Is China Really Running a Trade Surplus?

James K. Galbraith
Professor
Lyndon B. Johnson School of Public Affairs
The University of Texas at Austin
Austin, Texas

Sara Hsu
Adjunct Professor of Economics
St. Edwards University
Austin, Texas

Li Jianjun
Professor of Economics
Central University of Finance and Economics
Beijing, China

December 30, 2007

The University of Texas Inequality Project
UTIP Working Paper 45
This is my wife’s uncle. He was America desk officer for Zhou En-Lai in 1971.
A Puzzle: Rising Chinese Unit Export Values
 Table One: Export Unit Value (In US Dollars)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Export Unit
Value (Our
Calculations) 0.51 0.47 0.47 0.46 0.46 0.45 0.46 0.56 0.66 0.79 1.00
Export Unit
Value (Official
Statistics) 0.05 0.06 0.07 0.08 0.10 0.08 0.60 0.70 0.76 N/A N/A
Manufacturing
Export Unit
Value (Our
Calculations) 0.40 0.38 0.39 0.39 0.39 0.38 0.40 0.49 0.59 0.72 0.97
Table Two: Export Volumes and Total Exports Attributable to Volume Gain
(in Billions of Current US Dollars)
Exports of
Goods and
Exports of Services at
Goods and Unchanged Unit
Services Values Difference1
2002 365.4 365.4 0
2003 485.0 398.4 86.6
2004 655.8 457.1 198.7
2005 836.9 490.2 346.7
2006 981.0 452.4 528.6

Source: World Bank WDI and authors’ calculations

 Table Five: Sector Unit Value Representation in Total Dollar Value per Exported Unit, by SITC
Code

(in US Dollars)

3 4
2 Mineral Animal 5
0 Crude fuels, and Chemicals 7
Food materials, lubricants vegetable and Machinery 8 M
and inedible, and oils, fats related 6 and iscellaneous
Total live except related and products, Manufactured transport manufactured
trade animals fuels materials waxes n.e.s. goods equipment articles
1994 0.51 0.04 0.02 0.02 0.00 0.03 0.10 0.09 0.21
1995 0.52 0.04 0.02 0.02 0.00 0.03 0.11 0.11 0.19
1996 0.51 0.03 0.01 0.02 0.00 0.03 0.10 0.12 0.19
1997 0.47 0.03 0.01 0.02 0.00 0.03 0.09 0.11 0.18
1998 0.47 0.03 0.01 0.01 0.00 0.03 0.08 0.13 0.18
1999 0.46 0.02 0.01 0.01 0.00 0.02 0.08 0.14 0.17
2000 0.46 0.02 0.01 0.01 0.00 0.02 0.08 0.15 0.16
2001 0.45 0.02 0.01 0.01 0.00 0.02 0.07 0.16 0.15
2002 0.46 0.02 0.01 0.01 0.00 0.02 0.08 0.18 0.14
2003 0.56 0.02 0.01 0.01 0.00 0.03 0.09 0.24 0.16
2004 0.66 0.02 0.01 0.02 0.00 0.03 0.11 0.30 0.18

Source: OECD Data and authors’ calculations

 Table Fourteen: Change in Unit Value, Year on Year, by Sector
(in Percentages)

3 4
2 Mineral Animal 5
0 Crude fuels, and Chemicals 7
Food materials, lubricants vegetable and Machinery 8
and inedible, and oils, fats related 6 and Miscellaneous
Total live except related and products, Manufactured transport manufactured
trade animals fuels materials waxes n.e.s. goods equipment articles
1995 3% -17% -11% 10% -23% 22% 17% 20% -8%
1996 -3% -2% -12% 6% -21% -7% -16% 7% -1%
1997 -7% -17% -20% -10% 32% -12% -7% -5% -4%
1998 1% -4% -16% -26% -52% 1% -5% 15% 0%
1999 -2% -9% 2% -17% -61% -8% -6% 8% -5%
2000 0% -8% -11% 32% -31% -9% 0% 10% -7%
2001 -3% -5% -15% -2% -13% 1% -6% 5% -8%
2002 3% -4% -12% -16% -26% -4% 1% 12% -3%
2003 21% 8% 3% 18% 6% 15% 17% 33% 12%
2004 18% -6% 2% 14% 12% 18% 28% 25% 9%
 Table Fifteen: Export Unit Values of ASEAN Countries1
(in US Dollars)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Indonesia 109 104 81 65 100 90 96 103 120 81
Philippines 146 134 105 121 100 84 77 79 77 N/A
Singapore 120 112 97 96 100 93 91 90 93 96
Thailand 127 122 107 102 100 102 97 105 118 130

Source: UN Comtrade Yearbook 2005

Is it Price Increases?
 Table Sixteen: U.S Import Price Indices (from World1) by Commodity Category

Mineral Com-
Crude fuels, Chemicals modities
Food materials, lubricants and Machinery Misc. and
and Beverages inedible, and related Manu- and manu- tran-
live and except related products, factured transport factured sactions,
animals tobacco fuels materials n.e.s. goods equipment articles n.e.s.
1991 96 86 82 63 96 91 105 98
1992 93 87 86 60 97 90 106 100 122
1993 95 87 91 48 96 90 108 101 136
1994 111 88 102 56 104 98 110 102 137
1995 105 91 111 59 106 104 112 104 138
1996 103 93 106 80 105 98 110 103 133
1997 108 97 103 61 101 99 105 103 110
1998 103 98 92 38 97 94 102 101 105
1999 103 100 101 83 98 97 100 101 104
2000 100 101 97 106 101 100 99 100 95
2001 95 103 90 61 97 92 98 99 99
2002 99 103 95 95 98 94 96 99 114
2003 101 104 108 108 101 98 95 100 139
2004 112 107 126 141 110 110 95 101 157
2005 117 109 134 202 115 114 94 101 171

Source: BLS Data2

 Table Eighteen: Japanese Imports from World, Unit Price Index on Yen Basis,
(2000 average=100)

Wood,
Metals lumber
All Foodstuffs & & Petroleum, Chemicals Machinery
com- & related related coal & & related & Other
modities feedstuffs Textiles products products natural gas products equipment goods
991 118 122 116 125 110 99 103 143 116
992 111 120 110 114 115 88 94 139 110
993 100 109 98 93 141 73 90 125 100
994 94 107 99 95 125 62 95 117 97
995 94 106 98 100 117 63 104 110 100
996 103 119 106 102 131 80 102 115 107
997 111 123 113 112 133 92 111 119 113
998 105 123 118 108 111 73 108 122 117
999 96 108 107 94 107 71 98 108 105
000 100 100 100 100 100 100 100 100 100
001 102 110 103 101 104 107 105 97 106
002 101 113 103 100 107 105 105 93 107
003 100 116 100 102 104 112 110 85 103
004 104 124 99 125 111 124 115 80 104
005 118 127 100 153 113 172 124 78 109
006 137 135 105 216 132 216 139 81 120

Source: Statistics Bureau, Ministry of Internal Affairs, Japan and authors’ calculations1
 Table Seventeen: EU15 Unit Price Index (2000 = 100), Imports from China (excl HK)
Food
and Mineral Animal
live Crude fuels, and Chemical
animals materials, lubricants vegetable s and Machinery Misc.
chiefly Beverag inedible and oils, fats related Manu- and manu- Total -
for es and except related and products, factured transport factured All
food tobacco fuels materials waxes n.e.s. goods equipment articles products
1995 88 67 81 87 82 99 87 92 77 83
1996 92 75 85 96 99 101 89 92 81 86
1997 97 94 93 103 119 103 95 95 89 93
1998 96 97 94 102 125 98 92 91 88 90
1999 96 96 90 92 105 94 89 90 88 89
2000 100 100 100 100 100 100 100 100 100 100
2001 100 100 103 127 98 99 101 100 99 100
2002 98 92 91 112 83 91 94 97 93 95
2003 87 83 84 127 78 82 84 88 82 85
2004 82 75 90 261 84 78 83 88 78 84
2005 85 75 97 217 94 82 85 88 79 84
2006 94 77 97 187 90 83 89 89 85 88

Source: Eurostat Online and authors’ calculations1

 Table Three: ASEAN Share in World Exports1

(Percentages)

1998 1999 2000 2001 2002 2003 2004 2005

ASEAN Share
in World
Exports 4.8% 5.1% 5.6% 5.2% 5.2% 4.0% 5.4% 5.4%

Source: UNCTAD Statistics Database

Is it the Processing Trade?
 Table Four: Import Unit Values (into China)
(in USD)

1996 1997 1998 1999 2000 2001 2002 2003 2004

Import Unit Values 0.47 0.38 0.38 0.36 0.36 0.38 0.38 0.43 0.45
Manufacturing
Import Unit Values 0.74 0.52 0.54 0.47 0.43 0.52 0.55 0.59 0.61

Source: OECD Data and authors’ calculations

Is it a Rising Wage Bill?
 Table Six: Wage to Output Ratio
(in Percentages)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

13% 12% 11% 11% 11% 11% 11% 11% 11% 11% 11%

Source: China Data Center and authors’ calculations

Is it Quality Improvement?
 Table Twenty-Two: Top Twenty Subcategories (within SITC 6 through 8) for Change in Share due to
Value Change1

Change in Share due to Value Change,

SITC 6 through 8, 3-digit level category 2002-4
752 Automatic data processing machines, n.e.s. 11%
764 Telecommunication equipment, n.e.s.; &
parts, n.e.s. 8%
759 Parts, accessories for machines of groups
751, 752 5%
845 Articles of apparel, of textile fabrics, n.e.s. 3%
894 Baby carriages, toys, games & sporting goods 3%
776 Cathode valves & tubes; diodes; integrated
circuits 3%
763 Sound recorders or reproducers; television
record. 3%
851 Footwear 3%
778 Electrical machinery & apparatus, n.e.s. 3%
842 Women's clothing, of textile fabrics 2%
821 Furniture & parts; bedding & similar stuffed
furni. 2%
841 Men's clothing of textile fabrics, not knitted 2%
893 Articles, n.e.s., of plastics 2%
772 Apparatus for electrical circuits; board,
panels 2%
658 Made-up articles, of textile materials, n.e.s. 1%
699 Manufactures of base metal, n.e.s. 1%
848 Articles of apparel, clothing access.,
excluding textile 1%
653 Fabrics, woven, of man-made fabrics 1%
871 Optical instruments & apparatus, n.e.s. 1%
771 Electric power machinery, and parts thereof 1%

Source: OECD Data and authors’ calculations

1 To calculate this, we look at the change in the unit value, relative to the average,
from 2002-4 relative to the original percentage of total value in 2002. This gave us a
percentage that presents the unit-value change component of the shift in share
toward the sector.
Well, maybe it’s capital inflow, channeled
through the current account to evade capital
control, facilitated by the legalization of dollar
accounts held by Chinese firms in China at
the end of 2002 and incentivized by interest
differentials and expectations of an RMB
appreciation. Could that be it?
 Table Eleven: RMB Less Dollar Yields

1998 1999 2000 2001 2002 2003 2004 2005 2006

Avg 3-month
Chinese
Repo less US
Treasury 1.96 -1.17 -3.4 -0.83 0.54 1.59 1.35 -1.44 -2.41
Avg 3-month
CHIBOR
less USD
LIBOR 2.23 0.95 -2.46 0.03 1.6 1.66 1.71 -0.77 -2.57

Source: CEIC, US Treasury Statistics, British Bankers Association

Table Twelve: Non-Deliverable Forward Premium
(Percentage of Spot)

Source: Ma and McCauley (2007, p. 16)

Table Thirteen: Foreign Exchange Transactions within China
(in 100 Million Units)

Overall USD HKD JPY EURO

Turnover Trading Trading Trading Trading
(in USD) Volume Volume Volume Volume

2001 750.3 741.3 30.6 613.9 N/A

2002 971.9 951.1 108.8 730.8 1.1
2003 1511.3 1478.2 186.3 761.6 3.0
2004 2090.4 2044.1 244.9 1349.6 1.9

Source: People’s Bank of China

 Table Nine: Capital inflows under varying assumptions of unit value increase

(in USD)

Percentage of
Increase from
2002 2003 2004 2005 2006
30% 26.0 59.6 104.0. 158.6
60% 52.0 119.2 208.0 317.2
90% 77.9 178.9 312.1 475.8
100% 86.6 198.7 346.7 528.6

Source: OECD, WDI and CEIC Data and authors’ calculations

If so, how big are the disguised inflows and what
difference would they make to the trade balance?
Table Ten: Effect of estimated capital inflows disguised as current account on Balance of Trade
(in Current billions of US Dollars)

Balance of
Balance of Trade
Trade Adjusted
Adjusted for
for Maximum
Exports of Minimum Value
Goods and Difference Value (100%) of
Exports of Services at (Max Hot Imports of (30%) of Hot Money
Goods and Constant Money Goods and Balance of Hot Money Inflows
Services Unit Values Inflows) Services Trade Inflows
1998 207 207 0 164 44 44 44
1999 221 221 0 190, 31 31 31
2000 280 280 0 251 29 29 29
2001 299 299 0 271 28 28 28
2002 365 365 0 328 37 37 37
2003 485 398 87 449 36 10 -51
2004 656 457 199 607 49 -10 -149
2005 837 490 347 712 125 21 -222
2006 981 452 529 878 103 -55 -425

Source: WDI and authors’ calculations

Finally, where did they go?
 Table Seven: Gross Capital Formation
(In Current US Dollars or Percentages where indicated)

Percentage Percentage
change in change in
gross capital gross capital
Gross capital Percentage formation formation
formation change in adjusted for adjusted for
GDP (billions (billions of gross capital min hot max hot
of current US$) current US$) formation money inflows money inflows
1996 856.1 346.2
1997 952.7 361.5 4% 4% 4%
1998 1,019.5 378.2 5% 5% 5%
1999 1,083.3 398.0 5% 5% 5%
2000 1,198.5 420.9 6% 6% 6%
2001 1,324.8 480.5 14% 14% 14%
2002 1,453.8 550.5 15% 15% 15%
2003 1,641.0 676.1 23% 18% 7%
2004 1,931.7 835.7 24% 19% 8%
2005 2,243.9 971.0 16% 12% -2%
2006 2,668.1 1,085.8 12% 7% -11%

Source: WDI and authors’ calculations

 Table Eight: Beijing Real Estate Statistics
(in Million Yuan)

Real Estate Industry Real Estate Industry Investment in Commercial

Operating Income Total Profits Office Buildings Buildings Sold
2000 -1862 -1303 4521.9 424.84
2001 -1046 -215.3 7199.3 1245.8
2002 -1026 -587.1 9732.6 2595.3
2003 895.9 1743.3 14275 5177.9
2004 8661.1 10701 18789 5883.4
2005 6184.4 8131 19617 12085
2006 11053 14959 21674 16256

Source: CEIC