PRC retrenchment measures may slow U.S. exports after 1988 surge; export growth is fueled by proliferation of joint ventures - People's Republic of China - World Trade Outlook

Business America, April 10, 1989 by Rosemary Gallant

Export Growth is Fueled by Proliferation of Joint Ventures

Two-way U.S.-China trade grew 37 percent in 1988 to a record $13.5 billion, making China the United States' 12th largest trading partner. On the export side, U.S. sales to China expanded 44 percent to more than $5 billion. Imports grew by 35 percent to $8.5 billion, resulting in a record $3.5 billion trade deficit.

Building upon these record levels in U.S.-China trade during the past year, U.S. sales to China in 1989 are projected to grow about 10 percent to $5.5 billion. This growth will be fueled, in part, by the rapid expansion of the number of Sino-American joint ventures, up by more than 20 percent in 1988.

China made rapid economic gains in 1988, with real GNP growth of more than 11 percent. The growth was lopsided, however. Industrial output expanded by nearly 21 percent, while agriculture grew by only 3 percent. The manufacturing sector grew significantly faster than energy and raw materials output, aggravating already serious shortages. Double-digit growth of investment, consumption, and the money supply pushed the retail price index up by a record 18.5 percent.

In response to this high rate of inflation and what it perceives as excessive industrial growth, China has implemented various economic retrenchment measures since the third quarter of 1988. The central government has called on industrial ministries and provincial and local governments to halt or slow down construction of "nonproductive" projects such as office buildings, hotels, and recreational facilities. Thus far the Chinese government reports that more than 14,000 investment projects have been postponed or canceled.

Late in the year, the central government also tightened restrictions on bank credit, raised savings account interest rates, and instituted inflation indexing for longer-term certificates of deposit. Despite these tighter monetary policies, inflation is not expected to ease significantly in 1989.

Tighter credit and investment restrictions are hampering the operation of both domestic enterprises and foreign joint ventures. Shortages of both investment and operating capital have forced managers to scramble to find the resources to implement existing contracts and to place some contracts on indefinite hold.

The retrenchment has also led to greater caution in China's foreign trade. Domestic shortages have led the govemment to prohibit exports of 10 key materials including copper, nickel, aluminum, and pig iron; in addition, 171 minerals, chemicals, and raw material products now require export licenses.

On the positive side, U.S. export gains were led by rebounding grain exports valued at nearly $700 million. China's grain imports have grown in response to poor grain harvests and increased industrial consumption. These trends will continue through 1989.

At the same time, the United States is benefiting from China's rapid industrial growth. Exports of plastics, logs and lumber, and chemicals grew dramatically in 1988. Exports of plastics and resins increased 134 percent . . . log and lumber exports were up 167 percent . . . and organic chemical sales grew by 71 percent over their 1987 levels.

Sales of these industrial raw materials may be affected by the current retrenchment, but the rapidly growing coastal areas will continue to need industrial raw materials to expand China's exports and to satisfy consumer demands. In addition, sales of machine tools, petroleum, electric power, and transportation equipment are expected to do well this year.

U.S. imports from China in 1988 grew in nearly every product category. However, in contrast to previous years, clothing imports-our single largest import category from China-increased only I percent over the previous year. Imports of other light industrial consumer goods, such as toys, footwear, games, and sporting goods, continued to grow rapidly.

During the past year, the U.S. govemment expanded its efforts to support Sino-U.S. trade in a variety of ways. U.S. controls on exports of several categories of high-technology products were liberalized, including those on computers, instruments, telecommunications technology, and semiconductor manufacturing equipment. The U.S. ExportImport Bank made more direct loans to China than to any other country, and for the first time used the so-called "war chest" to match concessionary credits offered by European suppliers. The United States and China concluded a new Maritime Agreement after five years' of negotiations. The agreement will ease restrictions on the U.S. and Chinese flag carriers in the transport of bilateral cargo. Lastly, the U.S. govemment continued to press for greater market access and improved investment conditions in the Joint Commission on Commerce and Trade and other bilateral forums.

In 1989, the Department of Commerce is organizing trade missions to China for manufacturers of medical, printed circuit board manufacturing and test equipment, and food processing equipment. The Department will host a building materials trade mission and sponsor a technical seminar for the Chinese insurance industry. For more information on the events, contact the Office of China and Hong Kong at (202) 377-3583.