Ties That Bind - Bay Area Council Economic Institute

Bay Area-China Trade: Behind the Numbers
Notwithstanding issues and reversals, China’s implementation of its WTO obligations has led to
progressive market opening, with barriers dropping in a broad range of sectors. Specific areas
remain sensitive. In the first month after global trade quotas on textiles and apparel were eliminated
at the end of December 2004, China’s textile and apparel exports to the U.S. jumped 75%
to $1.2 billion. Both the U.S. and United Kingdom reimposed temporary, less restrictive quotas
which caused some production to shift to Central America and Southeast Asia, although China
continues to dominate the global textile and apparel market. For technology companies, U.S.
export controls, designed to bar the transfer of dual use (civilian/military) technology will remain
an issue.
The valuation of China’s currency is also contentious, with U.S. charges that the yuan is deliberately
undervalued (disadvantaging imports but providing a distinct advantage to Chinese exports.)
In response, China appears set on a course to allow its currency to gradually appreciate,
but is wary of rapid change from fear of speculation, instability and the effects of a sudden rise
on marginal producers. In July 2005 the government pegged the yuan to a basket of currencies,
replacing the dollar peg that had been in place since 1994. The yuan immediately appreciated by
2.1%. It is expected to rise another 4% against the dollar by the end of 2006, and by 4–5% per
annum over the next five years.
Estimates vary as to how much the yuan may be currently undervalued, but 20% is considered
conservative. It is unclear, though, whether a large revaluation would significantly impact the
U.S. deficit, since a cheaper yuan would also lower the cost of imported materials that China uses
in its export products, and since U.S. consumers would likely continue spending, but might buy
instead from cheaper, non-Chinese suppliers.
Services Trade
High-value services and technology drive the Bay Area economy, and find a ready market in
China’s fast-growing consumer and business environment.
Financial Services
0DUNHW (QYLURQPHQW
China began reforming its banking system in 1979, in preparation for entering the global economy
and offering market-based financial services. A major task involved consolidation of numerous
smaller banks throughout the PRC into the “Big Four” national banks—Bank of China
(BOC), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and
Agricultural Bank of China (ABC)—a process completed in 1994. In addition, more than a
dozen joint-stock holding banks operate nationally, and more than 100 city commercial banks
and several hundred rural credit cooperatives offer retail financial services.
China’s banking industry is highly concentrated, though the trend is toward dispersion. The top
four banks controlled 52.4% of system assets in 2005. Mid-sized joint-stock banks held 15.5% of
57