Final Exam review

Question 0

What are the three trade regimes in China in the post-1994 period? Describe and discuss the major features of each regime.

Answer 0

Pre-reform: everything including trade was centrally planned. Most trade was with Soviets and other command economies. Changed slightly after fallout with USSR

Post-reform: dual trade regime, some open trade.

WTO: convergence to international standards and true market priorities

Question 1

What are the major themes of SOE reform in the 1980s and 1990s respectively, and how do these results compare with the last decade?

Answer 1

1980s Early reform had expanded enterprise autonomy, managerial contract system, But no privatization and worker layoff. Autonomy was limited. Contracts were short term. Still had soft budget constraints.

1990s. 1994, grasping large and letting go of small. Privatization and layoff workers. State retreated on competitive markets. Retained some state control but also let others go public.

Question 2

How did the dual-track foreign exchange market work? How did the dual-track in foreign trade work?

Answer 2

Official and swap market exchange rate.

Swap was mkt driven, while official was state determined.

1994 the two rates were unified.

Dual foreign trade: ordinary (old) and processing (new) trade sector

Question 3

Why a dual track instead of a single track? Use the examples in foreign exchange and foreign trade to explain the advantages and disadvantages of a dual track.

Answer 3

In a dual track foreign exchange market there are two foreign exchange rates, swap market and official foreign rate.

Dual track in foreign trade: old sector (import substitution) and the new sector (export oriented). Exporters had incentives because they could keep some of profits. Advantage for dual foreign trade was a new market introduced

Question 4

Why is there a huge discrepancy between the average statutory import tariff and the actual tariff revenue share in import values in China?

Answer 4

Tariff rates decline because of smuggling and exemptions

Question 5

What are the major structural changes in China’s exports in the last 20 years? What were the forces behind such changes? Explain.

Answer 5

Three areas: export commodities, export regions, and production displacement

Question 6

Why was China so eager to join the WTO? Explain the top three reasons.

Answer 6

Trade and growth remains shallow and there was a growth slowdown after the Asian Crisis.

Reform and restructure: WTO could serve as an anchor for further reform and increasing competition.

National Club: be a part of civilized world and have bigger role in world affairs

Question 7

Discuss the special challenges for China’s accession to WTO, both in negotiation and implementation.

Answer 7

China was still a developing country and Not a complete market economy. But it was large and growing fast.

Domestic challenges: short term costs and long term national interest

Foreign challenges: political and economics reservations

Question 8

What is “tariff-rate quota” (TRQ) system? What are the three important parameters in TRQ? What is the purpose of TRQ?

Answer 8

Low tariff in quota, and higher tariff out of quota.

Initial quota and alternate quota

Question 9

Under the terms of Chinas’s accession to WTO, can the US impose quantitative restrictions only on imported goods originating from China? Can the US do the same to other WTO members? Why?

Answer 9

A country may impose restrictions on imported goods, provided certain conditions are met. Relatively easy for countries to do to China.

Question 10

In antidumping cases, why can China not use its domestic production costs as a basis for calculating the normal value of its exports? What can China do in this circumstance?

Answer 10

China is treated as a nonmarket economy

Question 11

What are the risks for Chinas’s agriculture sector after it enters the WTO? What are the possible solutions?

Answer 11

China does not have an agricultural advantage. More import of grain after WTO. Projected job losses. China migrating to more labor intensive products.

Question 12

Why do economists consider Chinas’s financial sector very fragile after the WTO accession? What are their arguments?

Answer 12

Financial services for banking is fragile due to high competition from foreign banks. Projected one million job losses.

Affect wholesale rather than retail.

Question 13

What are the distinct patterns of foreign investment in China? Name some government policies that are directly responsible for such patterns

Answer 13

Investment Is mostly FDI, not through stock market due to stock restrictions. Most loans are short term and few are from foreign banks, which is due to the banks being state owned and giving preference to certain companies. Also currency isn’t convertible.

Question 14

In what aspects are Special Economic Zones in China special? How are special economic zones in China compared with Export Processing Znes in other Asian economies?

Answer 14

Tax incentives for foreign investors. Simplified administrative procedures. Funding differences, these were experiments in market economy.
They were a window to the outside, could form joint ventures with foreigners. Laboratories for the future

Question 15

What are the three major forms of foreign direct investment in China? What are the dynamics in the relative importance of each for over time? Explain the reasons.

Answer 15

Contractural joint venture, a contract to team up with Chinese and foreign entity.
A service contract.
Equity joint ventures in eighties and nineties that created new entities.

Recently, wholly owned foreign enterprises. Foreigners getting more accustomed to China and rule of law.

Question 16

What are the comparative advantages of Hong Kong and Taian respectively in the near future?

Answer 16

Legal environment for Hong Kong is very good for foreign investors. A lot of investing still channel through Hong Kong. Some talk of being overtaken by Shanghai.

Taiwan has deindustrialized and shifted production to mainland China. Comparative advantage is that higher market services, reflective of higher developed economy.

Question 17

What are the three categories of government fiscal revenue in China? How should one calculate e true government debt in China?

Answer 17

Budgetary is 20%.
Extra budgetary are fee like d,v,?
Off budgetary is like NPL, amc liabilities, Also pension structure.

Question 18

Is it true that fiscal contracting practiced in China between 1980-1993 has led to a significant increase of the share of local government expenditure in total government expenditure? What is the major feature the fiscal contracting between the central and local governments, and what is the economic rationale?

Answer 18

Yes it did.
Looking at previous period, tax revenue was not correlated with local expenditures. In eighties it became more correlated and decentralized power. Better incentives for local gov to increase fiscal discipline.
Major features: fixed revenue allocation, sharing scheme, marginal revenue retained by locals high (some instances 100%). Originally five year scheme.

Question 19

How did local governments respond to fiscal contracting between 1980-1993?

Answer 19

80s, Increase in amount of marginal revenue that could be retained by locals. If they performed well, they could reap benefits. Massive growth in revenue, and in employment. Encourage enterprises to do well in order to tax.

Question 20

What are the major components of fiscal and tax reform of 1994?

Answer 20

Separation of taxes. Fiscal federalism and centralization of authority. Different from US.
Simplified and made taxes uniform.
Taxes were shared between local and central gov.

Question 21

Compare value-added tax, sales tax, and personal income tax. Explain the major advantages and disadvantages of each in the context of today’s China from the perspectives of efficiency and equality.

Answer 21

Likely question.
Value added: every time there is a transaction there is a tax added on, every stage of exchange. Rebate if export goods. Harder to evade and easier to collect that sales tax. The problem is that it’s regressive tax, a consumption tax that everyone pays regardless of income. Rich and poor have same rates.

Income tax: is more progressive

Question 22

Explain the two basic economic roles of law in the modern economy? Why does one make a distinction between rule of law and rule by law?

Answer 22

Guanxi- relationships
Rule of law creates conducive environment.
Law creates parameters.
Increase transparency, predictability, and reduce transaction costs.
Gov will use law to maintain order, but rule of law is applied in accordance to rule by law.

Question 23

On what legal basis can the Chinese gov be sued by its citizens and organizations? What are the major limitations in such a lawsuit?

Answer 23

Ministry of law passed. Gov can be sued by people in terms of environment, class action possible.
Big businesses have a lot of power in China.

Question 24

What are the most common contract-related lawsuits in China? What are the most common administrative litigation cases?

Answer 24

Age discrimination, wrongful termination, etc, intellectual property rights. Related to environmental pollution.

Question 25

What is judiciary local protectionism? Why is it so prevalent in China but not the US?

Answer 25

Local courts protect local businesses because they have an incentive through taxation, etc. Local judges side with local enterprises. In China the courts are more concentrated than US

Question 26

Explain the relationship between law and Guanxi (connections) in the context of economic contracting?

Answer 26

Social capital, personal connections. | Law may be viewed as more preferable.

Question 27

Use the quantity equation of money to explain why the link between money growth and inflation in China is not as tight as in other countries?

Answer 27

Monetary conditions have tightened since 2004 readjustments. | Quantity equation determines price.

Question 28

What are the Chinese gov policies to fight inflation? In which aspect does the Chinese gov use policy instruments that are different from those used by the US Federal Reserve?

Answer 28

Keep rmb lower than actual

Question 29

What is the macroeconomic policy pursued by the Chinese gov in the period between 1998-2002? What is the economic rationale?

Answer 29

Asian financial crisis changed the economy, China took a hit. Deflation became concern. Wanted to implement expansionary monetary and fiscal policy. Exp monetary policy increases money supply and reduces interest rates. Exp fiscal policy increases C, G, and I. So gov increased spending.

Question 30

What are the forces making pressure on Chinas's currency to appreciate since 2005?

Answer 30

In 2005 China moved away from dollar peg to basket of currency peg. Means China is more prone to market based depreciation or appreciation. Overvalued currency can lead to crisis. Undervalued currency, other countries don't like it and can lead to protectionist policies. External pressures: China has a huge trade surplus with us and Europe. A lot of currency tied to interest rates. If China has higher interest rates it would lead investments away. Domestic pressures: hard to control inflation. Big problem in last couple years. Pressures against: imports would be cheaper, and exports more expensive to other countries

Question 31

Explain the reasons for the pressure of Yuan appreciation from the perspective of China's domestic macroeconomic policies.

Answer 31

Overvalued currency can lead to crisis ie Capital flight. Undervalued currency, then other countries don't like it and can lead to protectionist policies. Domestic pressures: hard to control inflation. Big problem in last couple years. Against: imports would become cheaper and exports more expensive to foreigners

Question 32

Discuss the historical process of Chinas's regional economic emergence.

Answer 32

In 1950s traded only with other central planned economies. 1960s became more self reliant. 1970s some imports of textiles, etc. 1980s-1990s big expansions in foreign trade. Now, joining the WTO

Question 33

What is the Trade Triangle and what is its significance for Chinas's role in Asia?

Answer 33

The Trade Triangle is import resources from Asia and export manufactures to rest of the world. China has a trade surplus with the rest of the world. With rest of Asia, they import primary products to China. More comprehensive regionalism, supply chain integration, China takes over high value of chain, so not competing on exports. China is in a unique position. It has a huge domestic market, but is also very competitive in providing exports. But its dependence on exports and join WTO make it more dependent on world economy. Leaning towards appreciation but also wants to sustain growth.

Question 34

Discuss the linkage between Asian regional integration, Chinas's WTO accession and globalization.

Answer 34

China is in a unique position. Huge domestic market, but also very competitive in providing exports. But its dependence on exports and WTO accession makes it more dependent own world economy. Leaning towards appreciation but also want to sustain growth.

Question 35

What are the significant issues regarding labor market dynamics for Chinas's sustained growth?

Answer 35

China has a huge shortage in skilled labor. But addressing those issues, increasing education and capacity. How long can China sustain lower wages. Already have seen rise in wages and companies moving to other countries. How high does labor productivity have to be to match those wages? Aging population means greater dependency ratio. Rural to urban migration is high. How long will it continue?

Question 36

Discuss how Chinas's land, water, energy use can be expected to evolve over the next generation?

Answer 36

China is a resource constrained economy. Shortage of arable land and increasing urban areas means less farm land. Buying farmland in Africa. High competition for limited water supply. Middle class use a lot more water relative to rural . Rising middle class. How will be secure in future? Energy, driven by urbanization, income growth, and trade. Coal and renewable energy. Coal is imported, a dependency. Appreciating currency will also impact energy use. A lot of energy in China is used by foreign companies.

Question 37

What is Chinas's appropriate role in global climate changes?

Answer 37

Right now China is largest absolute emitter of green house gasses, but per capita is lower than US. Some energy exported, some domestic. Infrastructure development is extremely energy intensive. Urbanization, urban areas are more intensive. Environmental conditions.

Question 38

How does middle class emergence challenge Chinas's sustainable growth prospects?

Answer 38

``` China will have 38% of world middle class by 2030. Implications for food supply, energy, water. Middle class has trade offs. Sign of economic growth and prosperity, but middle class have different demands. ```