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June 10, 2004

Inaccurate Trade Data Distort the Degree of China’s Currency Manipulation

June 10, 2004

Inaccurate Trade Data Distort the Degree of China’s Currency Manipulation
Brief Number One

Importance of accurate trade data:  The U.S. Department of the Treasury, the IMF, and economists all depend on accurate trade data to determine whether China is manipulating its currency, whether China’s exchange rate gives China an unfair competitive advantage over other IMF members, and whether and to what degree China’s exchange rate is undervalued.

  • The Treasury Department is required to report semiannually whether countries are manipulating their exchange rates and the criteria that the Treasury uses is whether a country has a global trade surplus.  In the case of China, Treasury argues that China is not manipulating its currency because, based on Chinese trade data, it has a trade deficit with the rest of the world but not with the United States. An analysis of trading partner data demonstrates that China has a trade surplus not only with the United States but a substantial trade deficit with the rest of the world as well.
  • The IMF conducts “Article IV Consultations” designed to ensure, among other things, that each IMF member shall “avoid manipulating exchange rates or the international monetary system in order to … gain an unfair competitive advantage over other members.”  By using inaccurate Chinese trade data that severely underestimates China’s global trade surplus and the degree of undervaluation, the IMF fails to press China to appreciate its exchange rate to bring it in line with underlying economic fundamentals.
  • Economists use a variety of methods to calculate whether a currency’s value reflects market conditions.  One method is to calculate at what exchange rate a country’s overall current account would be in balance.  The largest component of the currency account is the trade balance and accurate statistics are essential.  In China’s case, the trade surplus is substantially underestimated.

Chinese data grossly underestimate China’s trade surplus: China’s economic statistics are widely viewed as inaccurate and their trade statistics would appear to be no exception.  The analysis below reveals a wide and growing disparity between official Chinese and U.S. data on trade flows between the two countries in recent years.  Comparisons show large and increasing differences, especially between China’s exports to the United States (according to China) and U.S. imports from China (according to the United States).  These discrepancies have increased dramatically in recent years, from $20.7 billion in 1995 to $59.1 billion in 2003.[i]  On the U.S. export-China import side of the equation, there is also a consistent and growing divergence in the opposite direction, with U.S. exports to China (as reported by the United States) trailing the corresponding figures on Chinese imports from the United States (as reported by China).  The discrepancy was $3.7 billion in 1995, declined to $2.2 billion in 1998, but then jumped to $5.5 billion in 2003.  With these two sets of trade statistics increasingly diverging from one another,

Fair Currency Alliance Brief No. 1/page two

the overall divergence, or “reliability gap,” between the U.S. and Chinese data has widened precipitously, from $24.4 billion in 1995 to $64.6 billion in 2003.  A comparison of these data is provided in the table below.

China’s Trade Surplus with the United States, 1995 – 2003

By Source, in billion USD

China Data

U.S. Data

Divergence

1995

9.4

33.8

24.4

1996

11.3

39.4

28.1

1997

17.2

49.5

32.3

1998

21.8

56.9

35.1

1999

23.5

68.9

45.4

2000

30.9

84.2

53.3

2001

29.4

84.1

54.7

2002

44.1

104.2

60.1

2003

60.3

124.9

64.6

 

As shown, despite the significant understatement evident in the Chinese data, the reported surplus with theUnited States nonetheless increased more than six-fold from $9.4 billion in 1995 to $60.3 billion in 2003. The corresponding U.S. data show a nearly four-fold increase in the Chinese surplus over the same period, rising from $33.8 billion in 1995 to $124.9 billion in 2003.  In absolute dollar terms, the increase in the surplus over the period according to the Chinese data equaled $50.9 billion, which significantly trailed the increase according to the U.S. data, which equaled $91.1 billion.  As a result, the divergence between the two sets of data increased by more than $40 billion over the period, reaching a peak of $64.6 billion in 2003.

The discrepancy inherent in the Chinese government’s import and export data is not limited to trade with the United States. It is a phenomenon repeated with virtually all of China’s trading partners and is demonstrated by a comparison of China’s trade statistics with the corresponding data reported by the major trading partners accounting for the great bulk of China’s trade, by the following method:

For exports from China:

—                     The value of Chinese exports (f.o.b. basis), according to Chinese trade statistics

—                     The value of imports from China (f.o.b. basis), as reported by 43 partner countries

For imports into China:

—                     The value of Chinese imports (f.o.b. basis), according to Chinese trade statistics

—                     The value of exports to China (f.o.b. basis), as reported by 43 partner countries

The results of this exercise are similar, but on a correspondingly larger scale, to the results of the bilateral comparison of Chinese and U.S. trade statistics.  Overall, use of partner-country data shows that the Chinese government’s published data significantly understate exports from China

Fair Currency Alliance Brief No. 1/page three

to the world and overstate Chinese imports from the world.  Consequently, China’s balance-of-trade, according to the Chinese government’s data, is distorted from both sides, presenting an increasingly inaccurate and understated total for China’s global surplus.  As an additional check, the same partner-country data were compiled using the U.N. Comtrade Database. The results confirmed a large discrepancy in the Chinese data and are closely correlated with the Global Trade Atlas database.  See Table 3, the results of which are summarized as follows:

China’s Global Trade Surplus, 1999 – 2002

By Source, in billion USD

China Data

43 Partner Data

Percent Divergence

1999

37.7

140.4

272%

2000

35.4

171.6

385%

2001

35.3

170.3

382%

2002

45.1

189.9

319%

The large and growing trade surplus of China, as well as the large and growing discrepancy between China-reported exports and imports and their converse – trading-partner imports from and exports to China, respectively – is present whether the data are adjusted by five percent to approximate f.o.b. values or by ten percent, the deflator employed by the IMF.

Finally, the China-generated data remain grossly understated compared to partner-country converse data, even if the latter are adjusted to account for Hong Kong re-exports of goods originating on the Mainland.  This re-export trade – in which goods are exported from Mainland China to Hong Kong, then re-exported to the rest of the world – has been blamed as the source of much of the discrepancy between Chinese and partner-country trade figures. However, Hong Kong’s data that identify the value of total re-export trade – both Hong Kong’s exports to and imports from the Mainland – do not explain the data discrepancies, as shown below.


China’s Global Trade Surplus,

Adjusted for Hong Kong Re-Export Trade, 1999 – 2002

By Source, in billion USD

China Data

43 Partner Data

Percent Divergence

1999

37.7

119.6

217.0%

2000

35.4

148.8

320.0%

2001

35.3

152.5

332.0%

2002

45.1

175.8

290.0%

In sum, there is a large and growing difference between what China reports as its trade surplus with the world and what China’s forty-three largest trading partners report as China’s surplus in their own trade statistics when aggregated.  These China-world trade surpluses are becoming more pronounced and show consistent under-reporting by China no matter which one of several calculation methodologies is used.  China’s own export data are still grossly understated even if adjusted for so-called Hong Kong re-export trade.  Based on the selected

Fair Currency Alliance Brief No. 1/page four

trading partners’ data when adjusted for Hong Kong’s re-exports, China’s surplus has increased from $119.6 billion in 1999 to $175.8 billion in 2002, an astounding 47 percent increase over just three years. More importantly, the surplus was three to four times larger than that reported by China over the same period.  Notably, the under-reporting by China does not vary significantly when compared to the Chinese data as reported to the IMF.  See Table 5, comparing Tables 5A and 5D.

Not only is the Chinese government’s version of its balance-of-trade at significant odds with its trading partners’ data, but these discrepancies are worsening over time.  The most salient fact for this analysis is that the Chinese government’s balance in each year greatly understates its trade surplus with the rest of the world.

Finally, even when the trade surplus with the United States is set aside, the result is a lower worldwide surplus for China – but a large and growing surplus nonetheless.

China’s Global Trade Surplus (Excluding U.S. Trade), 1999 – 2002

By source, in billion USD

China Data

Partner Data

Divergence

1999

14.2

71.5

57.3

2000

4.5

87.3

82.8

2001

5.9

86.2

80.3

2002

1.0

85.6

84.6

These data show that China’s surplus with the rest of the world is growing right along with its even more significant and quickly rising surplus with the United States alone. 

As these discrepancies become larger, the fundamental utility of the Chinese government’s data becomes more and more open to question.  If the extent of China’s large and growing trade surplus were accurately reported, it might go a long way to account for the persistent but otherwise inexplicable “gaping hole” in the global balance-of-payment statistics as reported by the International Monetary Fund.  SeeRuskin, A., “A Truer Measure of China’s Trade Surplus,” The Financial Times, October 29, 2003.

Conclusions: A series of straightforward conclusions must be drawn from this comparison of China’s published foreign trade statistics with the corresponding data compiled by China’s trading partners:  (1) China’s data consistently and egregiously understate its balance-of-trade surplus with the world; (2) the understatements are becoming more pronounced over time; (3) China’s data are too unreliable to use as a basis for methodologies estimating undervaluation of the yuan or to evaluate whether China’s policies to support the yuan’s peg to the U.S. dollar constitute currency manipulation.

The preceding analysis illustrating the unreliability of the Chinese government’s trade statistics directly undercuts China’s claim that its large and growing trade surpluses with the United States are counter-balanced by trade deficits with the rest of the world.  Reliance upon the data showing the true level and trend of China’s worldwide trade surpluses leads to the conclusion that China’s huge and growing worldwide trade surpluses fulfill the requirements for an affirmative determination of currency manipulation.