Deep integration and vertical trade in ASEAN+3 region Chinese economy is now closely linked to its regional neighbors,

2. Deep integration and vertical trade in ASEAN+3 region Chinese economy is now closely linked to its regional neighbors,

and particularly with the ASEAN+3 countries. Nevertheless, the patterns of integration between the PRC and her neighboring countries vary substantially. China imports sophisticated capital goods and more advanced parts and components from Japan, Korea and Taiwan to be assembled in the export-oriented plants and export the final products to international markets, particularly the US and the European Union. he more advanced ASEAN-5 countries (hailand, Malaysia, Singapore, Indonesia and the Philippines) export less sophisticated parts and components mainly for making semiconductors and personal computers. Growing regional trade in parts and computers indicates stronger economic complementary or deeper economic integration and stronger vertical trade in this region. he imported products that are to be re-exported are exempted from import duties and over a half of China’s exports are produced by foreign owned or in joint venture with foreign partners. Because of these, a large part of and particularly with the ASEAN+3 countries. Nevertheless, the patterns of integration between the PRC and her neighboring countries vary substantially. China imports sophisticated capital goods and more advanced parts and components from Japan, Korea and Taiwan to be assembled in the export-oriented plants and export the final products to international markets, particularly the US and the European Union. he more advanced ASEAN-5 countries (hailand, Malaysia, Singapore, Indonesia and the Philippines) export less sophisticated parts and components mainly for making semiconductors and personal computers. Growing regional trade in parts and computers indicates stronger economic complementary or deeper economic integration and stronger vertical trade in this region. he imported products that are to be re-exported are exempted from import duties and over a half of China’s exports are produced by foreign owned or in joint venture with foreign partners. Because of these, a large part of

he less developed ASEAN countries of the Mekong sub-region selling unsustainable raw materials, food and resources-based products to the fast growing market of China. he broad-based industrial development in the PRC requires many different types of raw materials. Energy consumption is growing fast due to rapid industrialization, urbanization and motorization. Demand for food is rising fast due to rising consumer incomes, urbanization, and demographic changes including female participation rates.

Following its predecessors in East Asia and ASEAN regions, the PRC has adopted currency undervaluation as one of the key policy instruments of export-led development strategy. Exchange rate undervaluation is the most powerful policy instrument to promote export and raise productivity in emerging economies, including in the PRC. On domestic front, such a policy has been used to shift allocations of economic resources from non- traded sector of the economy with low productivity to more productive traded sector. Dani Rodrik (2010) estimates that resource reallocation because of the undervalued RMB has raised the PRC long-term growth rate by more than 2 percent. he authorities in the PRC have skillfully used the undervaluation of exchange rate policy in combination with other distorted policies and exploitation of natural endowments of the country to enhance its international competitiveness and raise productivity. he distorted policies include repressed financial system with directed lending, subsidized interest rated and low risks (Calomiris, 207), energy and electricity prices (Liu, 2010), disregards of the environment (Yiping and Tao, 2010). he PRC’s natural resources includes her abundant labor supply (Yao, 2010). On top of these, the authorities in the PRC also raise productive public investment in human capital and infrastructure contributing to productive capacity and improving the economy’s potential output in the long-run.

Undervaluation of RMB commands the world’s attention because the PRC is a much bigger country in size than that of Japan, Korea, Taiwan and other export-oriented East and South East Asian countries. he Undervaluation of RMB commands the world’s attention because the PRC is a much bigger country in size than that of Japan, Korea, Taiwan and other export-oriented East and South East Asian countries. he

At more than $2,5 trillions, the PRC’s external reserves is now the biggest in the world. he level of this reserve is much larger than that required on prudential justification such as import financing and servicing foreign obligations of the country. Like in other countries, the People’s Bank of China (PBC), the central bank, manages the liquid component of the reserves for foreign exchange management. he investment part of foreign exchange reserves is managed by an independent China Investment Company, Ltd, a state-owned Sovereign Wealth Fund, and placed in high-yield and less liquid portfolio investment overseas. Under the capital control, government has the monopoly right to invest abroad representing all economic agents.

Correcting undervaluation of the Renminbi (RBM) is one of essential policies for rebalancing economic growth of the world and this region.

he issue is not only relevant to the US and the PRC bilateral relations (Bergsten, 2010) but also to other countries as well. he manufacturing sector in many emerging economies, including ASEAN, cannot compete with low cost agriculture and manufactured products made in China. hey are the main victims of such a distorted exchange rate policy of the PRC.

Attracted by large the gap between economic growth and interest rate short-term capital is massively flowing from advanced economies and in emerging markets. To stem the capital inflows, many emerging economies adopt a combination of currency appreciation, reserve accumulation and various forms of capital controls. Exchange rate appreciation is detrimental to their exports and economic growth. hailand reinstated a 15 percent Attracted by large the gap between economic growth and interest rate short-term capital is massively flowing from advanced economies and in emerging markets. To stem the capital inflows, many emerging economies adopt a combination of currency appreciation, reserve accumulation and various forms of capital controls. Exchange rate appreciation is detrimental to their exports and economic growth. hailand reinstated a 15 percent