Export Bust

From Martyn…

Millions of quota-exceeding “Made in China” garments piled up at US and European customs have caused fractious meetings between Chinese trade representatives and their overseas counterparts recently. However, US and European trade representatives might take heart from a new research report by the National Development and Reform Commission which warns that China will soon struggle to maintain its booming export levels and a slowdown is forecast for either later this year or early next, from the unlinkable South China Morning Post:

“The fast growth in exports cannot be sustained and the turnaround could happen later this year or early next year,” China Securities Journal yesterday quoted the research report as saying.

The report suggested that the central government should “appropriately relax its control over credit and focus on readjusting supply [issues] to avoid the problem of overcapacity of production facilities as a result of excessive growth in investment”.

The report doesn�t specify how the government should ease control over credit and bank loans but some analysts claim that a recent small rise in lending growth may reflect a slight easing of credit by the banks under the guidance of the People’s Bank of China.

The reasons for the slowdown, according to the report, are a slackening in international demand combined with excessive growth in China’s production capacity that has taken the steam out of export performance:

“The phenomena of an obvious slowdown in foreign trade, continuous contraction in the growth of imports and the negative growth of utilised foreign direct investment all indicate that the momentum of export growth is diminishing,” it said. Since much of China’s export growth came from processing trade, a sustained slowdown in imports inevitably would hurt exports, the report said.

Chinese officials have said repeatedly that although the economy is still growing at more than 9 per cent this year, excessive retrenchments and a credit crunch could lead to a recession. The report warned of the need to guard against high investment growth in the power, coal and transport sectors, which could cause serious oversupply problems.

In 2003, concern about overheating in the steel, cement, aluminium and property sectors prompted the central government to introduce controls such as a tightening of requirements for obtaining bank loans and limits on the conversion of farmland for property development.

To date, China�s economy has benefited greatly from a formula of subsidized inputs, including raw materials and oil, huge amounts of FDI (Foreign Direct Investment) and tax benefits for exporters. This led to an export-driven economy and high levels of export-driven growth. This method was always unsustainable in the long run and now it looks about time for China to look for another formula for continued growth.

The Discussion: 14 Comments

China announced GDP growth of 9.5% in the second quarter of this year. Jake Van Der Kamp of the South China Morning Post did an interesting exercise whereby he stripped out the fixed asset investment figures from the GDP to see how the rest of China’s economy is doing. Note that fixed asset investments reached a record high of 50% of China’s GDP this year. According to Jake, without fixed asset investments, the stated GDP growth of 9.5% would drop to a tiny 0.06% – the rest of China’s economy is barely growing.

Another component of GDP is balance of foreign trade. China’s trade surplus from 2004-2005 amounts to 4.5% of GDP this year. If you take out the trade figures, you will get a “negative” GDP growth figure for China.

Without fixed asset investments and foreign trade, China’s economy would be “contracting”. Granted, there are some technical problems with Jake’s GDP adjustments but nevertheless what this tells you is despite the much talked about emergence of a great consumer market in China, the reality is China’s economy is exceptionally dependent on fixed asset investments (many of which, I suspect, are wasteful) and foreign exports. This makes China highly vulnerable to the global (especially the US) economic cycle. Economist Brad Setser made the following observations about China:

“Indeed, I increasingly think China’s dependence on exports is a sign of weakness, not of a sign of strength. Chinese domestic demand is not growing fast enough to match the increase in China’s production capacity. Politically, it is unrealistic for China to expect to rely on exports to solve its domestic problems – whether deflation or a lack of domestic demand. And as exports rise toward unheard of levels for a major, continental scaled economy, China increasingly is exposed to the global business cycle. And its dependence on the US – a country that cannot afford to buy all the products it currently buys from China without a huge, subsidized credit line from the Chinese government – is equally unhealthy, and is a major risk to China.”

“China’s economy looks even more unbalanced than the US economy, with far too much savings (and too little consumption) and far too much reliance on exports.”

While the US undersaves, overconsumes, and imports too much resulting in a trade deficit, China oversaves, underconsumes, and exports excessively leading to a trade surplus. The US and Chinese economies are inextricably linked and any adjustments of the imbalances in these two economies will be felt by both countries, and the rest of the world.

September 3, 2005 @ 3:18 am | Comment

Nice post.

China’s economic development has mainly been made up of cheating gullible foreigners out of their money and technology in return for a bite of the mythical ‘China market’ and allowing foreigners to go to China and manufacture things while paying the workers peanuts.

I’m not surprised therefore to hear that the economy is unsustainable like it is.’

China will fall flat on its face one of these days as the nifty economic footwork will eventually cause China to trip over its own shoes.

September 3, 2005 @ 7:37 am | Comment

So Chinese exports will drop off? I can’t see that myself. China has established itself as the factory of the world. I mean, what other role can it play with its inexhausable supply of cheap labor?

I have enjojyed the recent posts about the Chinese oil crisis on this site. That’s how I first came here because I followed the link from instapundit.

Please keep up with the good work!

September 3, 2005 @ 10:13 am | Comment

What else can China do economically than produce low-cost products by the million? Cheap plastic toys, Xmas tree decorations, socks, underpants, knickers, shoes?

Everyone in the world is able to buy cheap Chinese goods. The rich countries beneift enormously from the Wal-Marts of this world. Please don’t tell me that I have to pay over US$50 for a new TV?

September 3, 2005 @ 11:22 am | Comment

Rick & Ron,
You guys obviously know nothing about China or the Chinese. I live in Cupertino and work in Santa Clara (Silicon Valley) as an enginner for a well-known company. My group work with enginners in Shanghai on a daily basis, and probably a third of enginners in my company (of a total of 80,000 employees worldwide) here in the Silicon Valley comprises of ethnic Chinese (and probably 2/3 of that are mainlanders who came for enginnering graduate school). Through my enconuters with the Chinese enginners, I can tell you that they are very smart and capable. What you are talking about (low-cost products) was true 15 years ago, but no longer apply today. I’ve seen some of the best hardware and software designs coming out of China in recent years.

September 3, 2005 @ 6:36 pm | Comment

Thanks PC, it’s always good to meet another Jake Van Der Kamp fan. Yes, when he does turn his attention to China’s economy his articles are usually superb.

PC referred to a recent JVDK article which said that without China’s ridiculously high level of fixed asset investments, the stated GDP growth of 9.5% would drop to a tiny 0.06%. MEaning that China’s “booming economy” is almost totally reliant on fixed asset investment.

The article – in full – was reproduced at Simonworld. It’s well worth reading and probably isn’t avaiable anywhere else on the www,unless you subscribe to the SCMP.

September 4, 2005 @ 1:54 am | Comment


To address your points and those you provided from Brad Setser, I’m in total agreement. I also subscribe to the same school of thought.

Also, you’re spot on to say that many of China’s fixed asset investment projects are wasteful—they’re also the corruption heavyweights of China’s corruption problem.

Re China’s dangerous over-reliance on exports and, in turn, the US/European economic cycles, yes, this is one reason why China will never “cash-in” its US DLollar Forex reserves and T-Bills and therby weaken the US economy which so many “China Threat” people often remind us. China would be totally shooting itslef in the foot if it weakened the currency, and therefore buying power, of it’s No. 1 customer.

I see you have you own site PC, I’ll check it out today to see if you write much about China.

Thanks for the great comment. Much appreciated.

September 4, 2005 @ 2:12 am | Comment

Asian blogs 8: Peking Duck

The eighth addition to my Asian blogroll is The Peking Duck, another multi-author China weblog. Lately it has had plenty of posts of interest to econobloggers, including China’s Forex Piggybank, China’s Looming Oil Crisis and the looming Export Bust.

September 4, 2005 @ 5:16 am | Comment

Congratulations Martyn! Your China economy posts have just earned The Peking Duck a place on The New Economist blogroll.

September 4, 2005 @ 6:29 am | Comment

Heh, I just came over to this site from The New Economist as well. Nice economic posts martyn, keep up the good work.

What other China blogs cover the economy?

September 4, 2005 @ 7:32 am | Comment

Thanks for the simon world link above martin. That’s a hell of an interesting article by the South china Post.

September 4, 2005 @ 2:21 pm | Comment

To the commentator who wrote:
“Rick & Ron,
You guys obviously know nothing about China or the Chinese….”
Actually, I’ve got a feeling that they might know an awful lot about China and the Chinese. But the important thing to remember here is many different things can be true at the same time in China.
Most Chinese companies are still eager to manufacture cheap goods for sale overseas. And they’re not just focusing on the US and EU, but the whole world. I’ve got friends who’ve just come back from sales trips to Moscow, Dubai, Korea, Japan, India and Brazil.
There are companies here which cannot see anything beyond manufacturing cheap goods for export. There are companies here which focus solely on stealing trade secrets and copying them. And there are also companies here which are focusing on developing their own products and becoming world leaders in their own right.
I think that the people you are working with belong to the final group, and it’s a small, but fast-growing group.
I think that the people that Ron is complaining about belong to the second group.
You’ve both got valid points, but you’re just experiencing different sides of China.

September 5, 2005 @ 1:29 am | Comment

That’s right. China is a group of mis-matched regional economies with a thousand, ten thousand differences. It’s impossible to talk about “China” or the “Chinese economy” as there are simply far too many integral parts to it.

Wise words dishuiguanyin.

September 5, 2005 @ 6:10 am | Comment

This post is actually very interesting and quite similar to a recent post on my blog: http://badbot.blogspot.com

September 13, 2005 @ 6:47 am | Comment

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