CHINESE FOREIGN TRADE: 1950/1985

by COLM KEARNEY and YONG TONG* *

The recent commitment to “open door” policies which has been em- phasised by the Chinese Government together with the growth in eco- nomic and industrial performance of the country, suggests the importance of examining its trading performance. The purpose of this paper is to accomplish this task using both descriptive and econometric analysis of the latest available data: conventionally postulated export and import demand functions for China are estimated on annual data over the period 195011985. Amongst the most noteworthy of the results a re that the Marshall-Lerner conditions seem to hold and that the income elasticities of both exports and imports a re close to unity. The paper concludes that, on the basis of the estimated relative elasticities, attempts by the Chinese Government to expound the domestic economy at a rate which exceeds the growth of the major developed economies will result in the emergence of constraints upon the current account of the balance of payments. These constraints may be alleviated by allowing the exchange rate to depreciate andlor by continued use of import controls.

China’s Foreign ’Ikade: Background China is a socialist country with a politically regulated economy which

is based predominantly upon public ownership of the means of production together with a special mechanism of resource allocation. The prices of most goods, apar t from agricultural and sideline products which a re transacted on free markets (when production quotas have been fulfilled), a re planned prices which are set by the government price bureaus. Prices, however, do not play the most important role in resource allocation in China. Almost all enterprises and collective units implement State economic plans which cover the procurement of materials a s well a s the production and sale of finished products. Prior to the late 1970s, all State run enterprises turned over their profits to the Government from which they received any required production funds including wages. Between 1979 and 1986, however, China conducted a two-stage reformation of its public finance system by moving from a profit- turning-over to a tax-paying system. Under the new system, enterprises pay

* University of New South Wales. * * Shanghai University.

We are grateful to Louis Sigel and Bing Zhao who provided valuable comments on an earlier version of this paper. Remaining weaknesses a r e the responsibility of the authors.

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taxes to government while retaining post-tax profits for production development and the improvement of factory members’ welfare. From 1983, the Government initiated further changes in its attitude toward market forces by establishing for the first time in Communist China’s history, the policy of combining State economic planning with the operation of market forces. Since then, the scope of the State plan has declined so that by 1986 less than 20% of total industrial product was produced under the so-called mandatory planning arrangement. The upshot of these reforms [including the passing of the bankruptcy law in 1986) has been to enhance the role of the market mechanism in setting prices and allocating resources. In spite of these developments, however, the State production plans continue to exercise considerable influence upon the activities of enterprise while many prices continue to be set by the Government.

Any analysis of China’s economic and trading position must acknowledge the fact that it is a developing country with a low economic base. Although a great deal of progress has been made since the end of World War 11, China remains lowly ranked in terms of per capita incomes. It is pertinent to note, for example, that apart from the textile and wheat mill industries, virtually all Chinese industries have a history of less than three decades. In addition, there are significant regional disparities in China’s level of economic development. Prior to 1949, almost all China’s industries were concentrated in several coastal cities such as Shanghai and Tianjin. In spite of four decades of effort by the Chinese Government to promote inland economic development, the maritime provinces’ TPS [Total Products of Society) still dominates the national economy. Although some maritime industries operate with outdated machines and equipment, they employ relatively skilled labour and have relatively developed infrastructures together with substantial industrial management and marketing expertise. Their production efficiency is consequently higher than that of many inland industries, and this factor together with their geographic conditions and the experience of conducting foreign trade, has enhanced the ability of the maritime provinces to successfully engage in international trade.

Given the important role of government in planning and developing China’s economic performance, the changing nature of policy has had profound effects. Although much has been achieved since the Communist Party formed government, the extent of political disagreement within government together with its serious lack of expertise of socialist economic structures and development has resulted in progress being spasmodic. Fortunately, the Government has recently opted for reform of many economic structures in order to achieve a more judicious mix of government planning together with the operation of market forces. An important aspect of this reform has been the process of decentralisation to provinces, municipalities and enterprises. The Government has also realised the importance of providing a stable environment within which economic development can proceed at a fast and even pace. These reforms have direct implications for China’s trading performance. In recent anti-liberalisation propaganda, Communist Party

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leaders have repeatedly stressed that anti-liberalisation forces within the Party would not dilute the “open door” policy and that trade with foreign countries would continue to benefit China’s economy (Zhao Zi-yang, (1987)). In short, current policies are directed towards the promotion of economic growth within a stable environment which is conducive to greater foreign trade.

China is a resource-rich country which consists of over 9.5 million square kilometres of land accompanied by almost half as much (4.7 million square kilometres) of coastal waters. In addition, there are 134 verified mineral types of which about 20 (amongst them being coal, iron, tungsten, antimony, tin, zinc and some rare-earth metals) are known to be in abundant supply by international comparisons although some of these (particularly iron, copper and manganese) are lean ores. Although the area of China is very large, however, two-thirds of this is mountainous with low temperatures and short growing periods. Compared to India which cultivates about 75% of its land, China cultivates less than 15% of its land. In addition, China’s massive population of over 1 billion people has the effect of making the resource base per capita less impressive. This factor also contributes to the existence of substantial domestic markets.

Finally, it is worth making some observations about the quality of data which exists for the Chinese economy in general as well as for its trading patterns in particular. From the early years of the People’s Republic, the Government Statistics Department conducted limited national surveys of industrial enterprises and subsequently expanded these surveys to en- compass other sectors of the economy (see World Bank (1983), pp. 223-227). The State Statistical Bureau (SSB) was established in 1952 and this was followed by the establishment of the Provincial Statistical Bureau (PSB). These agencies collected a wide range of basic economic statistics until the Great Leap Forward (195811960) and the Cultural Revolution (196611976) caused much upheaval. During the late 1950% for example, data was reported in terms of quotes rather than real outcomes and the SSB together with the PSB were actually abolished in 1968. In general, therefore, economic data for China during the late 1950s and from the mid-1960s to the mid-1970s are not very reliable. It is fortunate, however, that the foreign trade data are much more reliable and relatively accurate. Prior to the 1980s, China’s foreign trade was conducted mostly through 12 foreign trade corporations which were directly supervised by the Ministry of Foreign Trade (MFT). Trade statistics were collected by these corporations from port documents which provide the volumes and value in US dollars of actual trade. In addition, we have access to reliable data from China’s trading partners.

China’s Foreign lkade: Summary Statistics Despite a turbulent history, China’s foreign trade has grown at a fast pace

since the 1950s, and this performance has improved substantially in recent years. From 1953 to 1985, the total value of China’s foreign trade in current

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prices increased at an average annual rate of 11.2%, with exports and imports growing respectively at 10.8% and 11.5% annually. Since the official deflators for these series do not exist for time periods prior to the 1970% Table 1 utilises the IMF’s index of world wholesale prices to convert to real quantities. Using this measure, China’s real annual trade growth averaged 4.3% over the same time period.

TABLE 1 CHINAS TRADE BY VALUE AND VOLUME: 195011985

Year Value of Value of World Volume Volume

US $lm US $lm Prices Exports lmports Exports Imports Wholesale of of

1950 0.55 1951 0.76

1953 1.02 1954 1.15 1955 1.41 1956 1.65 1957 1.60 1958 1.98 1959 2.26 1960 1.86 1961 1.49 1962 1.49 1963 1.65 1964 1.92 1965 2.23 1966 2.37 1967 2.14 1968 2.10 1969 2.20 1970 2.26 1971 2.64 1972 3.44 1973 5.82 1974 6.95 1975 7.26 1976 6.86 1977 7.59 1978 9.75 1979 13.66 1980 18.27 1981 22.01 1982 22.35 1983 22.23 1984 20.81 1985 27.36

1952 0.82

0.53 0.19 1.10 0.20 1.03 0.20 1.24 0.21 1.18 0.21 1.59 0.22 1.43 0.23 1.39 0.24 1.73 0.24 1.94 0.25 1.79 0.25 1.33 0.26 1.07 0.26 1.17 0.27 1.42 0.28 1.85 0.29 2.06 0.30 1.85 0.30 1.79 0.31 1.68 0.32 2.14 0.34 2.03 0.35 2.62 0.37 4.73 0.43 6.99 0.52 6.87 0.57 6.04 0.63 6.61 0.69 9.99 0.74

14.38 0.85 17.94 1 .oo 20.19 1.13 17.70 1.25 19.62 1.39 20.40 1.58 40.61 1.76

2.88 3.86 4.05 4.89 5.37 6.41 7.25

8.15 9.11 7.38 5.84 5.73 6.18 6.93 7.77 7.93 7.04 6.75 6.79 6.65 7.46 9.22

13.69 13.31 12.74 10.94 11.03 13.16 16.07 18.27 19.48 17.89 16.00 13.17 15.51

6.80

2.77 5.59 5.08 5.95 5.51 7.23 6.28 5.91 7.12 7.82 7.10 5.22 4.12 4.38 5.13 6.45 6.89 6.09 5.76 5.19 6.29 5.73 7.02 1.13 3.39 2.05 9.63 9.61 3.48

16.92 17.94 17.87 14.17 14.13 12.91 23.02

Notes to the Table: Sources a r e Almanac of China’s Foreign Economic Relations and Trade (1984, 1986), Bank of China’s Annual Report (1984, 1986). and International Financial Statistics (1986). Prior to 1981 the data on exports and imports a r e provided by the Ministry of Foreign Trade while after 1981 it is provided by the Customs Office.

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It is informative to divide this period into five sub-periods in order to understand the main reasons for the turbulence in the data. (i) 195011958. This period witnessed a steady growth in China’s trade of 4.7% in real terms. This was aided by the process of rehabilitation and construction following the civil war in the early part of the period. It is worth noting, however, that trade with the US and other Western countries was restricted so that the bulk of this growth was confined to a small set of socialist countries. The first five-year plan of 195311957 contributed to this being China’s longest period of continuous growth since the founding of the People’s Republic. (ii) 195911961. During this period trade fell at an annual average rate of 19.3%. The main reasons for this calamitous performance are twofold. First, the radical communisation in rural areas which signalled the Great Leap Forward together with the virtual collapse of a number of provincial economies resulted in a 38.9% decline in the country’s gross output of agriculture and industry during this period. Second, China’s relationship with the Soviet Union deteriorated sharply, and with it went a major source of China’s trade. (iii) 196211965. This period witnessed a recovery in China’s trading per- formance from the earlier period of crisis. The average annual growth of real trading volumes was 13.7%. This trend was facilitated by a shift in direction away from the Soviet Union and other socialist countries towards Japan and other Western countries. (iv) 196611969. The onset of the Cultural Revolution resulted in a determined move towards self-reliance, and the Ministry of Foreign Trade together with its sixteen Foreign Trade Corporations which previously monopolised China’s trade, virtually ceased operations. The real average annual growth rate in trade amounted to - 9.01% and this was not aided by further deterioration in Soviet-Chinese economic relations. (v) 196711985. The experience of previous periods forced the Chinese Government to develop its domestic economic base by shifting away from the cultural revolution towards reconstruction, development and trade. Great efforts were made to normalise relations with the US and other Western countries, and trade increased in real terms at an average annual rate of 9.8% (after a 26.7% growth during the period 197011974].

Following the death of Mao in 1976, the new Government hastened the process of economic development by abandoning the so-called “class struggle” policy and promoted more sophisticated technological development. The early 1970s witnessed the signing of contracts for the importation of foreign technology which enhanced the growth of industry and trade in China. The latter was further aided in 1980 by the demise of the Foreign Trade Corporations’ monopoly of trade.

It is interesting to summarise this account of China’s trading experience since the 1950s by relating the trading figures to the growth of the domestic economy. Table 2 demonstrates that the tradehational income ratio hovered around 1 2 % during the 1950s before declining steadily to 5.8% by 1971.

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Since then the trend has been reversed to reach 21.9% in 1984 and it continues to improve with the “open door” policy of the present government.

TABLE 2 CHINAS FOREIGN TRADE AS A PERCENTAGE OF NATIONAL INCOME: 1950/1984

Year Exports Imports Exports NI Exports/ Imports/ Exports

Imports l”0J [OloJ Imports/ RMB/bn RMBlbn and NI NI and

NI “Jlo)

1950 0.20 1951 0.24 1952 0.27 1953 0.35 1954 0.40 1955 0.49 1956 0.56 1957 0.55 1958 0.67 1959 0.78 1960 0.63 1961 0.48 1962 0.47 1963 0.50 1964 0.55 1965 0.63 1966 0.66 1967 0.59 1968 0.58 1969 0.60 1970 0.57 1971 0.69 1972 0.83 1973 1.17 1974 1.39 1975 1.43 1976 1.35 1977 1.40 1978 1.68 1979 2.12 1980 2.71 1981 3.68 1983 4.38 1984 5.81

0.20 0.32 0.34 0.42 0.41 0.56 0.49 0.46 0.57 0.65 0.60 0.39 0.31 0.33 0.39 0.51 0.56 0.49 0.47 0.43 0.51 0.48 0.59 0.95 1.40 1.35 1.19 1.22 1.72 2.23 2.74 3.37 3.87 5.69

0.40 0.60 0.65 0.81 0.85 1.10 1.09 1.05 1.29 1.49 1.29 0.91 0.81 0.86 0.98 1.18 1.27 1.12 1.09 1.07 1.13 1.21 1.47 2.21 2.92 2.90 2.64 2.73 3.55 4.55 5.70 7.35 8.60

12.01

4.26 4.97 5.89 7.09 7.48 7.88 8.82 9.08

11.18 12.22 12.20 9.96 9.24

10.00 11.66 13.87 15.86 14.87 14.15 16.17 19.26 20.77 21.36 23.18 23.48 25.03 24.27 26.44 30.10 33.50 36.88 39.40 46.73 54.84

4.74 4.87 4.60 4.91 5.35 6.18 6.32 6.00 6.00 6.39 5.19 4.80 5.10 5.00 4.75 4.55 4.16 3.95 4.07 3.70 2.95 3.30 3.88 5.04 5.94 5.71 5.55 5.28 5.57 6.32 7.35 9.33 9.38

10.59

5.02 7.10 6.37 6.50 5.98 7.75 6.01 5.51 5.52 5.83 5.34 4.32 3.66 3.57 3.61 3.99 3.85 3.59 3.60 2.92 2.91 2.52 3.00 4.47 6.51 5.89 5.33 5.02 6.23 7.25 8.10 9.33 9.03

11.32

9.35 11.97 10.97 11.41 11.32 13.93 12.32 11.51 11.52 12.22 10.53

9.12 8.76 8.57 8.36 8.54 8.01 7.55 7.67 6.62 5.86 5.82 6.88 9.51

12.44 11.60 10.88 10.31 11.80 13.57 15.46 18.66 18.41 21.90

Sources: State Statistical Bureau Statistical Yearbook of China (1984), and The Bank of China Annual Report (1984). NI denotes National Income.

The result of these trends is that by the 1980s. China’s trade as a percentage of GDP is normal relative to other low-income countries. Table 3 provides these figures and demonstrates that there remains ample scope for further expansion in China’s trading performance in the future.

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TABLE 3 CHINA’S TRADE BY INTERNATIONAL COMPARISON

( O h of GDPJ

China India OLIC LMIC UMIC (1981) 11982) (1982J (1982) (1982)

Exports 8.41 6 11 20 24 Imports 8.1 9 19 26 25

Notes to the table: Figures a re not directly comparable to those in Table 2 because GDP rather than NI is the measure of domestic output. Source: World Bank Anex 5 (1985). pp. 18. OLlC: Other low-income countries, excluding China and India. LMIC: Low middle-income countries. UMIC: Upper middle-class countries.

Turning now to the commodity composition of China’s trade since the 1950s, the dominant trends are presented graphically in Figure 1. Primary products have traditionally accounted for 60-80% of total exports, but the trend has been downwards in response to the developing process of in- dustrialisation. Of this, agricultural products were of paramount importance, accounting for over 50% of total exports in the early 1950s, but this had declined to less than 20% by the 1980s. Petroleum exports have taken the running since the 1980s to account for 20% of total exports. Indeed, China has been self-sufficient in oil since the mid 1960s following the exploitation and development of the Daqing oil field in 1960. Because of the continuing domestic exploration problems, lack of investment funds and a substantial domestic demand, however, it is unlikely that China will significantly increase its oil exports in the foreseeable future. In contrast to the experience with primary product exports, manufactured goods exports from China have grown strongly. For instance. heavy industry accounted for around 20% of exports in the 20 years to the mid 1970s; more recently it has accounted for around 40% of exports.

More than two-thirds of China’s imports come from the developed countries. In 1985 and 1986, imports from Japan, the US and the EEC accounted for 62.2% and 57.8% respectively. These imports comprise mostly heavy industrial products, machinery, transport equipment, steel and chemical products which are needed to facilitate the country’s process of industrialisation.

Econometric Analysis* This section reports the results of econometric analysis of the extent to

which standard empirical macroeconomic relationships can explain move- ments in China’s exports and imports over the last quarter century. Econo- mists are becoming increasingly aware of the desirability of deriving their important macroeconomic relationships from the microeconomic first

* Details of the work on which these results a r e based a re available from the authors.

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principles of optimisation behaviour. This task is particularly difficult in the present context insofar as we are dealing with a number of economic systems which operate in very different ways.

It is of considerable interest to discover whether reliable estimates can be obtained of the income and “price” elasticities of Chinese imports and exports. Knowledge of these elasticities can shed light on how China’s rate of economic growth relative to the rest of the world may be constrained by its foreign trading position and whether foreign exchange rate management policy may successfully alter the dimensions of any balance of trade position. This latter point obviously concerns the issue of whether the Marshall- Lerner conditions apply to the foreign trade sector of the Chinese economy.

We adopted the general-to-specific methodology of Hendry (1981) to estimate standard equations for imports and exports. Allowance was made for both income and real relative price effects over the period 1950 to 1985.

The estimated equations were in line with expectations. It is noteworthy that the sum of the price elasticities of exports and

imports, after allowing for the lagged effects, sum to greater than unity. This evidence is consistent with the conditions which are necessary for the Marshall-Lerner conditions to hold so that exchange rate devaluation will lead to improved trading performance. It is also noteworthy that the income elasticities of both imports and exports are very close to unity. Insofar as this situation remains true, the outlook for China over the foreseeable future is that attempts to expand the domestic economy at a rate which is greater than that experienced by the developed countries will ultimately result in balance of payments constraints being reached. This will occur as the growth of exports falls short of imports, and this possibility will be reinforced by tendencies for China to borrow international funds to finance the importation of foreign capital equipment. This finding is consistent with the World Bank Report (1984) on China’s future development prospects. The evidence suggests that this constraint on China’s economic growth may be somewhat relieved by allowing the foreign exchange value of its curency to depreciate. An alternative policy option which may be adopted by the Chinese Government to alleviate this external constraint upon its economic growth is to resort to continued controls on its imports.

REFERENCES Bank of China (1984. 1985), Annual Report. Bucknall. K.B (1980). “Australia-China Bade”, CSAAR Research Paper no. 9. Griffith University. Central Committee of the Communist Party of China (19841. “Decision of The Central Committee

of The Communist Party of China on Reform of The Economic Structure”, China Daily, 22 Oct.

Chinese State Statistical Bureau (1984. 1985), Statistical Yearbook of China. Hendry. D.F. (19811, “Predictive Failure and Econometric Modelling in Macroeconomics: The

’kansactions Demand for Money” in P. Ormerod (ed.), Economic Modelling, London.

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Liu Sui-nian (1987). "Must Defend Seriousness of State Plan", People's Daily, 8 April. International Monetary Fund (19861, International Financial Statistics Yearbook. World Bank (1983). "The Energy, Statistical System and Basic Data". China: Socialist Economic

World Bank (1985). Annual Report on China. Zhao Zi-yang (1987). "Speech at the Spring Festival Party". People's Daily, 30 January.

Development.

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