Growth breakdown Posted on 01/03/2008 10:01:04 AM PST by charles m
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.
Growth breakdown
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.
“China’s rapid growth isn’t hugely dependent on exports”
Propaganda alert!
China is the second largest exporter in the world having just surpassed the US (Germany is number 1)
I didn’t know the conservative Economist was propaganda. The Economist has always sided with caution and away from exaggeration.
Rather comprehensive “propaganda,” that includes a discussion of all the assumptions being made. Or is everything with which you disagree “propaganda?”
LOL- BS.
I wouldn’t go as far as to call the Economist “conservative,” in the American sense. But it certainly doesn’t “hide the ball,” as the above poster appears to suggest.
ZERO Exports in 2003???
So, they import a kilogram of iron, and make it into a box of nails that weighs about as much, considering the value addition on the part of the Chinese as comparatively low (i.e., slave labour), the box of nails would sell for slightly above the price of the raw materials themselves.
They use the "net exports" tag to hide the real value of exports. Make no mistake, China is very dependent on exports.
Define export? Does it include all services rendered as well? What domestically is growing their economy even in those areas that are internally consumed, foreign investments from firms like Boeing, GM, Cisco, IBM, McDonalds....... China’s economy is like S. Korea, Germany (post war), Japan (post war); an economy that bets on exports to grow industrially. Their domestic consumer does not have the “money” to buy a Lenovo laptop; he does not have the money to buy the products produced there.
If I give you only $100 a month to live on, you’ll spend it on water and food. If I give you another $100 you might try to get a tarp and some wood for a fire. If I give you yet another $100 you might even get a radio and some cloths. Most of China to this day is in poverty parts are even borderline starving. They do not have the means to afford the industrial nor the consumer goods and services produced there. Of their economy, much is involved with essentials that are domestically consumed. ***The industrial/technological component*** of their economy is INDEED driven by exports and only now beginning to become more accessible to their domestic consumer as some of the new financially wealthy Chinese can afford these products, such as Refrigerators (Something not common in MOST Chinese households even 10 years ago).
This is indeed propaganda because it’s a distortion of reality.
And regarding the misuse of the word "propaganda," is the Economist an arm of the Chinese government or otherwise vested in spreading false information about the regime? Words mean things.
I need to read this when I have more time
A decade before they brought over their first American company to manufacture there, they planned on eventually taking away our entire mfg base and eventually, once we were dependent, shutting us off cold.
They’ve been planning to destroy us for over fifty years.
“America doesn’t really count for much in the world anymore - heres why”
I know they have a chip on their collective shoulders what with their once hegemony of the world being reduced by America to a mere shadow of it’s former status, but you would think they could be honest about SOME things. I guess Ideology and desire are too powerful a combination for their wee economist brains.
“America doesn’t really count for much in the world anymore - heres why”
I know they have a chip on their collective shoulders what with their once hegemony of the world being reduced by America to a mere shadow of it’s former status, but you would think they could be honest about SOME things. I guess Ideology and desire are too powerful a combination for their wee economist brains.
That was sarcasm.
Anderson's analysis makes complete sense. Given a massive and poor population, China could arguably double it's economic growth by giving ever peasant a bicycle and an umbrella.
They use the "net exports" tag to hide the real value of exports. Make no mistake, China is very dependent on exports.
You just completely contradict yourself. Where did you study economics?
The example you gave demonstrates why China is NOT dependant on exports. Had they sorced the material domestically, then that would demonstrate a greater dependance on exports. Instead, they get it from Australia.
An old rule of economics-when things start going south, all you hear is good news. Thanks for posting, this may be a landmark piece in a couple of years. After whatever is brewing in the East breaks.
No conflict = no story.
Though unprofessional, that is the norm today.
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The definition of exports varies. Even our definition didn’t include services until some years ago. So major firms that employ tens of thousands of employees and are selling billions in services were not included (EDS, Perot Systems, IBM, HP etc).
Exports are made up of many different things, and the industrial/technological aspect of the Chinese economy is largely driven by exports as well as foreign investments such as GM, VW, Boeing etc.
What share of Lenovo’s market do you think is China, where they are made? http://www.lenovo.com/us/en
No the average Chinese person cannot afford a Lenovo laptop produced there. However, there are over a billion Chinese people and they do buy and sell a lot of things that are produced domestically. Since China doesn't produce a lot of the components that go into that Lenovo laptop, 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.
China makes money on high volumes with relatively low profit margins. The laptop that is assembled there may sell for $1000, but it doesn't contribute $1000 to their economy. It likely only contributes a small fraction of that $1000 to their economy. Meanwhile they have over a billion people who need things for domestic consumption.
Exports are a very significant part of the Chinese economy. Having to percent of an economy's growth being due to and increase in the net value of their exports is very significant, because the trickle down effects on the economy from that business tend to remain within the domestic economy and grow the domestic economy even more.
However, at the same time, it is a relatively small part of the overall economy, which means that China is less susceptible to economic troubles in the countries they export to than people might think.
It also means that a lot of money that people think we are pumping into China's economy is really being pumped into the economies of the countries that supply them with the components they assemble.
I have little doubt that China is working to change this, and is trying to build their own domestic capacity to build more of those components in China, and that is likely where they plan a lot of their future growth to come from. It doesn't mean we shouldn't worry about China. It just means we should understand where they are and where they are headed.
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