China’s Shifting Economic Policies and Trade


Official state visits to the U.S. like that of Chinese President Hu Jintao are carefully managed to show the positive trade and diplomatic relationships of the two countries. Policy differences are discussed behind closed doors and leaked to the outside to serve the purposes of the respective countries. China has made substantial progress in opening trade in the ten years it has been a member of the WTO, but economic policy changes continue to be needed to transform trade relations. U.S. agriculture has a huge stake in that transformation.


The most important economic policy change recently by China is allowing some Chinese companies that earn foreign exchange to retain it for use in trade or investment and allowing U.S. customers of Chinese banks to hold Yuan. At the end of 2010 China had an estimated $2.85 trillion in foreign reserves; about 65 percent were denominated in U.S. dollars, which have accumulated as export companies have exchanged foreign currencies for Yuan. This is far beyond what would be logical for a developing country and these reserves are likely to lose value in coming years. The Chinese government is rightly concerned about U.S. monetary policies that could devalue U.S. government bonds. Given the internal needs of the Chinese economy and opportunities to invest in the world, in a market driven system virtually none of the funds would be invested in U.S. government debt. Those funds would be circulating through trade and investment in China adding to economic growth in the world.

The value of the Yuan has increased about 3.6 percent compared to the dollar since mid-June when China said it would allow for increased flexibility in the exchange rate. U.S. Treasury Secretary Timothy Geithner estimates that the real value of the Yuan after accounting for the higher price inflation in China is increasing about 10 percent per year. If the Yuan is undervalued against the dollar – 15-20 percent on a trade weighted basis is a reasonable estimate, but not fully known without actual trading in the Yuan – China is selling its export products too cheaply and paying too much for imports. That hurts Chinese producers and consumers who are customers for the rest of the world. The U.S. is not the only country raising concerns about exchange rates. Brazil has also had concerns because of Chinese imports to Brazil and Chinese competition in third country markets. Smaller Asian countries have been less vocal publically, but share the concerns of Brazil.

Closely related to the exchange rate is the Chinese government’s decision to trade with selective countries like Russia based on the value of the Yuan to the Ruble without conversion to U.S. dollars. China has been increasingly critical of the U.S. dollar as the major reserve and exchange currency for the world. Some of the criticism is justified, but a reserve and exchange currency must earn by experience its role in trade. Despite the problems of the U.S. dollar, investors and savings flocked to the U.S. dollar during the economic crisis of 2008 and 2009. If the Yuan is to have a greater role in trade, it must earn it through trading experience and become openly and easily convertible to other currencies.

For the benefit of China and its trading partners, China’s production and consumption need to be fully integrated with other markets for trade to fully reflect the costs and the benefits of production and consumption. While these policy changes have contributed to more market driven production and consumption, other Chinese economic policies need to be adjusted. Bank credit needs to be more market driven rather than government managed to target specific industries.

China has begun to focus on increasing domestic demand among businesses and consumers in its own market where demand has been kept low by the emphasis on exports. The government appears to have decided to limit foreign businesses in this expanding market. U.S. and other countries’ manufacturing and high-tech companies complain of administrative controls, requirements to transfer sophisticated technology, domestic companies with state subsidies, including cheap credit, and laws favoring homegrown businesses. Chinese officials have promised to make changes, but they are not apparent at present.

All of these changes, some in progress and others not yet begun, would put trade on a true market basis rather than influenced by distortions caused by Chinese economic policies. This would be positive for China and its trading partners. With the world’s second largest economy growing at over twice the rate of the rest of the world and almost 20 percent of the world’s population, China is too big to ignore or to have a different set of rules for trade.

China is neither the savior of the world economy nor its biggest problem. The size of an economy does not guarantee success or failure. Switzerland and Singapore are small and prosperous. Adjusting to changing markets is important for small and large countries. China must let market forces guide its economy to meet the needs of suppliers of inputs and consumers around the world. That can only happen with a currency and economic policies that respond to market signals.

How Chinese economic policies are resolved will influence domestic demand for U.S. agricultural products from a growing middle class. In fiscal year (FY) 2011, China is expected to be the second largest market for U.S. agricultural products at $17.5 billion, just short of Canada at $18.0 billion and ahead of Mexico at $16.0 billion. China has a population of 1.3 billion compared to Mexico at 110 million and Canada at 34 million. China’s population is 43 percent urban, with that group growing at 2.7 percent per year compared to total population growth of only 0.5 percent per year. In FY 2010, China purchased $15 billion of U.S. agricultural products, but the product mix was very narrow with soybeans at $9.3 billion, cotton $1.7 billion and hides and skins $900 million. A more open economy would be good for trade in a broad range of U.S. agricultural products.

Trade policy problems are normal in growing economies. If governments recognize that trade improves the economies of both buyers and sellers, there is a common base for working out policy differences.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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