An old Chinese myth--Contrary to pop. wisdom, China's rapid growth isn't hugely dependent on exports

Contrary to popular wisdom, China's rapid growth is not hugely dependent on exports

MOST people suppose that China's economic success depends on exporting cheap goods to the rich world. If so, its growth would be seriously dented by a stuttering American economy. Headline figures show that China's exports surged from 20% of GDP in 2001 to almost 40% in 2007, which seems to suggest not only that exports are the main driver of growth, but also that China's economy would be hit much harder by an American downturn than it was during the previous recession in 2001. If exports are measured correctly, however, they account for a surprisingly modest share of China's economic growth.

The headline ratio of exports to GDP is very misleading. It compares apples and oranges: exports are measured as gross revenue while GDP is measured in value-added terms. Jonathan Anderson, an economist at UBS, a bank, has tried to estimate exports in value-added terms by stripping out imported components, and then converting the remaining domestic content into value-added terms by subtracting inputs purchased from other domestic sectors. At first glance, that second step seems odd: surely the materials which exporters buy from the rest of the economy should be included in any assessment of the importance of exports? But if purchases of domestic inputs were left in for exporters, the same thing would need to be done for all other sectors. That would make the denominator for the export ratio much bigger than GDP.

Once these adjustments are made, Mr Anderson reckons that the "true" export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore (which on January 2nd reported an unexpected contraction in GDP in the fourth quarter of 2007, thanks in part to weakness in export markets). Indeed, China's economic performance during the global IT slump in 2001 showed that a collapse in exports is not the end of the world. The annual rate of growth in its exports fell by a massive 35 percentage points from peak to trough during 2000-01, yet China's overall GDP growth slowed by less than one percentage point. Employment figures also confirm that exports' share of the economy is relatively small. Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.

Even if the true export share of GDP is smaller than generally believed, surely the dramatic increase in China's exports implies that they are contributing a rising share of GDP growth? Mr Anderson's work again counsels caution. Although the headline exports-to-GDP ratio has almost doubled since 2000, the value-added share of exports in GDP has been surprisingly stable over the same period (see left-hand chart). This is explained by China's shift from exports with a high domestic content, such as toys, to new export sectors that use more imported components. Electronic products accounted for 42% of total manufactured exports in 2006, for example, up from 18% in 1995. But the domestic content of electronics is only a third to a half that of traditional light-manufacturing sectors. So in value-added terms exports have risen by far less than gross export revenues have.

Many of China's foreign critics remain sceptical. They argue that China's massive current-account surplus (estimated at 11% of GDP in 2007) proves that it produces far more than it consumes and relies on foreign demand to buy the excess. In the six years to 2004, net exports (ie, exports minus imports) accounted for only 5% of China's GDP growth; 95% came from domestic demand. But since 2005, net exports have contributed more than 20% of growth (see right-hand chart).

This is due not to faster export growth, however, but to a sharp slowdown in imports. And even if the contribution from net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand. The boost from net exports is in any case unlikely to vanish, even if America does sink into recession, because exports to other emerging economies, where demand is more robust, are bigger than those to America. According to Standard Chartered Bank, Asia and the Middle East accounted for more than 40% of China's export growth in the first ten months of 2007, North America for less than 10%.

Multiplier effects China's economy is driven not by exports but by investment, which accounts for over 40% of GDP. This raises an additional concern: that weaker exports could lead to a sharp drop in investment because exporters would need to add less capacity. But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production. Adding in the capital spending of local firms that produce inputs sold to exporters, he reckons that a still-modest 14% of investment is dependent on exports. Total investment is unlikely to collapse while investment in infrastructure and residential construction remains firm.

An American downturn will cause China's economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China's growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing's worries about the economy overheating, it would be welcome.

The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America's total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China's growth than it is of America's.

“and they only make a relatively small markup on assembling the parts, producing that laptop doesn’t contribute as much to their economy as you might think.”

This type of propaganda makes me puke - and to think that much of this is State Dept generated is very discouraging.

Do you know how many manufacturing facilities in this country have been put out of business by product wholly made in China?

They are Counterfieting GM cars, ferraris, Caterpillar engines, specialty gearboxes, multi million dollar extrusion lines,...you name it.

This article glosses over the magnitude but you get the idea.
http://usinfo.state.gov/ei/Archive/2006/Mar/14-403976.html

You must be joking - here are the facts - and what part of “The Chinese now have $1 Tillion in reserves to buy anything and everything American.................
..............................
On our recent trip to China, we were astonished to hear one top official at the Chinese Ministry of Commerce insist that piracy is “negligible.” Just walk down the street in Beijing and you will be offered pirated CDs. Entire shopping malls are devoted to knock-off goods.

From every measurement, other than those of some Chinese government officials, violations of intellectual property rights are rampant. The Business Software Alliance and the U.S. Trade Representative’s office in Washington say that more than 90 percent of the business software in use in China is unlicensed. Just imagine what a subsidy for Chinese business that entails—free software! Nearly 100 percent of the DVDs available in China are pirated.

But the problem does not stop there. The Commission heard testimony this year about the diversification and increasing sophistication of Chinese counterfeiting. Chinese counterfeiters are, for example, fashioning auto parts, including brake pads made out of grass and wood, and selling those under American brand names, even exporting them to the United States. Counterfeit parts are being discovered in commercial airplanes and even in U.S. military vehicles and weapons.

There is growing evidence that pharmaceuticals sold on the Internet, purporting to be from Canada, are actually knock-offs coming from China, and their ingredients are sometimes bogus. The risk to the United States of rampant IPR violations is no longer just economic, serious as that is. They are now an increasing threat to the health and safety of American consumers.

Let’s turn to the trade deficit. At the time of the Tiananmen Square massacre in 1989, the U.S. trade deficit with China was $3 billion. In 1995, the U.S. bilateral deficit with China was about $20 billion. Ten years later, last year, it was ten times that amount, $202 billion. That meant that China accounted for 28 percent—the largest portion of any nation—of America’s 2005 trade deficit of $716.7 billion.
The problem is accelerating as the gap with China continues to grow dramatically. Last Thursday, the Commerce Department said the June trade deficit with China was $19.7 billion, up from $17.7 billion the month before. We sold $4.3 billion of stuff to China in June; China sold $24.1 billion of stuff to us.

Well, so what, some say. Why should this matter?

America’s overall trade deficit requires that we get foreigners to finance the difference between our exports and imports. Foreigners do so either by loaning us the money or by investing in the U.S. Or we can also pay for our deficit by selling American-owned properties held overseas.

So far this big debt run-up has not been painful. That’s because Beijing has decided to loan America the money and at pretty good rates, too.

Some time this year, in fact, China will have accumulated $1 trillion in foreign currency reserves—mainly dollar-denominated securities such as U.S. government and corporate bonds. China has accomplished this in part by buying up the dollars that enter the country to pay for China’s exported goods. The Chinese central bank then uses those dollars to buy U.S. bonds.

China does have rampant pirating of intellectual property. Most of Asia does. A large part of it is movies, music and computer software. However, a lot is also knock off clothes and fashion accessories.

It is much less common in computer components. Making CDs and DVDs is pretty simple. Making counterfeit clothing is also pretty simple. Making counterfeit ICs is a lot more difficult, and is likely to remain that way because IC fabs cost billions to build. The ones being built in CHina are joint operations with foreign companies (such as IBM) and production capacity is a gets allocated carefully, because there's pretty much always a shortage of something that fab could be making.

Your comments about counterfeiting are valid.

However, my comments we factual. Since you're calling them propaganda, I have to assume that either you didn't read what I wrote very carefully, or you simply have no clue of what you are talking about.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.