC P(YUS-PRC). The "normalized" values of other categories of PRC imports which conceivably could have come from the United States are estimated in the same way. The Data Four types of trade data are required for all commodity categories and subcategories: PRC exports to all countries and to the industrialized West; PRC imports from all countries and from the industrialized West; exports to all countries from the industrialized West and from the United States; and imports from all countries by the industrialized West and by the United States. For PRC trade data, we relied on the estimates contained in Central Intelligency Agency, "People's Republic of China: International Trade Handbook" (December 1972; October 1973; and September 1974). These estimates are for broad commodity categories and subcategories only, and figures for detailed breakdowns are not available. Trade data for the industrialized West and the United States were based on "World Trade Annuals" prepared by the Statistical Office of the United Nations and the "Bulletins of Foreign Trade Statistics," series C, published by the Organization for Economic Cooperation and Development. These data were grouped into a number of commodity categories according to the classification adopted in the CIA Handbook for PRC data. Countries in the industrialized West are West European countries, the United States. Canada, Japan, Australia, and New Zealand. INTERNATIONAL FINANCE IN THE PEOPLE'S REPUBLIC OF CHINA By DAVID L. DENNY* The past 5 years have witnessed significant changes in the foreign relations of the People's Republic of China. The increasing foreign economic relationships have been an important part of these policies. China's foreign trade has rapidly expanded both in terms of numbers of trading partners and of total trade turnover. Chinese foreign trade corporations have begun to purchase large-scale plant and equipment again, most of which will be paid for over a 5- to 7-year period. Finally, the PRC has increased its contacts with international economic organizations. This paper explores the way the PRC conducts its international financial activities. Because of the lack of useful information on remittances, trade in "invisibles," gold sales and other aspects of the balance of payments, this paper is largely restricted to a discussion of the methods of financing commodity trade. The discussion will focus on two central themes: (1) To what extent is the PRC "becoming more flexible in its external transactions and moving closer to standard international practices"; 1 (2) Do PRC international financial procedures differ significantly from those followed in other centrally planned economies (CPE's)? 1 The discussion is divided into seven sections. In the first, PRC official policies concerning international finance are discussed. In the second, several aspects of recent PRC international trade are reviewed as background for an analysis of PRC international finance. Institutional aspects of PRC international economic relationships are examined in the third section. The fourth section discusses some important aspects of the financial provision of PRC trade contracts. The fifth section examines the fluctuations in the exchange rate of the Chinese currency. The sixth section analyzes the financial burdens imposed by the repayment schedule for Peking's recent purchases of agricultural and nonagricultural commodities. The possibility of PRC future membership in the International Monetary Fund and World Bank is explored in the final section. *International Trade Specialist, People's Republic of China Division, Bureau of EastWest Trade, Department of Commerce. The present paper is an extension of research undertaken for an article entitled, "Recent Developments in the International Financial Policies of the People's Republic of China" in China's Changing Role in the World Economy, edited by Bryant Garth and the editors of the Stanford Journal of International Studies. Sections II, III, and IV of the present piece have been substantially abbreviated; readers may want to consult the earlier work for additional material. In the process of research I have received advice from a large number of colleagues in government and from busfnessmen. In particular, I have benefited from the research and editorial assistance of Martha Avery. I alone, of course, bear the responsibility for the views presented herein. 1 C. Frederick Wiegold, "China Moves Into International Finance," American Banker, Mar. 10, 1975. Mr. Wiegold is paraphrasing the views of Mr. Louis Saubolle, a respected authority on China's international finance. Others have made the same point even more vigorously Dick Wilson, "The Bank of China's Expanding Role in International Finance," United States-China Business Review, vol. 1, No. 6, pp. 21-26, and Christopher Lewis, "The Communist Capitalists," Far Eastern Economic Review, vol. 84, No. 13, Apr. 1, 1974, pp. 18-19. I. PRC INTERNATIONAL FINANCIAL POLICIES The key themes of Chinese international financial policy are selfreliance, retention of a maximum degree of control over international financial activities, and a substantial aversion to risk and speculation. The Chinese are known as consummate businessmen and bargainers as well—but it can be argued that at times economic advantage is sacrificed for stability and control. The historical reasons for PRC concern about controlling its own economic future and insulating its economy from the effects of worldwide inflationary and deflationary pressures have been discussed elsewhere. For these reasons, as well as for reasons of domestic economic stability, a priority concern for the PRC was to unify the currency and banking system, to nationalize the customs service, to quickly gain a monopoly over all foreign trade enterprises and to create the People's Bank of China (PBC) as the unit responsible for all domestic and international financial transactions. In Anthony Dick's words, the PBC: is responsible for the monetary affairs of the whole of the industrial and commercial sectors, and it has extensive powers of financial supervision over the organization to which it lends money *** its control and supervision of the financial affairs of enterprises is all embracing. In the field of foreign trade the PRC acts in three capacities. As a central bank, it monopolizes the foreign exchange holdings of the PRC, operates the system of exchange control and lays down exchange rates against various currencies.3 A recent statement credited PRC financial stability to strong central control: The long-term stability of the renminbi is also due to the state's centralized and unified control of the issuing of notes through adjusting, in a planned way, the amounts of money put into circulation and to be called in. Issued by the state bank in a unified way and subject to its centralized control, the renminbi is the only currency in circulation in China.* In contrast, in Chinese eyes the situation prevailing in the capitalist world is one characterized by "Monetary Markets in Chaos.” 5 In international financial circles, China is best known for its policies of "self-reliance." In their own words: Our country never relies on getting loans to solve the problem, still less on the issuing of more bank notes. Today, China is one of the few countries with neither internal nor external debts. This policy, however, is not considered inconsistent with the purchase of agricultural and nonagricultural commodities on "commercial credit" (12-24-month term) nor has it prevented China from purchasing complete plants on deferred, medium-term (5-year) repayment schedules even when these involve explicit interest charges. It should be emphasized, however, that use of credit is not a radical policy shift for the PRC. It accepted a substantial amount of credit from the Soviet Union in the 1950's. After that was paid off, the PRC engaged 7 2 William Triplett, "The Banking Industry," in William Whitson (Ed.) Prospects for Trade With China, (New York: Praeger Publishing Co., 1974), pp. 190-209. 3 Anthony Richard Dicks, "The People's Republic of China," in Robert Starr (Ed.), East-West Business Transactions, (New York: Praeger Publishers Co., 1974), p. 397. Hsia Li-chih, "Striking Contrast Between Two Different Economic Systems," Peking Review, No. 48, Nov. 29, 1974, p. 29. 5 "Capitalist World: Monetary Markets in Chaos," Peking Review, No. 48, Nov. 29, 1974, p. 29. Hsia Li-chih, op. cit. p. 9. 7 Wiegold, op. cit. |