Riding the wave: China's growing economy is challenging the way we look at the trading loop

Recycling Today, August, 2004 by Wade Schuetzeberg

Propelled by gargantuan trade flows (the U.S. shared a $124 billion trade deficit with China in 2003, whereas the newly expanded European Union has just tallied $65.7 billion in two-way trade for the first 5 months of 2004, according to the Xinhua news agency), the economic trading loop of consumption, recovery and reuse produces more fiber flow than ever before. From well less than 1 million metric tons in 1995 to more than 8 million metric tons last year, China's import of recovered paper could swell to more than 10 million metric tons by the end of this year. In fact, from 1993 to 2003, consumption of recovered paper is up 12 percent per year, and net imports are up 28 percent per year, according to a RISI (Resource Information Systems Inc. of Bedford, Mass.) forecast.

MACRO-ECONOMIC FACTORS. With more than $50 million in direct foreign investment in each of the last two years, China has surged ahead in leading global growth figures. The central government reported 2003 growth of 9.1 percent, well above a target rate of 8.5 percent. More concerning was the further 9.7 percent charge ahead in the first quarter of 2004. By late April, China's President Hu Jintao reacted by condemning excessive growth in fixed-asset investment and in redundant construction.

Within weeks, the government had established a series of actions to cool the economy and to curb inflation. Such steps included limiting price controls; providing for more comprehensive examinations of banks' books to discourage risky loans; setting stricter limits on converting farmland to industrial or residential use; and re-evaluating previous government approvals of projects in overheated sectors like steel, cement and real estate.

A Fortune magazine article "Why China Won't Hit a Wall," published May 3, 2004, quotes Jonathan Anderson, a UBS Securities economist in Hong Kong, as saying he "draws a distinction between periods of overheating, when economies grow at rates that can't be sustained, and bubbles, when asset prices and productive capacity soar so far beyond underlying demand that they pose significant risk of a sudden collapse." The article continues, "What's happening in China, he argues, is the former, not the latter. The most likely scenario, in his view, is that China will manage a soft landing, with real growth slowing from last year's torrid 11.5 percent to a more sustainable 7.5 percent in 2005."

As if inflation weren't enough, other macroeconomic factors loom large for China, including China's currency peg--a fixed arrangement between the renminbi (RMB) and the U.S. dollar. China has held the rate steady since 1994. Mounting pressure has led to a review of the peg and for the first time since the Asian financial crisis in 1997, Guo Shuqing, head of the body that manages China's $416 billion in foreign currency reserves, has outlined a rough timetable for removing constraints on the country's closed capital account.

Commenting on what has become a flashpoint issue, Shuqing argues in support of the Beijing sentiment that the RMB may not have to be revalued. Still, according to a Feb. 12, 2004, article in the International Herald Tribune, "... hints that China might let its currency rise 5 percent to 10 percent against the dollar in the next months raised hopes in the U.S. of a smaller trade deficit."

Going further, Morgan Stanley Chief Economist Stephen Roach argues that China is not causing the U.S. trade deficit. The same International Herald Tribune article quotes Roach as saying: "Rather than blame China for its trade deficit, he argues, the United States should recognize that it has a trade imbalance because it spends beyond its means." If the deficit with China were to close, Roach says, a similar one would open with another country. "The rich world has ganged up on China."

KEY ISSUES. The developments in the recovered paper industry should be described as evolutionary rather than revolutionary. Key issues affect participants similarly across the globe, whether on the "supply-side" or "demand-side."

In an effort to understand the leading edge of change, one should look at key issues affecting recovered paper trade, including: the shipping industry's capacity problems; new regulatory concerns; European and intra-Asian exports; and new mill capacities in China and Europe.

Containerized shipments have revolutionized global trade. Overall, sea-borne trade now amounts to about 6 billion metric tons of goods annually, accounting for more than 90 percent of world trade by volume, a rise of about 50 percent since 1990, according to a March 8, 2004, article in the Financial Times. As well, it is no secret among industry participants that recovered paper is the largest volume item shipped from the United States.

Recently, however, a problem is looming on the horizon. A lack of cargo carriers and equipment has caused imbalances throughout the Far East trade lanes with North America and Europe. And there is one root cause: China's emergence as an economic power.