THE IMPACTS OF THE ASIAN ECONOMIC CRISIS ON CHINA'S FOREIGN TRADE

　　Wen Hai　Kaifeng Zhong

　　June 1999

　　The Asian financial crisis is now almost two years old. It started in Thailand in July 1997, and quickly spread to most countries in Southeast and East Asia. The financial crisis has become an economic crisis. Since China has similar financial and economic problems as many of its troubled neighbor countries, many people have constantly predicted in 1998 that China would be the next victim in the Asian crisis dominos. Although China has survived well so far, its economy has also suffered deeply from the Asian economic crisis. The impacts of the Asian economic crisis on China's economy are mainly on the external sector. However, the economic performance in the external sector would further affect China's macroeconomic situation. This paper examines the impacts of the Asian economic crisis on China's foreign trade (in particular on export). It also attempts to discuss the possible impacts in the near future.

　　1. What Happened In Asia?

　　--- the Factors that have affected China's foreign trade

　　In July 1997, a financial crisis started in Thailand. It quickly became a region-wide economic crisis. By the end of 1997 and middle of 1998, most of the countries in the region had suffered from economic difficulties. In particular, currencies in most of the Asian countries had sharply depreciated. Financial crisis caused economic slowdowns or recessions in most Southeast and East Asian countries.

　　Depreciation of Currencies in Most Asian Countries

　　During the economic crisis, most of the Asian countries had to devalue their currencies against the US dollar. However, the Chinese currency (Reminbi) has remained almost fixed against the US dollar. This means that most the Asian currencies have depreciated against the Chinese Yuan at the same rate as to the US dollar.

　　Figure 1 shows the monthly changes in exchange rates in six Asian countries from the beginning of the crisis (July 1997) to March 1999. Most currencies depreciated sharply from the late 1997 to January 1998. After a short period of recovery from January to April, there was another round of depreciation. By the beginning of 1998, the currencies in Asian countries stabilized.

　　Figure 2 shows the changes in currency values of six Asian countries. The first series is from July 1997 to the December 1998. By the end of 1998, most currencies had stabilized. It is fair to use the change of this period to indicate the total value change in this economic crisis. The second series is from July 1997 to August 1998. This is a trade weighted real effective exchange rate. Also, this series covers a one-year period. This series is more useful in measuring the effect of currency depreciation on foreign trade.

　　Needless to say, most of the Asian currencies have depreciated in a large percentage against the Chinese Yuan as well as the US dollar. Except Singapore, the currencies in the other five countries had depreciated 20-30% on average, while Indonesian rupian had depreciated more than 50%. These were not the depreciation rates between the peak and trough.

　　Decline in GDP

　　The other consequence of the crisis was the decline of GDP in most Asian countries in 1998. Figure 3 shows the quarterly changes of GDP growth rates in six Asian countries, and Figure 4 shows the GDP growth rates of six East and Southeast Asian countries in 1998.

　　Almost all the countries in East and Southeast Asia suffered a severe recession in 1998. Indonesia was the one had the deepest drop in its GDP (-15%). Thailand, Malaysia, and South Korea had 5% to 8% GDP decreases in 1998. The average GDP growth rates of Indonesia, Thailand, Malaysia, and South Korea in the period of 1990-1997 (before the economic crisis) were 7.5%, 7.5%, 8.7, and 7.2% respectively (World Bank: World Development Report, 1998/99). Compared to the high performance in 1980s and earlier 1990s, these low GDP growth rates were very unusual.

　　2. How Has The Asian Economic Crisis Affected China's Foreign Trade?

　　--- the impacts of the Asian economic crisis on China's foreign trade in the short run

　　Decrease in Exports to Asian Countries

　　The impacts of the Asian crisis on China's foreign trade were from both currency depreciation and GDP decline in these countries.

　　First of all, the currency depreciation had two effects on imports of their own countries: price effect and income effect. The depreciation of the currencies in East and Southeast countries made Chinese goods and services more expensive. The relative import price increase did not only make people in these countries to switch their consumption to other goods (substitution effect), but also had a negative indirect income effect. With the same amount of the budget, people had to purchase less. The deep depreciation of currency also had a direct income effect. The total value of GDP/income of these countries in terms of the US dollar or the Chinese Yuan also decreased sharply.

　　Both price effect and income effect made most countries in the region reduced their imports from China and other countries with stable currencies. According to the estimation by Ito and other economists in the IMF, the short run real exchange rate elasticities of import in these countries are from 0.24 (Malaysia) to 2.14 (Thailand). It indicates that a 1% depreciation of the currency, the country might reduce import from 0.24% to 2.14%.

　　Secondly, the decline in GDP also had a direct income effect on import. When an economy is in a recession, both consumption demand and production demand for foreign goods would decrease.

　　Therefore, both currency depreciation and GDP decline in the Asian countries reduced their imports from China. Figure 5 shows the growth rates of China's exports to selected Asian and other major countries in 1998. It is clear that the exports to all major East and Southeast Asian countries (except Philippines) decreased in 1998. The export to Japan decreased 6.7%, Korea -31.2%, Thailand -23.5%, Malaysia -16.9%, Singapore -5%, and Indonesia (the worst) -36.4%.

　　How important are these countries in China's total export? Figure 6 shows China's major export markets in 1997. Excluding Hong Kong, Japan was China's number one export market, and Korea was the number three after the United States. Singapore, Indonesia, Malaysia, and Thailand were also very important. All of them were more important than Canada for China's exports. In 1998, only Philippines increased its import from China. However, Philippines was not a significant market for China. In 1997, export to Philippines accounted for only 0.14% of total Chinese export.

　　Overall, the Asian market accounted for almost 40% of China total export. The economic crisis in Asia sharply reduced China's exports to this region.

　　China's Policy Responses

　　Export has been one of the main engines of China's economic growth in the past two decades. Up to 1998, China's export grew at an average of 15% or so annually. The export sector is the most competitive and dynamic part of the Chinese economy. This was the first time for China to face the external challenge since the economic reform started in 1978. The Chinese government realized the seriousness of the situation and adopted several policies in 1998 inpuorgto maintain 10% growth in export. The policies consisted of:

　　(1) Increase tax refund rates for export products

　　·In 1998, China increased tax-refund rates in five sectors:

　　From January 1, 1998, the tax-refund rate for textile machinery exports has increased from 9% to 17% (a full refund of domestic value-added tax if the product is exported);

　　From June 1, 1998, tax-refund rates for ship, coal, steel, and cement have been increased to 14%, 11%, 11%, and 9% respectively.

　　·Refund rates for 7 export products in electronic industry and 5 products in other light manufacture industries have also been increased from 9% to 11%.

　　·In January 1999, there was another increase in tax-refund rates for several major Chinese exports, including machinery equipment and tools (to 17%), chemical product (to 11%), and all others export product that had 6% refund rate (all increased to 9%).

　　(2) Reduce export barriers

　　·Abolished export quota for 26 products;

　　·The textile quota (export to the US) used to be controlled by the government. In 1998, 15% of these quotas was directly given to production firms. The percentage of enterprise-company determined quota increased to 20 in 1999;

　　·The number of products subject to export licenses have been decreased from 115 in 1998 to 59 in 1999.

　　(3) Speed up the reforms in the trading system and state owned trading companies

　　·Promoted merges and acquisitions inpuorgto make the state owned trading companies more competitive. For instance, Guangzhou has merged 18 trading companiesotni"Guangzhou Textile Import-Export Co. (Lt.)";

　　·Ownership reforms in state owned trading companies. Separate these companies from government (MOFTEC) and make themotnishareholding companies;

　　·Allow private companies to enter the foreign trade sector;

　　·Reduced the restrictions for firms to engage in foreign trade by changing from application-approval system to registration system.

　　(4) Increase financial support to foreign trade sectors

　　·To those trading companies that had temporary financial difficulties, the Chinese banks provided specific loans;

　　·In 1998, the People's Bank (the Central Bank) lifted the limits on the amount of loans to enterprises. There is no more quantitative restriction for commercial banks to make loans to firms.

　　(5) Diversify the export markets

　　·Encourage exports to the North American, European, and African markets;

　　·Encourage the exports of diversified products

　　China's Trade Performance in 1998-9

　　The efforts by the Chinese government to promote exports did make China's foreign trade suffer less in 1998. Despite a sharp decline of exports to Asian market, exports to other markets were increased significantly until late in the year. Nevertheless, the overall performance of China's foreign trade in 1998 deteriorated.

　　Figure 7 and 8 show the growth rates of China's total exports and imports in 1998 and earlier 1999. Data in Figure 7 are the monthly trade growth rates. Up to May 1998, China still had positive growth rates in exports. However, this was mainly due to the contracts signed in 1997 before the Asian economic crisis. In May, it had the first negative export growth comparing the same period in the previous year (1997). Although there were a positive growth rates in June and December, China's export declined in most of the remaining months in 1998. The situation in the first two months in 1999 was even worse. The exports decreased around 10% in both January and February 1999.

　　Figure 8 shows China's trade growth rates by the end of each month in 1998 and in 1999. It is very clear that the growth rates of exports, imports, and total value of foreign trade have declined. By the end of 1998, the increase of exports in the earlier period was offset by the declines in the later part of the year. The annual rate of export growth in 1998 was almost zero. It was far below the initial target of 10%.

　　3. What Will Be the Impacts of the Asian Economic Crisis on China's Foreign Trade In the Near Future?

　　---the Impacts of the Asian Economic Crisis on China's Foreign Trade

　　In The Long Run

　　Many indications show that most of the Asian economies (except Indonesia) have begun to stabilize after more than one and a half year of crisis. However, the impacts of Asian crisis on China's foreign trade have not ended even if the Asian crisis is over. Given the condition that China will continue to hold the currency at 8.2 Yuan to the U.S. dollar, the recovery of East and Southeast Asian countries will also have impacts on China's foreign trade.

　　Competition in the European and the North American Market

　　In the positive aspect, stabilization and recovery of Asian economies will increase the demand for imports including imports from China. However, in the negative aspect, economic recovery in the East and Southeast countries will bring more competition with China in world markets. During the economic crisis, international capital flew out from the East and Southeast Asian countries and the export sectors in these countries were in a very difficult situation. When the recovery starts and working capital flows back to these countries, their export ability will be quickly restored. With 20 to 30 percent decrease in prices (due to the depreciation of currencies) compared to China's exports, the exports from East and Southeast Asian countries will be very competitive.

　　The question is whether China is competitive with these Asian countries. In China, many economists and officers in MOFTEC believe that China does not export similar products as other Asian countries do. They believe that China will not affected much by the growth of exports in other Asian countries. However, the export data show that China does compete with these Asian countries.

　　Table 1 shows the list of China's top 20 exported products in 1996 sorted by the four-digit SITC. These 20 products accounted for almost 25% of China's total exports in that year. Among these 20 items, Singapore exported 17 (17.6% of its total exports), Malaysia exported 18 (22.4% of its total exports), Indonesia 20 (23.7% of its total exports), Korea 18 (9.8% of its exports), and Philippines 18 (21.2% of its exports). Some of the top China's exports (highlighted in Table 1) are also major exports of these Southeast Asian countries. It is clear that China and other Asian countries (in particular the Southeast Asian countries) have similar composition of export goods in the world market.

　　Table 2 provides some idea what could happen for the Asian countries' exports in 1999. According to a research conducted by IMF economists, the long run (one year) exchange rate elasticities of export in these Asian countries are from -0.21 to -0.99. By multiplying the estimated elasticities to the rates of depreciation of currencies, we get a rough estimation of what will be changes in their exports in 1999, ceteris paribus. In fact, even in 1998, the depreciation of currencies had already enabled most of the East and Southeast Asian countries increase the volume of exports. This trend will continue in 1999. Given a limited increase in the global market, the rapid increase of exports from East and Southeast Asian countries will make China's exports more difficult in 1999.

　　Positive Impacts from the Asian Crisis

　　The Asian economic crisis also has and will have some positive impacts on China's foreign trade in the long run. This is the first time since the reform started in 1978 that China has to think seriously about how the external sector could affect the aggregate economy and how export could face tough challenges. The difficult situation of China's exports in late 1998 and in 1999 has forced China to make certain changes.

　　·Pressures on reforms of the External Sector

　　Since late 1998 when the export markets were getting tougher, the demand and willingness for further reforms in external sector has been increased. Many firms requested the removal of export barriers and elimination of the red tapes. Also, facing the keen international competition, the Chinese enterprises (both manufacturing companies and trading companies) must be more efficient inpuorgto remain in business. Instead of lowing prices, Chinese enterprises have to improve the quality and diversity of their products. Pressures on further reforms of state owned trading companies and further development of private trading companies have been increased.

　　·Changes in Export Compositions

　　In the past decades, China's major exports are labor-intensive products. More than 50% of the exports are the processing products. Textile is one major export product that has restricted and limited markets.

　　The competition in the world market will push Chinese enterprises to look for different products. It will also give Chinese enterprise more pressures as well as incentive to develop different market.

　　·Changes in China's Industrial Structures

　　In the past decades, a very large proportion of the export goods were produced by joint venture or foreign invested companies. Most of these foreign enterprises are direct investment from Hong Kong or Taiwan. The sizes of these foreign enterprises are relative small, technologies are simple, and most of these products are labor-intensive. Even before the Asian crisis, many of these products were already in a situation of excess supply. The Asian crisis made some of these low-skilled products oversupplied. Excess supply in many labor-intensive and low quality products may push China to develop a more diversified, multiple staged, and comprehensive industrial structure.

　　3. Conclusion Remarks

　　The Asian economic crisis and China's fixed exchange rate policy have reduced China's exports sharply in 1998. Although China had successfully increased its exports to the European and North American markets, the losses in Asian market overweighed the gains from other markets. The annual growth rate of total exports in 1998 was almost to zero and it was negative 10% or so in the first two months of 1999.

　　The decline of China's exports will continue for some periods while the Asian economies are recovering from the crisis. The Asian crisis on China's foreign trade had (and also will have) some positive impacts on reforms in China's trading sector.

　　Figure 1: Monthly Change in Exchange Rates

　　Six Asian Countries,

　　1997.7 -1999.3

　　Figure 2: Currency Depreciation against US$

　　in Six Asian Countries

　　Series 1: 97.7-98.12; Series 2: 97.7. -98.9 (Trade Weighted)

　　Source of Data: International Financial Statistics, various issues; The Wall Street Journal (for 1999 data)

　　Trade weighted depreciation rate: IMF, World Economic Outlook, October 1998

　　Figure 3: GDP Growth Rates in Asian Countries

　　1998 Quarterly

　　Source of Date: The Economists, and IMF, World Economic Outlook, October 1998

　　Figure 4: GDP Growth Rates of Asian Countries in 1998

　　Source of Data: IMF, World Economic Outlook

　　Figure 5: Growth Rates of China's Exports

　　To Asian and other Major Countries in 1998

　　Source of Data: Ministry of Foreign Trade and Economic Cooperation, PRC

　　Figure 6: China's Major Export Markets In 1997

　　Source of Data: Ministry of Foreign Trade and Economic Cooperation, PRC

　　Figure 7: China's Export and Import

　　Monthly Growth Rate (%), 1998-1999.1

　　Compared to the same period of the last year

　　Source of Data: General Administration of Customs of the PRC, China Monthly Export and Import, 1998-9

　　Figure 8: China's Trade Growth Rate

　　By the end of each month (1998.1-1999.2)

　　Source of Data: General Administration of Customs of the PRC, China Monthly Export and Import, 1998-9

　　Table 1: Competition in Exports: China vs. Other Asian Countries (Please see files No.E1999010.1)

　　1996 Data

　　Table 2: Estimation of Export Changes

　　In other Asian Countries in 1999

　　Indonesia

　　Malaysia

　　Thailand

　　Korea

　　Singapore

　　Philippines

　　Exchange Rate Elasticity

　　of Export (Long Run)

　　-0.32

　　-0.53

　　-0.99

　　-0.52

　　-0.21

　　Depreciation of Asian

　　Currencies

　　-56.3%

　　-27.2%

　　-19.1%

　　-19.8%

　　-2.7%

　　-26%

　　Estimates of Export Increase

　　18.0%

　　14.4%

　　18.9%

　　10.3%

　　0.57%

　　Export Volume Changes in 1998

　　+26%

　　+13.4%

　　+29.6%

　　+2.8%

　　Note: Estimation of export change is calculated by the exchange rate elasticity of export and depreciation rate.

　　Source of Data: The estimates of long run exchange rate elasticity of export are from Takatosho Ito, et al., Exchange Rate Movement and Their Impact on Trade and Investment in the APEC Region, IMF, December 1996. The data of currency depreciation are from World Economic Outlook, IMF, October 1998. These are trade-weighted real effective exchange rates.