L1-China&39;s Economic Conditions(15)

growing FDI in China is coming at the expense of FDI in their country. Policymakers in bothdeveloping and developed countries have expressed concern over the loss of domesticmanufacturing jobs that have shifted to China (as well as the downward pressures ondomestic wages and prices that may occur from competing against low-cost Chinese-madegoods).

Many analysts contend that China’s currency policy, despite reforms undertaken in July2005, is having a negative impact on the economies of many of its trading partners byartificially making its exports cheaper, and imports more expensive, than they would beunder a floating system. They have urged China to move toward a floating exchange rateregime as soon as possible, contending that such a move would benefit China’s economy andthose of its trading partners.7 Chinese officials have expressed concern that further currencyreforms, if implemented too quickly, could prove disruptive to the economy. A number ofbills have been introduced in Congress to address Chinese currency policy, including somethat would impose a 27.5% tariff on Chinese goods unless China appreciated its currency tomarket levels.8 Failure by China to implement further reforms to its currency regime couldprompt Congress to take up currency-related legislation. On the other hand, some analystshave raised concerns that China’s move toward a managed float tied to a basket of currenciesmay diminish China’s purchase of U.S. Treasury securities, which could affect U.S. interestrates.

China is attempting to establish and promote companies that can compete globally,especially in advanced technologies. In some cases, China has attempted to purchase largeforeign companies. For example, in December 2004, Lenovo Group Limited, a computercompany primarily owned by the Chinese government, purchased IBM’s personal computerdivision. In June 2005, the China National Offshore Oil Corporation (CNOOC) made a bidto buy a U.S. energy company, UNOCAL, for $18.5 billion, although strong opposition inCongress forced CNOOC to withdraw its bid. China’s possession of large currency reservesand desire to become a world leader in the production of a variety of goods and strategiccommodities will likely lead the Chinese government to expand efforts to take over majorinternational corporations. Many Members charge that China’s use of extensive subsidiesto support state-owned firms, especially to fund takeover bids, threatens U.S. economicinterests and may violate its WTO commitments.

China’s rapid economic growth and continued expansion of its manufacturing base arefueling a sharp demand for energy and raw materials, which is becoming an increasinglyimportant factor in determining world prices for such commodities. China is now theworld’s second largest consumer of oil products (after the United States) at 6.7 millionbarrels per day, and that level is projected to double to 13.4 million barrels per day by 2025.9According to the U.S. Energy Information Administration, around 40% of world oil demandgrowth over the past four years came from China and this demand is “a very significant

7

For a discussion of this issue, see CRS Report RS21625: China’s Currency Peg: A Summary ofthe Economic Issues, by Wayne Morrison and Marc Labonte.

For a listing of these bills, See CRS Issue Brief IB91121,China-U.S. Trade Issues, by Wayne M.Morrison.

9

8

Global Insight, Global Petroleum Outlook Forecast Tables (Long-Term), January 2005.