China's Changing Trade Sturcture04-11 17:06 Caijing
Since the global financial crisis, China’s trade structure has changed significantly:
1. The contribution of net exports to GDP growth has, on average, been negative, suggesting trade is no longer a major driver of growth;
2. As import growth now outpaces export growth, China’s trade surplus should continue to shrink;
3. For China’s exports, emerging markets are now more important than the G3; and
4. Ordinary trade has started to dominate the trade structure, though processing trade remains the main source of the trade surplus.
THE TURNING POINT
Trade’s share of China’s GDP has fallen from around 35% before the GFC to around 25% post the GFC with net exports now contributing, on average, negatively to GDP growth. As China has maintained a growth rate of more than 9%, domestic demand – particularly investment – is now seen as the driver of economic growth. Meanwhile the trade surplus has declined to around 2.1% of GDP in 2011, after a peak of around 7.6% of GDP in 2007, but it is still substantial in absolute value terms.
Despite this picture of moderating export growth and a trade surplus that is likely to narrow further this year to around USD120bn on the back of an uncertain global economy, we don’t expect declining export growth will drag down GDP growth sharply.
Since 2008, China’s import growth has outpaced export growth, and imports, in value terms, have been steadily catching up with exports. In value terms, exports have historically been 30% larger than imports, but in 2011 imports were nearly on par with exports (monthly average: Export: $158bn, imports: $145bn). If this continues, China will soon run a balanced trade account, and, in the not-too-distant future, will start to run trade deficits, though possibly a small current account surplus because of net earnings of investment income.
The EU is now China’s largest export destination, surpassing Japan. Imports from Japan have declined steadily over time while those from Latin America, Oceania, and Africa have seen the fastest growth, rising from less than 3% of the total imports to 6.9%, 5.1%, and 5.3%, respectively. In particular, imports from Latin America are expected to soon overtake imports from the US.
EMERGING MARKETS ACCOUNT FOR MORE THAN 50% OF CHINESE EXPORTS
China’s export market structure has changed rapidly in the last decade. The G3’s combined share of China’s exports has decreased from around 53% in 2001 to less than 44% in 2011: exports to the US have declined from over 20% to 17.1%; exports to Japan has halved from 16.9% to 7.8%; however exports to the EU increased from 15.4% to 18.7%.
Meanwhile, the emerging markets’ share of China’s exports has grown: the ASEAN economies have expanded from 7.0% to 9.0%, and are expected to grow in importance; Latin America has doubled from 2001 to 6.4% in 2011. China’s export growth to Latin America has also outpaced other regions, averaging 33% over the past decade, compared with overall export growth of around 23%.Going forward, as the developed nations continue to register sluggish growth, emerging markets will play a much greater role in China’s trade.
ORDINARY TRADE VERSUS PROCESSING TRADEProcessing trade continues to be the main source of China’s trade surplus. According to the General Administration of Customs, China’s trade profile had been dominated by processing-related imports and exports. This changed after 2008 when the total ordinary trade surpassed processing trade. In 2011, processing trade (imports and exports) only represented 36% of China’s total trade flow, though processing exports still accounted for about half of total exports. With a surge in ordinary imports after 2008 and generally stable processing imports, the former is now twice as large as the latter.
This trend indicates that Chinese imports are shifting rapidly from manufacturing materials to consumer products. As such, we think China’s future economic growth will start to exert a greater influence on the global economy. Meanwhile, Chinese ordinary trade deficit has grown progressively larger, suggesting this sector is the major source of the trade deficit. At this stage, processing trade still remains the single largest source of China’s trade surplus.
With the rising dominance of China’s ordinary trade, we have seen Chinese exports gradually move up the value-added ladder. For example, primary product exports and labour intensive exports, as a share of China’s total exports, have declined over time from 47.0% in 2002 to 36.5% in 2011, while manufacturing products, and machinery and equipments have increased by over 10% over the last ten years.
Further evidence can be found using the World Customs Organisation’s six-digit Harmonised System of International Trade. Here we find that in 2000 China exported 3678 product lines of over USD1 million, while the EU produced 4746. However, ten years later the gap narrowed significantly with China producing 4234 and the EU, 4772. This means that China has become more similar in its export products, suggesting its export products have been moving up quickly in technology contents.
LABOUR INTENSIVE SECTORS ARE LOOSING EXPORT COMPETITIVENESS
Since China’s 2005 currency reform, the RMB has appreciated by around 25%, and has gradually eroded China’s export competitiveness. On the flip side, a stronger RMB will also help China rebalance its external sector by increasing its domestic purchasing power and imports. Indeed, a comparison of the nominal effective exchange rate with the large ASEAN economies of Indonesia, Malaysia, the Philippines, and Thailand suggests that the trade-weighted RMB has been a strong currency in the region. Should this trend continue, and the RMB real effective exchange rate (REER) strengthens annually by 6-10%, China will achieve a trade balance by 2018.
China’s structural reform policy will probably accelerate this 2018 trade balance projection. The 12th Five Year Plan has set a target of an annual 13% minimum wage increase. While higher domestic wages will hurt labour intensive manufacturing, it will also boost domestic consumption. As noted in the 6 March Greater China Insight feature note “China’s Great Rebalancing” domestic imbalances are deteriorating and require urgent reforms. Currently, investment is still the major economic driver, representing 49% of GDP in 2011. With an appreciating currency and growing income, Chinese consumer demand is set to grow rapidly, and consumption will become a driving force for the economy.
We draw the following implications from the above analysis. First, as emerging markets now play a bigger role in China’s export markets and Chinese growth is mainly led by its domestic demand, China’s exports and Chinese growth will not fall sharply even with a soft external demand from developed economies. Second, as ordinary trade starts to dominate China’s trade, China’s trade surplus will likely decline further. However, this does not necessarily mean that the economy will slow down sharply. In fact, rising imports and increasing level of intra-industry trade with its trading partners suggest that Chinese demand will become more important to the rest of the world. Third, China’s trade competitiveness will be gradually eroded by its rising wages and appreciating currency. This means that the labour intensive exports will become less important in China’s exports and the export sector will have to move up the value-added chain. At least from the empirical evidence we looked at, China’s exports are moving towards the right directions.
Li-Gang Liu and Louis Lam
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