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Macroreview: Crisis Tests Strength of China's Export Muscle

08-19 18:29 Caijing

China's exporters have suffered in the global downturn, but they've clung to import market share in major economies.

By Caijing chief economist Shen Minggao and economist He Yin

(Caijing.com.cn) Despite China's efforts to stabilize its export business, the country's trade surplus will continue to decline through the rest of 2009. World market demand remains weak.

But the recession is giving China an opportunity to pause and review the strengths as well as the weaknesses of the nation's export sector.

One strong point is that Chinese products are maintaining respectable market shares for imported goods in the world's major economies. At the same time, however, recent policy shifts may hurt exports in the long run by favoring state-owned enterprises over private business.

In the first seven months of this year, China's exports fell 22 percent year-on-year while imports declined 23.6 percent. The contribution of exports to gross domestic product growth turned negative this year, dragging down growth by 2.9 percentage points.
Less than 25 percent of China's exports are labor-intensive commodities such as leather products, paper goods, textiles, furniture, apparel and shoes. The remaining 75 percent of what's sold abroad are capital- or technology-intensive goods such as metal products, minerals, steel, iron, machinery, telecommunications equipment and transportation machinery.

The recession has had a greater effect on technology- and capital-intensive exports than on labor-intensive goods. The former fell 30 percent year-on-year in the first half of 2009, while labor-intensive exports declined at the fastest rate in the first two months of 2009 before improving to monthly declines of 10 percent between March and July 2009. 

Data show that China's technology- and capital-intensive exports have been more vulnerable to the recession for three reasons. First, the demand for technology- and capital-intensive products fell quickly due to the recession in developed economies. Demand for labor-intensive goods is less flexible than for capital-intensive goods.

Second, a large proportion of foreign direct investment in China has been concentrated in capital-intensive projects, such as machinery and telecommunications equipment manufacturing. When the recession hit foreign economies, foreign-funded firms withdrew investments from China.

For example, in the second half of 2008, South Korean-financed companies closed shop in northeast China and Taiwan-funded firms bid adieu to southeast China.

Finally, the vulnerability of technology- and capital-intensive exports becomes apparent when consumer incomes slip in hard times, turning shopper attention to cheaper, more labor-intensive products.

Although China's labor-intensive products are highly competitive on the world market, they are less likely to fuel export growth because they comprise a small portion of total exports. Any rebound for Chinese exports, therefore, will have to depend on the capital-intensive manufacturing sector.

The average price index for exports rose gradually and peaked in the first half of 2008. Then, in the fourth quarter, the price index plunged, falling 10 percent in June year-on-year. China's trade revenues are mainly determined by export quantities, as prices have been relatively flat. 

China's Portion

If China's market share of all goods imported by other countries remains unchanged through the current downturn, it will show that China's competitive edge has not been affected by the recession. Has this happened? Actually, China's market share fell slightly in 2008. But in recent months, it's been rising again.

Chinese-made products cornered 20 percent of Japan's imported goods market in 2003 and have remained at that level ever since. Similarly, the Chinese market share has reached 20 percent in Europe and the United States, and has been approaching 15 percent in India, Russia and Brazil.

Since November 2008, according to information compiled by CEIC Data Co. Ltd., China's exports to major developed economies have fallen. Shipments to the United States fell 36 percent year-on-year in May 2009, while exports to Japan declined 38 percent and the European Union imports were off 28 percent. However, Chinese-made products have been steadily winning larger shares of the import markets in those countries, mainly because so many exports to developed economies are low-end products or things consumers need even during a recession.

At the same time, however, China's shares of the import markets in emerging economies have fallen by wide margins during the recession, as Chinese goods are similar to products made in those countries. For example, the share of Chinese products among Russia's imports rose to 10 percent in 2008 from 5 percent in 2005, but the momentum vanished in the global slump, so that by May 2009, China's exports to Russia had fallen 43 percent year-on-year.

We feel 20 percent is the highest import share that Chinese products can expect in a foreign market. Once market share reaches that ceiling, it tends to stop growing. Thus, China should stabilize its market share in developed countries while expanding its share in developing countries.

Meanwhile, China's state-owned companies have enjoyed a larger share of the export business since the recession began. The proportion of the export business controlled by private companies sector has been shrinking.

This marks a reversal of fortunes. The share of the export sector controlled by state-owned companies had fallen to less than 30 percent in 2008 from more than 70 percent in 1995.

The main reason for this change is that China's monetary and fiscal policies since November 2008 have favored state-owned enterprises. But if these policies are not revised to provide more benefits for privately own companies, the current fall in exports will be hard to reverse. In fact, the decline may accelerate.

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