Zhuhai and Why the Export Slump Won’t Doom China’s Economy

I have been staying in different locations every night, for the past few days. On Friday night, we slept in the night train that took us from Longyan to Guangzhou. We then took a bus ride to Zhuhai.

 

Zhuhai is a city I’m quite familiar with. We went shopping in the huge underground shopping area next to Gongbei checkpoint. Later in the evening, we went to a shopping centre in  Jita, which is a more affluent area in Zhuhai. Yesterday, It rained heavily from early morning till noon.

 

I am in Shenzhen now, staying in the usual hotel. While surfing the internet, below article caught my attention:

 
 
Why the Export Slump Won’t Doom China’s Economy
China’s exports contribute far less to GDP growth than many assume, with domestic spending and investment and knowledge gained from exports driving growth

By Anil K. Gupta and Haiyan Wang
http://www.businessweek.com/globalbiz/cont…0420_581968.htm
The role of exports as the driver of China’s economic growth is exaggerated. So is the fear that, as export growth slows, the country’s economy will come to a grinding halt. The numbers tell us the real story.

Measured on a top-line basis, China’s exports are indeed very large. World Bank figures put the 2007 numbers at $1.22 trillion, or about 37% of gross domestic product. Comparing raw data for GDP and exports, however, is like comparing apples and oranges. GDP refers to value added within the economy and not the sum of top-line revenues. According to data from the National Bureau of Statistics of China, 58% of China’s exports constitute so-called processing trade where components are imported into China and the final assembled product shipped out.

Take, for example, consumer electronic goods such as an iPod or an iPhone. These Apple (AAPL) devices are assembled in China, but the value added within China accounts for less than 10% of the export value. Aggregated across all exports, estimates of value added within China range from a low of 25% to a high of 50%. Our own discussions with senior officials at China’s Commerce Ministry suggest that their estimates are around 33%. In other words, even after two decades of explosive growth, in 2007 exports contributed about 12% of China’s GDP, or one-third of the top-line figure of 37%.
Unsustainable Growth Trend

China’s exports have indeed grown at a 25% annual rate, over twice the rate of growth in GDP. Since the value added by exports presently contributes about 12% to China’s GDP, this means that, in recent years, export growth has contributed about 3% of the 11%-13% growth rate in GDP. This is an important component. However, these numbers also show that about three-quarters of the growth rate in China’s GDP has come from domestic spending and domestic investment.

What about likely future trends? Simple back-of-the-envelope analysis tells us that, just as trees do not grow to the sky, the days of high growth rate in China’s exports are over. China’s exports currently account for about 10% of the world’s exports and are almost tied with Germany for the No. 1 position in the world. If these numbers continue to grow at their historic 25% rate (and world exports at their historic 10% rate), then by 2020 exports from China would account for almost 50% of the entire world’s exports. Such a situation is economically and politically impossible. For one thing, as China gets richer, its labor costs will increase, and the more labor-intensive processing trade will begin migrating to lower labor-cost countries such as India and Vietnam. For another, belief in free trade or not, other big economies will find it politically impossible to accept such a high level of dependence on imports from China.

The most likely scenario is that China’s exports will now grow at a much more modest 10% rate. To maintain their value-added contribution to GDP at current levels, the Chinese government will need to proactively push for an increase in the domestic value in its exports. This is where we can see part of the logic behind the government’s explicit focus in its 11th five-year plan, launched in 2006, to start building China’s future competitive advantage on science, technology, and innovation rather than just cost efficiency. Some of the key initiatives in this new thrust include an increase in the research and development-to-GDP ratio from about 1.3% in 2005 to 2.5% by 2020 and, for the first time, seriousness about enforcing laws regarding intellectual-property rights.

Some of the early evidence regarding a move up the value chain in China’s exports is already in. Its exports to India heavily comprise capital goods such as power plants and other infrastructure equipment, where much of the value in the products is added within China.

In terms of the role that exports have played in China’s growth so far, the more important contribution has come not from the size of value added to GDP, but from the knowledge China has gained as a result of exports. The large volume of processing trade has taught vast numbers of Chinese managers how to produce high-quality products for the world’s most demanding markets, how to build a responsive supply chain for customers located thousands of miles away, and how to efficiently manage production operations employing tens of thousands of workers at a single location. The spillover of this know-how into the rest of the economy has been one of the major factors in helping boost domestic productivity, the single biggest driver of China’s economic growth.

Anil K. Gupta is the Ralph J. Tyser Professor of Strategy at the Smith Business School of the University of Maryland. Haiyan Wang is managing partner of the China India Institute. Their book Getting China and India Right was released by John Wiley in February 2009.

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About kchew

an occasional culturalist
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