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Much of
the analysis of
China’s
bloated trade surplus focuses on exports when it’s the
imports that deserve greater scrutiny.
In the
first eight months of this year, China’s exports grew 28
percent. That’s less than the annual export growth of 35
percent recorded in both 2003 and 2004.
More
importantly, the 20-percent increase in imports so far
this year pales in comparison with the 36-percent
expansion in 2004 and the 40-percent surge in 2003.
Slower
import growth, according to Louis Kuijs, a World Bank
economist in Beijing, is a key reason why China’s trade
surplus is spiraling out of control, creating an
avalanche of domestic liquidity that’s fueling inflation
and asset bubbles.
So what
explains the slowdown in China’s import growth?
Chinese
imports have decoupled from exports since 2005 because
assembly lines in the country are increasingly
purchasing intermediate parts from local suppliers,
according to Li Cui, an economist at the International
Monetary Fund (IMF).
The
substitution of imports with locally produced components
has important implications for the rest of Asia, which
has become more and more reliant on Chinese factories to
tap final demand in the US, Europe and Japan.
According to the Asian Development Bank, more than 70
percent of the trade between China, Hong Kong,
Indonesia, South Korea, Malaysia, the Philippines,
Singapore, Taiwan and Thailand includes “intermediate
goods”—parts, components and semi-finished material.
These are then used to manufacture products that are
ultimately sold outside the continent. China is the
“driver” of this regional trade, even though only 6
percent of it is on account of final consumption on the
mainland.
Yuan
appreciation
This may
help explain why other Asian countries have mostly
avoided supporting US calls for a stronger yuan. The
region’s policymakers reckoned that if an appreciating
yuan led to a drop in China’s competitiveness in
industrialized markets, their nations would lose out as
suppliers of parts used in those exports.
That
calculation may now be under threat. If the cross-
border supply chain breaks down because of
China’s
import substitution, other Asian countries will struggle
to reach final consumers in rich nations.
“As
China begins to specialize in more parts of the
production chain, its imports of intermediate goods from
the region could start to fall,” the IMF’s Li says.
In such
a scenario, Asian policymakers, too, might join the
clamor for faster yuan appreciation.
In the
first eight months of this year, Singapore’s non-oil
exports to China grew 1 percent, slowing from 13 percent
in the same period in 2006 and 27 percent for all of
2005.
Processing trade
Almost
half of
China’s
foreign trade is of the so-called processing variety, in
which everything from mobile phones and laptop computers
to DVD players and plasma TVs are assembled in China
using parts imported from around the world.
As long
as the product is exported, the imported components are
exempt from customs duty. Most of the factories that are
engaged in this kind of trade are located in the more
affluent coastal regions and owned by international
investors.
Processing trade tends to complicate any analysis of
China’s exports and imports.
“Trade
statistics can mislead as much as inform,” concludes
Greg Linden, an economist at the
University of
California,
Berkeley. Along with two researchers from University of
California, Irvine, he has done a preliminary analysis
of who captures the value in Apple Inc.’s iPod music
player, which is assembled in
China.
‘A few
dollars’
“For
every $300 iPod sold in the US, the politically volatile
US trade deficit with China increased by about $150, the
factory cost,” notes
Linden’s
study. “Yet, the value added to the product through
assembly in China is probably a few dollars at most.”
This
could be changing now, and quite rapidly.
“With
the expansion of domestic supply, China is increasingly
shifting from simple assembly operations toward
operations that have greater scope for using domestic
inputs,” Li says.
According to his research, the value that’s added
locally in China’s processing export is now 40 percent.
In the mid-1990s, the figure ranged from 13 percent to
19 percent.
The
growing sophistication of Chinese exports is only to be
expected. What isn’t so obvious is why
China’s
own final consumer demand hasn’t grown quickly enough to
absorb more goods from the rest of Asia. Personal
consumption accounts for just 40 percent of China’s
gross domestic product. Raising this abysmally low rate
to South Korea’s level of 50 percent would create $250
billion of additional consumer demand a year.
Appropriate policies
This,
however, would require a major restructuring of China’s
export- and investment-driven economy, including a
substantial appreciation in the exchange rate. The
government also has to spend more on education and
health care, which are two of the biggest precautionary
motives behind the country’s high household-savings
rate.
Until
the authorities back their intention to achieve this
transition with appropriate policies,
China’s
import growth may continue to fall behind exports,
expanding the trade surplus and squeezing out
manufacturers in the rest of Asia. |
