2011 report to congress - U.S.-China Economic and Security Review ...

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30mist at the Royal Bank of Scotland, predicted that China’s consumerprice index will remain between 5 percent and 10 percentfor the next decade. 35 And Nouriel Roubini, professor of economicsat New York University, decried China’s dependence on fixed assetinvestment as the principal driver of China’s GDP growth and afactor in its inflation. 36 All noted that the Chinese government ismerely treating the symptom, rather than the cause, of the inflationproblem. Until the Chinese government fully liberalizes itscapital account, and ceases manipulating its currency, China’strade surpluses will continue to inflate the supply of RMB in circulation.Until the Chinese government eliminates its reliance onsterilization bonds, Chinese savers will prefer the volatile real estatemarket as an investment vehicle over the negative real returnsfrom bank deposits and bonds. Finally, until the Chinese governmentfully subjects the RMB to the dictates of market forces,the consumption share of China’s GDP will remain stunted ataround 35 percent—half the rate in the United States, according tomany commentators. 37On the positive side, the Chinese government allowed the RMBto rise by roughly 6 percent in nominal terms over the last year,from 6.775 RMB per dollar on July 16, 2010, to 6.370 RMB per dollaron October 17, 2011. 38 This is the second-fastest rate of appreciationsince the Chinese government eliminated its hard peg tothe dollar in 2005. Nonetheless, the US. Treasury Department reportsthat the RMB remains ‘‘substantially undervalued.’’ 39 Thereis also nascent acknowledgement by Chinese academics that Beijing’sintervention in the foreign exchange market has a measurableeffect on the balance of trade, at least in certain sectors. Forexample, in a scholarly article published in the Chinese journal Advancesin Informational Sciences and Service Sciences, researchersfrom Huazhang Agricultural University found that every 1 percentincrease in the exchange rate between the RMB and the U.S. dollarleads to a 0.498 percent decrease in Chinese exports of citrusfruits. 40 Moreover, there is growing support among the engineersof China’s monetary policy to expanding the range of the dailytrading band beyond the current 0.5 percent, potentially acceleratingthe rate of appreciation. 41Meanwhile, the Chinese government is increasing its efforts toreduce its reliance on the dollar and nudge international debt marketstoward the RMB. 42 Last year, McDonald’s became the firstmajor multinational to issue an RMB-denominated corporate bondin Hong Kong, referred to by the financial community as dim sumbonds, which brought in RMB 200 million at a 3 percent yield. 43Caterpillar followed with a much larger issue of RMB 1 billion at2 percent. 44 In March 2011, Unilever paid an even lower yield of1.15 percent in an issuance of RMB 300 million. 45 Morgan Stanleyissued its own RMB 500 million round at 1.625 percent (see table3, below). 46 Finally, the Chinese Ministry of Finance issued RMB20 billion of sovereign debt, the largest RMB-denominated bond inhistory. 47dkrause on DSKHT7XVN1PROD with $$_JOBVerDate Nov 24 2008 13:46 Nov 10, 2011 Jkt 067464 PO 00000 Frm 00042 Fmt 6601 Sfmt 6601 G:\GSDD\USCC\2011\067464.XXX 067464
31Table 3:RMB Bond Issuances by MultinationalCompanies, 2010–2011dkrause on DSKHT7XVN1PROD with $$_JOBIssuer Round YieldAug-10 McDonald’s ¥ 0.2 bn 3.000%Nov-10 Caterpillar ¥ 1.0 bn 2.000%Mar-11 Unilever ¥ 0.3 bn 1.150%May-11 Morgan Stanley ¥ 0.5 bn 1.625%May-11 Volkswagen ¥ 1.5 bn 2.000%Total¥ 3.5 bnSource: Fiona Law et al., ‘‘Caterpillar Yuan Bond Issue DrawsStrong Demand,’’ Wall Street Journal, November 24, 2010.http://online.wsj.com/article/SB10001424052748703572404575634532182318468.html.¥ = yuan or renminbiThe low yields reflect the lack of alternatives available to Chineseretail investors. Some Chinese commentators have dismissedsuch corporate bond sales as publicity stunts by multinationals designedto appease the Chinese government. One financial analystdescribed McDonald’s RMB bond as a ‘‘McGesture.’’ 48 Others believethat these issuances are neither about fundraising nor politicsbut, rather, a method of benefitting from the appreciation of theRMB. 49Still, others point out that the fledgling RMB debt market, despitehaving been in existence for only one year, has alreadyachieved greater liquidity than the well-established debt marketsof the Philippines, Indonesia, and Malaysia, with daily trading volumein excess of $2 billion. 50 To put these numbers into perspective,during the first two quarters of 2011, the U.S. corporate bondmarket saw $630 billion of new issuances (RMB 4 trillion), and theaverage daily trading volume was $17.3 billion. 51 Thus, the UnitedStates maintains an overwhelming lead in the issuance of new corporatebonds but only a modest lead in daily trading volume (seetable 4, below).Table 4:US and Chinese Corporate Bond MarketActivity ($ billion) 2011 Q1–Q2New Issuances Daily Trading VolumeUS $ 630.90 $ 17.30China $ 0.50 $ 2.00Source: Securities Industry and Financial Markets Association(New York, NY).Meanwhile, a greater share of China’s foreign trade is settled inRMB. In the first four months of 2011, cross-border, RMB-denominatedtrade exceeded the total amount of RMB-denominated tradeconducted in all of 2010, 500 billion. 52 Put in relative terms, RMBdenominatedtrade in the first quarter of 2011 represented 7 percentof China’s overall foreign trade. 53 However, according to YinJianfeng, a financial researcher with the Chinese Academy of SocialSciences, as of the close of 2010, 80 percent of RMB-denominatedtrade concerned foreign companies importing into China. 54VerDate Nov 24 2008 13:46 Nov 10, 2011 Jkt 067464 PO 00000 Frm 00043 Fmt 6601 Sfmt 6601 G:\GSDD\USCC\2011\067464.XXX 067464
Page 1 and 2: 12011REPORT TO CONGRESSof theU.S.-C
Page 3 and 4: U.S.-CHINA ECONOMIC AND SECURITY RE
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Page 7 and 8: CONTENTSPageTRANSMITTAL LETTER TO T
Page 31 and 32: 23Figure 1:China’s Share of the U
Page 33 and 34: 25The weakness in U.S. exports of a
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Page 43 and 44: 35of bilateral negotiations under t
Page 45 and 46: 37Stonewalling the WTO: A Case Stud
Page 47 and 48: 39that China’s existing system of
Page 49 and 50: 41now. Because the structures of th
Page 51 and 52: 43How Big Is China’s State Sector
Page 53 and 54: 45Fortune Global 500, compared to j
Page 55 and 56: 47panies are less profitable, after
Page 57 and 58: 49erate primarily within state-cont
Page 65 and 66: 57Figure 1: Chinese FDI Stock in th
Page 71 and 72: 63U.S. firms with sensitive technol
Page 73 and 74: 65Addendum I: SASAC Companies, Larg
Page 75 and 76: 67Addendum I: SASAC Companies, Larg
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Page 79 and 80: 71January 2010, the heads of 19 U.S
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81China in Search of Western Techno
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83scious policy seeking to drive Ch
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89Like previous plans, the 12th Fiv
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95Consultative Conference National
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99panies account[ed] for fully 7 pe
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101Dr. Shih has testified before th
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103ment subsidies, which in turn wi
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105Addendum II: Figures 1-2Figure 1
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113drivers cited increased fuel pri
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123uating from college and hoping t
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131unfairly or unjustifiably harm U
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161gress, the DoD noted that China
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165eral U.S. military policies, inc
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167Figure 1:Territorial Disputes in
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171provides guidelines for dealing
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173network exploitations to facilit
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181ligence, surveillance, and recon
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187Therefore, the PLA maintains the
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189Of import, the PLA’s geographi
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197ther moves toward independence,
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199trates the depth of China’s sp
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201Figure 2:Representation of Beido
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205ganization, modeled on the Europ
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207China’s leadership also places
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211[General Armaments Department] p
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213Table 2: Select Chinese Satellit
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215weapons or coorbital satellite w
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217Malicious Cyber ActivitiesDirect
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RECOMMENDATIONSChina’s ‘‘Area
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239320. Chang Xianqi, Military Astr
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243woman Jiang Yu simply expressed
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245Table 1:Timeline of Sino-North K
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249China also provides economic sup
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251economic and social strains woul
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255Iran’s South Pars Gas Field af
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257When asked by Commissioners abou
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281trade, and dispute settlement. 2
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287of Request to the United States
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289fense, since its current fleet o
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3190aRCRD&ss=Hong+Kong&s=News; Pete
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323mation Office. Day-to-day superv
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327Although the slogans change over
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335What Constitutes a ‘‘Core In
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339Selected CAIFC/CPD Track Two Exc
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341disseminated through diplomatic
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375ecutive Schedule under section 5
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APPENDIX IIIPUBLIC HEARINGS OF THE
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APPENDIX IIIALIST OF WITNESSES TEST
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393Alphabetical Listing of Panelist
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397In TaiwanU.S. Government• Amer
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APPENDIX VLIST OF RESEARCH MATERIAL
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401The National Security Implicatio
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APPENDIX VIACRONYMS AND ABBREVIATIO
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