Overview of China’s Trade Performance after the Global Financial Crisis
The H-O Theorem (Kugman and Obstfield, 2006) concludes that the nation who has a comparative advantage in producing the good which intensively uses factors in which the country is relatively well endowed. It can apply widely in the current trading pattern in China and its developed market counterparts, as cheap labour is 代写留学生论文relatively abundant in China so we could always expect China to export manufacturing products to developed markets. However, this H-O model has its own limitation as its assumption of homogeneous factor of production, identical technology, perfect competition as well as no trade barriers and transport costs would impose a lot of challenges to the practical application of the model. However, the proven mathematical outcome of the H-O model, factor price equalisation theorem reckons that those low wage countries would tend to lead to exportation of labour intensive products therefore employment and wages will increase. This has been witnessed in recent development of Chinese trade performance after the global financial crisis.
More recent theories (Gross man and E. Helpman 1989, and Hausmann, Hwang and Rodrik, 2005) indicate that developing nations would tend to imitate those high technology products used to be produced by developed nations and recent speed that China restructured its export products and upgraded its variety of products have been witnessed. Gereffi (2005) reckons that industrial upgrading is an important process whereby each economic players, either nations, firms or workers, will migrate from low-value to relatively high value activities in the global production value chain. The control over trading activities as well as currency manipulation in contemporary China can also be found in the rise of East Asian miracles i.e. the success of Korea, Taiwan, Hong Kong and China whereby the markets and states played an important role in promoting export-oriented industrialization in these regions (Feenstra and Hamilton, 2006).
Post China’s economic reforms in 1978, international trade has formed a sizable portion of the country’s GDP. China’s exports, as a percentage of its GDP, rose consistently from 8% in 1982 to 38.4% in 2007, while its imports increased from 6.4% to 29.6% over the same period. The last time China recorded a trade deficit was way back in the late 1980s. Since then, China has been recording a trade surplus every year (except in 1993). Chart 1 given below shows the gap between China’s exports and imports (referred to as “Net Exports”), which began widening in the 1990s and reached a peak of 8.8% of the GDP in 2007.
Chart 1: Exports, Imports, as a percentage of GDP
Source: CEIC Database
The cheap labour compensation attributes a lot to China’s export success, along with its manually manipulated devaluation of its currency. The Chart 2 below shows that compensation (% of GDP) in some of China’s major provinces. Compensation of employees in Guangdong, a coastal province well known for its low-labour-cost manufacturing plants , declined from 55.6% in 1993 to 45.5% in 2000 and further to 38.8% in 2007.
Chart 2: Compensation of Employees in China & its Major Provinces (% of GDP)
Source: CEIC Database
The global financial crisis in 2008-2009 led to the growth in China’s exports moderating to 7.7% in 2008 and declining 17% in 2009, as against a strong growth of over 20% in each of the previous six years. Consequently, China’s net exports’ share declined from its peak of 8.8% of the nation’s GDP in 2007 to 3.8% in 2009. Prior to 2008, China’s low wages primarily drove the surge in the country’s low-cost exports. However, the declining share of China’s rural population and falling compensation of employees, as percentage of GDP, in the past decade, coupled with the labour unrest in 2010, has made it difficult for producers to continue benefiting from the region’s cheap labour, which could lead to an increase in the cost of Chinese labour, which could lead to an increase in the cost of Chinese products. Hence, though the decline in China’s net exports in the last two years (2008-2009) has been cyclical, there could be a structural decline in the next few years. This could be compensated by the increasing in its private consumption, as the authorities have been making efforts to slow down the investment-led growth that is being fuelled by credit.
Export Recovery in December 2009
A mile stone for China’s trade performance since its down time in Global Financial Crisis is in December 2008. China’s export growth returned to positive territory in December 2009, for the first time since October 2008, and its export rose 17.7% YoY, coming off from a low base (exports fell 2.8% a year earlier). Full year 2009 exports were down 16% YoY.
Imports rose 55.9% YoY, due both to the low base (-21.3%) and strong commodities demand due to skyrocketing housing starts and strong growth in public infrastructure construction. Full year 09 imports were down 11.2% YoY.
The Trade surplus of 2009 was US$ 196.1bn, down 34.2% YoY, bringing the total of $2.4 trillion in FX reserves as of the end of 2009 (Chinability 2010)
Export Tax Rebate and Back to Policy Normalisation in May 2010
Adjustment of the tax rebate policy marks the normalization of China’s export policies. China’s export has returned to the normal level with an increase of 50% YoY in May. In such a context, the export tax rebate policy was downgraded for the first time since July 2008, indicating China has taken a significant step forward in the /normalization of export policies.
In general, this adjustment is still relatively prudent. In comparison to the revocation of export tax rebate policy for 687 products and the downgrade of tax rebate rate for 1031 merchandises in July 2007, this adjustment merely revoked the export tax rebate policy for 406 merchandises, reflecting the Chinese government’s prudent attitude on adjustment of the export policies. This is also consistent with the Ministry of Commerce’s declaration at the press conference held earlier in June 2010 (MOFCOM, 2010)
The structural adjustment reflects the government’s strong determination to transform China’s economic growth pattern. This adjustment primarily revoked the export tax rebate for primary steel, non-ferrous metals, agricultural chemicals and rubber & glass products (all being products of the energy-guzzling, high-pollution and capital-intensive sectors), yet kept the tax rebate rate intact for export of the textiles, apparel and mechanical products. It should be pointed out that, this adjustment revoked the tax rebate policies for the major steel types exported by China[ including the hot-rolled, medium and heavy plate, cold-rolled coil with a thickness ≥3mm, cold/hot-rolled narrow strip and steel profiles]and lowered their tax rebate rate to 0 from 9%,.This reflects the government’s resolution to slash and adjust the backward steel capacity in the context of rising ore prices and increasing trade frictions.
Analysis of the Performance after De-pegging of RMB against USD
Beijing remains comfortable with its 2005 policy decision to allow gradual appreciation of the RMB against the US$. Implementation of this policy was suspended when exports collapsed and the world slowed. I think Beijing has been waiting for three things to happen before resuming gradual appreciation: strong economic recovery in China; stability in the US and European economies; and several months of Chinese export growth in positive territory, which is important to sell appreciation to the domestic audience. With the last element now in place, I expect gradual (5-7% annualized) appreciation to resume by mid-year.
Compared with the faltering economy in the US, China’s trade performance has performed fairly well since its official declaration of ending its nearly two years’ pegging with the US dollar in June 2010. The following chart displays the June data of China’s import and export activities.
Chart 1: Trade Performance
Jun-10 May-10 Apr-10 YTD
Trade Balance, US$ bn 20 19.5 1.7 55.3
Exports, US$ bn 137.4 131.8 119.9 705
YoY, % 43.9 48.5 30.5 35.2
MoM, SA,% 4.2 10.9 11.4 na
By destination, YoY, %
US 43.8 44.3 19.1 28.3
Japan 37.1 37.1 24.6 25.2
EU 43.2 49.7 28.5 36
ASEAN 42.2 48 42.6 45.4
Hong Kong 37.4 46.4 36.1 34.1
Korea 37.4 52.2 40.9 35.8
Taiwan 58.3 77.7 74.4 65.4
South Africa 74.8 66.3 42.6 49.4
Russia 83.3 91.6 62.8 59.2
Brazil 125 110.1 113.7 103.7
Imports, US$bn 117.4 112.2 118.2 650
YoY, % 34.1 48.3 49.7 52.7
MoM, SA, % 0.9 -0.9 6.9 na
By product, YoY, %
Hi Tech Products 33 50.2 41.7 45
Mechanical & Electrical Products 32.8 50 43.9 45.5
Unwrought Copper & Products 1.1 52.8 89.1 70.1
Steel Products 8.4 5.4 3.6 7.6
Plastics in Primary Forms 6.9 35.1 37.2 43.4
Crude Petroleum Oil 81.8 69.2 122.8 113.1
Iron Ore & Concentrates 75 70.1 39.8 53
Source: CEIC data
Export growth slid to +43.9% YoY from +48.5% YoY in May. Import growth decelerated to +34.1% YoY. The trade surplus widened marginally to US$20 bn. positive sequential growth suggests the headline weakness should come from the high base effect instead of the contraction in shipment.
It is found that traditionally China has a stronger trading relationship with Canada, Australia, the United States and several Latin American and East Asian emerging countries (Bussiere M. & Schnatz B. ,2006). This continues to be the story for 2010. In June 2010, export to Non-Japan Asia Softened. Defying concerns over EU debt crisis and potential contagion effect, shipments to the EU, US and Japan rose +5.2%, +5.8%, +7.1% MoM respectively in June. Hong Kong, the primary re-export port of China-made goods to EU and US, also saw MoM growth of +3.6%. Meanwhile, exports to Non-Asia EM economies remained robust. However, weakness was found in Non-Japan Asian economies, with Korea, Taiwan and ASEAN countries correcting 0.3%, 5.1% and 1.5% compared with previous month.
High base effect dragged down import growth of capital goods. Import growth of capital goods, machinery and hi-tech products, slowed to +32.8% and +33% YoY from +50% and +50.2% YoY in May. Defying domestic tightening and economic moderation, demand for raw materials remained strong with imports of iron ores and crude oil.
The continued robust export growth is in line with sovereign debt concerns in the Euro zone, are unlikely to be significant in the short run. In addition, since export tax rebates to more than four hundreds categories of export goods are to end on July 15, it is better not to rule out the possibility that some exporters have frontloaded 代写留学生论文shipments to catch the last export tax rebates. The new export order index under Mfg PMI has weakened sequentially for two consecutive months. Given that the new export index leads by two months, we expect the momentum of export growth to weaken from July. Moreover, the kick-in of the high base effect since June will continue to flatten year-over-year growth for the remainder of this year.
Conclusion
The strengthening trade surplus points to the need for Chinese authorities to allow continued Renminbi appreciation against the USD, given their pledge to allow market forces to determine the exchange rate. We expect the trade surplus to remain sizable in the next 6-12 months despite potential moderation in the growth rates of both exports and imports.
Appendix
Bussiere M. & Schnatz B. (2006), Evaluating China’s integration in world trade with a gravity model based benchmark, No. 693, November 2006,
Chinability. 2010. China’s foreign exchange reserves, 1977-2009. http://www.chinability.com/Reserves.htm
Feenstra, R.C. and G.H. Hamilton (2006). Emergent Economies, Divergent Paths." Economic Organization and International Trade in South Korea and Taiwan, Cambridge, United Kingdom: Cambridge University Press.
Gereffi, G. (2005). "The global economy: organization, governance, and development", pp. 160 182 in N.J. Smelser and R. Swedberg (eds.), The Handbook of Economic Sociology, second ed. Princeton, New Jersey: Princeton University Press and Russell Sage Foundation.
Grossman, G. and E. Helpman (1989). Product development and international trade. The Journal of Political Economy 97(6): 1261-1283.
Hausmann, R.J. Hwang and D. Rodrik (2005). “What you export matters” NBER Working paper 11905. National Bureau of Economic Research, Cambridge MA.
Ministry of Commerce Website (2010), http://english.mofcom.gov.cn/statistic/statistic.html
Krugman, P. and Obstfeld, M. (2006) International Economics Addison-Wesley Ch. 4