Thanks to China’s open-door policy, particularly the establishment of special export zones, its processing trade has grown rapidly. It now constitutes roughly half of China’s total trade.
Recent research into China’s processing trade confirmed that China’s processing exports account for more than half of its total exports. Even with the financial crisis in 2008, the proportion of China’s processing exports remained higher than 50 per cent, whereas processing imports declined to about 35 per cent. This indicates a gradual increase in value-adding activities associated with processing trade. In 2010 processing imports accounted for approximately 45 per cent of total imports, whereas processing exports accounted for approximately 55 per cent of total exports.
Besides ordinary trade, of the 18 other types of trade regime, processing with assembly and processing with intermediate inputs are the most important in China. Processing imports/exports with assembly account for roughly 7.12 per cent of China’s total imports/exports. Processing with imported materials accounts for more than 22 per cent of total imports and 39.8 per cent of total exports. Processing with assembly was prevalent in the 1980s, and processing with imported inputs became popular after 1990. This is indicative of China’s economic development, with it increasingly adding value to imports rather than simply processing raw materials.
There are two key differences between processing with assembly and processing with intermediate inputs.
First, processing with assembly does not require firms to pay for the raw materials. Chinese firms import embodied raw materials for free and then send the value-added products to the same firm in the country of origin. Firms engaged in processing with imported materials, on the other hand, are required to pay for the imported intermediate inputs. They import raw materials or intermediate inputs from abroad and then sell their valued-added products to the rest of the world.
Second, while processing with assembly is 100 per cent duty free, firms engaged in processing using imported inputs must pay import duties for those inputs first. After exporting their processed or final goods they can obtain a full duty rebate, but the requirement to pay duties is still a credit constraint because firms need to have sufficient cash flow to cover import duties.
The three ports with the largest share of processing imports are Shanghai, Shenzhen and Nanjing, comprising more than 55 per cent of China’s total processing imports. This confirms that most processing imports are located in Shanghai, Guangdong and Jiangsu. By contrast, the top three ports with the most ordinary imports — Shanghai, Qingdao and Tianjin — account for only 35 per cent of China’s total ordinary imports. This suggests that China’s processing imports are more concentrated than its ordinary imports.
The leading destinations for processing imports are different from the leading destinations for ordinary imports. One possible explanation is that ordinary imports include more final consumption goods, whereas processing imports include mostly intermediate goods.
The electrical machinery and transport equipment industry yields the largest volume of processing imports, accounting for approximately 40 per cent of China’s total. Four other industries — machinery and mechanical appliances, optical and photographic instruments, mineral fuels and oils, and plastic — account for another 30 per cent of China’s total processing imports.
Sea is the preferred transportation method for processing imports, accounting for 41 per cent of total volume. Air and truck freight account for 29.56 per cent and 27.42 per cent respectively. It may seem counterintuitive that the percentage of air shipment is higher than that of truck shipment because of the costs involved, but this is because these figures use the value of imports — rather than the quantity of goods — as a measurement. The average per-unit price of commodities sent by air shipment is usually higher than that for commodities sent by truck.
An interesting issue is the quality of processing imports. China imports raw materials from many trading partners. The top five countries that ship products of the highest quality for processing in China are Norway, France, Finland, Germany and the Netherlands. The United States ranks sixth. The next five countries are also in Europe. Meanwhile, the top five countries with the highest quality of ordinary imports are the Cayman Islands, Finland, Germany, Panama and Austria.
More than half of processing imports are attributable to foreign-invested enterprises. Another 17 per cent of processing imports are attributable to Sino–foreign joint ventures (either contractual or equity joint ventures). State-owned and private enterprises account for only a relatively small proportion (12.2 per cent and 10.2 per cent). This is quite a different situation to that of ordinary imports, where state-owned enterprises dominate.
The variety of inputs imported by Chinese firms has declined over time. This could reflect increased specialisation or an increased sourcing of domestically produced intermediate goods, or both. In any case, the processing trade remains a central pillar of the Chinese economy and will likely be so for quite some time.
Miaojie Yu is Associate Professor at the China Centre for Economic Research, Peking University.
Wei Tian is an Associate at the Department of Applied Economics, Peking University.
Miaojie Yu and Wei Tian’s research was presented at China Update 2012. The annual China Update conference is hosted by the China Economy Program in collaboration with the East Asia Forum at the ANU in July. This article is a digest of the authors’ chapter in Huw McKay and Ligang Song (eds), Rebalancing and Sustaining Growth in China (ANU E Press, 2012), available in pdf here. This book is the latest publication in the China Update Book Series, launched at the China Update conference every year.