World Energy Outlook 2007

total stock of Chinese ODI amounted to $73 billion in 2006. India’s ODI
assets remain small, at about $5 billion. However, ODI flows by Indian
companies are developing rapidly, reaching nearly $1.4 billion in 2005
(see Chapter 14).
A reduction in the net liabilities of both countries has been a striking feature of
the integration of China and India into the global financial system. Growing
surpluses in the capital account have been accompanied by surpluses in trade
of goods and services. China, in particular, has been running a trade surplus
since the early 1990s, while India’s trade balance went into deficit in 2003.
China’s surplus has grown considerably larger in the last four years, mainly due
to increased bilateral imbalances with the United States and Europe. These
surpluses, which have caused the surge in foreign exchange reserves,
complicate monetary policy operations and have put upward pressure on the
yuan. The Chinese authorities have been reluctant to revalue the currency too
quickly, for fear of undermining exports and slowing job creation. 4 Excessive
liquidity has fuelled a boom in property and stock markets, which endured
considerable turbulence in mid-2007. China’s large foreign-exchange reserves
and its large trade surplus, particularly with the United States, make China’s
monetary policy and its economic restructuring policies critical factors in
maintaining the stability of the world’s economic system (Roach, 2007).
How China’s and India’s international trade develops in the future depends on
how their domestic economies evolve structurally. 5 Investment in infrastructure
and in labour-intensive manufacturing for export will continue to drive China’s
economic development for some time to come. Investment in higher valueadded
goods is also set to grow. Investment in less-skilled sectors could shift
inland from coastal areas to take advantage of the vast reserve of low-cost,
underemployed farm labour. There may also be some shift in investment to
other countries, including India. Services could account for a growing share of
China’s exports, depending on the success of structural adjustment policies,
aided by the growing tradability of many types of business-related service
activities. Similarly, India looks set to retain its competitive advantage in
textiles, clothing and other relatively low value-added, labour-intensive sectors.
But there is potential for India to boost its share of trade in other, higher-value
manufactures, including pharmaceuticals and specialised engineering, in which
it already has a significant presence.
3. Between 2002 and 2005, the overseas investment of Chinese multinationals grew on average by
66% per year (UNCTAD, 2006).
4. McKinsey Global Institute (2007) investigates the implications of different scenarios for reducing
the Chinese-US trade imbalance.
5. See Chapter 7 and Chapter 14 for a more detailed discussion of the future evolution of China’s and
India’s economies.
144 World Energy Outlook 2007 - GLOBAL ENERGY PROSPECTS: IMPACT OF DEVELOPMENTS IN CHINA & INDIA