Highlights of this month’s edition: Bilateral trade: U.S.-China goods deficit reaches $251.8 billion through September on strength of imports from China; U.S.-China trade surplus in services hits record $6.81 billion in Q2, as U.S. exports grow and China services sector lags; The Fourth Plenum Decision: Government promises to improve fairness and accountability in the legal system, but the Party is not loosening grip on power; Bilateral policy issues: Renminbi “significantly undervalued” but Administration stops short of accusing China of currency cheating; United States requests China submit missing subsidies notifications to WTO; Quarterly review of China’s economy: Slowest GDP growth in over a decade; key indicators underperform (freight, real estate, consumption); exports strong but data unreliable; global investors in limbo as Shanghai-Hong Kong stock trading link missed projected start date amid ongoing protests in Hong Kong; Sector spotlight – Asian Infrastructure Investment Bank: The AIIB heralded as a much needed addition to address the region’s infrastructure funding shortfall; concerns remain on lending standards and its potential challenge to the World Bank and IMF. This edition of the monthly trade bulletin, originally released November 4, was revised on November 5 to highlight the United States’ record monthly goods deficit with China. The original version included an inaccurate subheading, which stated that the deficit was up but growing more slowly.

Key Points: Since its last overhaul in 1994, China’s flawed fiscal system has muddled through. Local debt, slowing revenue, and greater spending obligations are now spurring a new round of reform under President Xi Jinping; By eliminating the so-called “business tax,” Beijing is allowing services companies to enjoy the same tax deductions and rebates manufacturers do. The government may also establish a price-based tax on coal and a recurring tax on property; The government ultimately seeks to rebalance the economy. Fiscal reform could boost services, prevent housing bubbles, redistribute income, and reduce pollution. But it will be difficult to implement in China’s segmented economy and authoritarian system; The central government has a clear vision for improving budget flexibility and transparency. Yet it remains ambivalent about how to share revenue, spending responsibilities, and borrowing authority with local governments.

In May 2014, Alibaba, China’s leading e-commerce website, filed for a U.S.-based initial public offering (IPO) in what is expected to be one of the largest in U.S. history. The highly anticipated IPO will be just one in a recent wave of Chinese Internet companies launching IPOs in the United States. The trend has raised some misgivings among U.S. regulators about the corporate structures of these companies. To bypass Chinese government restrictions on foreign investment in the Internet sector, Chinese Internet companies use a complex and highly risky mechanism known as a Variable Interest Entity (VIE). An addendum was added to this paper on September 12, 2014.

Highlights of this month’s edition Bilateral trade: The U.S. June trade deficit in goods was the highest yet this year; although the U.S. surplus in services increased in the first quarter of 2014, the overall U.S. deficit is headed for another record; Bilateral policy issues: Latest S&ED sets a timeline for BIT negotiations, few other outcomes; WTO issues a mixed ruling in China’s challenge to U.S. countervailing duties; Ralls wins a limited legal victory in battle with CFIUS; Chinese investment in U.S. real estate jumps; Microsoft under investigation by Chinese antitrust authorities; Quarterly review of China’s economy: Momentum sustained despite housing slump; surge in exports and PMI; lack of rebalancing; corporate bond boom and new private banks; Beijing deepens ties with Latin America and co-establishes BRICS bank; and Sector spotlight – China’s meat industry: U.S. companies under fire in meat safety scandal; broader questions raised about China’s food regulation and discrimination against foreign companies.