China's Extraordinary Export Boom
The
story of the expansion of China's exports is a remarkable one by any
standards. In 1978, China's exports were valued at around $20 billion,
and its rank among world exporters was 32nd. Since then, exports have
grown at an average annual rate of 30 per cent, such that in 2004 China
overtook Japan to become the world's third largest exporter, with exports
of nearly $600 billion.
In
2005, export growth has continued unabated, with even more breathtaking
increases recorded in the first quarter of this year. Exports grew by
more than 35 per cent compared to the same period last year, while import
growth slowed down to 15 per cent. As a result, the Chinese economy
posted a trade surplus of $16.6 billion, compared to an overall trade
deficit of $8.4 billion in the first quarter of 2004.
This
extraordinary growth has already given rise to backlash, especially
in the United States, where protectionist pressures and anti-Chinese
sentiments are on the rise. There have been calls for China to revalue
upwards its currency the yuan (or RenMinBi), which is currently pegged
at 8.28 per US dollar, not only from the US administration, but from
the OECD, the G-7, and the IMF.
What is the story behind this apparently unstoppable export growth?
Many observers have attributed this to the benefits of international
economic integration, which is why the Chinese economy is typically
cited as the great success story of globalisation. There is no doubt
that such integration has played an important role, but the point to
remember when analysing the Chinese experience is that this integration
has not been purely market-led, but has been closely monitored, regulated
and indeed controlled by the state.
This is clearly evident from a look at the external trade policy regimes
in China, which have gone through several major phases. For two decades
after Government Administration Council adopted the Interim Regulations
on Foreign Trade Management in 1950, China's trade was based on complete
state monopoly and dominated by trade with the former Soviet Union and
other Eastern European countries. From 1979, along with various internal
reforms especially related to the peasant contract system in agriculture,
there was some opening up of trade.
From 1979 to 1987, there was a process of delegating authority with
respect to foreign trade to lower levels and decentralising the highly
concentrated planning management system. National purchase and allocation
plans were replaced instructive plans with market regulation and implementing
import and export licenses and a quota system. The pattern of trade
was also diversified to include compensation trade, processing with
supplied materials, trade on commission basis, border trade, local trade,
small-deal trade, processing and assembling with imported materials,
processing for export, chartering and leasing trade.
Between 1988 and 1990, foreign trade subsidies were frozen and a contract
responsibility system in foreign trade was implemented. From 1991 to
1993, the foreign exchange mechanism was readjusted and a double-track
exchange rate was adopted. Foreign trade enterprises (still dominantly
State Owned Enterprises) were allowed to retain part of their foreign
exchange earnings, but all financial subsidies to them were stopped
and they were made to take on the responsibility for their own profits
and losses.
In 1994, the unification of the dual rates in foreign exchange and adopting
a unified floating exchange rate for Renminbi on the basis of market
need and supply effectively meant a substantial devaluation of the RenMinBi.
At the same time, the practice of allowing foreign trade enterprises
to retain part of their foreign exchange earnings was abolished. The
tax refund system for exports was implemented, and the range of import
and export quotas and licenses was substantially cut.
On July 1, 1994, the ''Foreign Trade Law'' was officially put into effect,
which stated that China practices a unified foreign trade system and,
while giving appropriate protection to domestic enterprises, adopts
such internationally conventional anti-dumping, anti-subsidy and guarantee
practices. Controls were lifted over more than 90 per cent of export
commodities, where market prices were to be dominant, and a bidding
system was introduced for some important export commodities.
The WTO Accession Agreement of 2002 marked a new phase of intensified
liberalisation of trade, with China making sweeping commitments to reduce
quota controls, tariffs and so on especially with respect to agricultural
products. Nevertheless, despite the apparent drastic trade reforms,
the Chinese government retains substantial control over trade through
two important levers.
First, nearly half of all exports are still accounted for by State Owned
Enterprises, although the share of foreign owned enterprises has been
increasing recently. Second, control over the banking system and the
ability to direct and regulate the allocation of credit has been the
most important instrument both of macroeconomic control and of direction
of investment and production, which has had direct effects on both exports
and imports. The recent deceleration in import growth, for example,
is a clear result of the controls on credit implemented by the Chinese
authorities on fears of overheating in the economy.
These various phases have also been associated with different degrees
of integration into the world economy, based on indicators like trade
dependence in GDP. The share of total trade (imports and exports) in
GDP rose in a stable fashion from 9 per cent in 1978 to 25 per cent
in 1989. In the 1990s, influenced by the dual impact of the RMB's devaluation
and the accelerated growth of GDP value counted in terms of RMB, China's
foreign trade dependence ratio experienced great fluctuations. From
2000, the rise in trade shares of GDP has been very rapid, going up
from 43.8 per cent in 2000 to 60 per cent in 2003 to 70 per cent in
2004.
Despite the past experience of major exporters of the 20th century like
Japan and South Korea, this experience is historically unique in its
rapidity and extent, since no other country has been through such a
massive increase in trade shares in such a short time. This can be attributed
to a number of special features of China's current trade, which is particularly
based on the globally integrated production which is a relatively new
feature of the world economy.
The proportion of processing trade is rather high in the makeup of China's
foreign trade, which accounts for high imports being associated with
high exports. Further, the Chinese expansion is still dominantly driven
by manufacturing, and the tertiary sector still accounts for only one-third
of GDP.
It is also true that China's GDP has probably to some extent been devalued
because of statistics reasons. The overall GDP value of the country
is lower than the summation of the production values of all regions,
which suggests that the aggregate GDP data could be underestimates.
The sums of the regional GDP values were 8.7, 9.7, 11.7 and 15.6 per
cent higher respectively than the overall GDP values in the years from
2000 to 2003. This would make the trade share of GDP appear to be higher
than it actually is.
This is the context in which the recent trends in China's trade have
to be viewed. Chart 1 shows the pattern of overall trade since 1994.
It is evident that both exports and imports have been rising rapidly,
but the trade surplus (on the right axis) has been relatively moderate
and indeed has declined from its peak of 1997. The perception of overvaluation
of the yuan is not justified from the point of the of the overall trade
balance, which is currently showing a surplus of only around $32 billion,
or only 2.3 per cent of GDP, which is hardly large by international
standards.
What is of greater interest is the pattern of recent trade. The conventional view is that it has been driven by export of textiles and clothing, after the withdrawal of MFA quotas and the entry of China in the WTO. But Table 1, which indicates the top ten categories of export, suggests that apparel or garments has been only one of the factors behind the big export push. Toys, which was the other great export success of the 1990s, is also relatively less important in recent exports, which have been dominantly driven by capital goods.
Table
1: Top ten exports of China |
|||||||||
Commodity
Description |
2003
($ mn) |
2004
($ mn) |
Per
cent change |
||||||
Electrical
machinery & equipment |
88,977.6 |
129,663.7 |
45.8 |
||||||
Power
generation equipment |
83,468.9 |
118,149.3 |
41.7 |
||||||
Apparel |
45,759.2 |
54,783.6 |
19.7 |
||||||
Iron
& steel |
12,864.8 |
25,216.4 |
96.0 |
||||||
Furniture
& bedding |
12,895.5 |
17,318.6 |
29.1 |
||||||
Optics
& medical equipment |
10,564.3 |
16,221.0 |
53.6 |
||||||
Footwear
& parts thereof |
12,955.0 |
15,203.2 |
17.4 |
||||||
Toys
& games |
13,279.9 |
15,089.2 |
13.6 |
||||||
| Mineral fuel & oil | 11,110.2 |
14,475.7 |
30.2 |
||||||
| Inorganic & organic chemicals | 10,734.8 |
13,937.6 |
29.8 |
||||||
This
indicates some shifts in trade pattern. Toys, clothing, furniture and
television sets have dominated Chinese exports for years, but now newer
products like portable electric lamps and even radio navigation equipment
are now being shipped in growing quantities to countries ranging from
Britain and Spain to Brazil and Indonesia. At the same time, China is
becoming a large exporter of industrial commodities like steel and chemicals,
importing fewer cars and less heavy machinery as Chinese companies and
multinationals manufacture more of these in China.
These changes are reflected in imports, which are again dominated by
capital goods rather than raw materials. Even though China became the
most significant marginal consumer in the world oil market in 2004,
oil imports are only the third largest element in the total import bill,
as Table 2 indicates.
Table
2: Top ten imports into China |
|||||||||
Commodity
Description |
2003 |
2004 |
%
change |
||||||
Electrical
machinery & equipment |
103,925.9 |
142,073.6 |
36.7 |
||||||
Power
generation equipment |
71,500.2 |
91,631.6 |
28.2 |
||||||
Mineral
fuel & oil |
29,272.5 |
48,036.6 |
64.2 |
||||||
Optical
& medical equipment |
25,137.5 |
40,154.9 |
59.8 |
||||||
Iron
& steel |
25,596.9 |
28,387.1 |
10.9 |
||||||
Plastics
& articles thereof |
21,032.6 |
28,060.1 |
33.4 |
||||||
Inorganic
& organic chemicals |
18,736.9 |
27,809.0 |
48.4 |
||||||
Ore,
slag, & ash |
7,171.9 |
17,292.7 |
141.0 |
||||||
| Vehicle & parts other than rail | 11,814.8 |
13,102.7 |
11.2 |
||||||
| Copper & articles thereof | 7,165.4 |
10,484.3 |
46.3 |
||||||
The
changes in the steel industry are perhaps the most illustrative of what
is going on. China has become the world's largest steel consumer, because
of its massive construction boom and investment in road infrastructure.
But Chinese steel production has risen even faster, as practically every
province has erected steel mills. So many of these mills produce steel
reinforcing bars, known in the industry as rebars and used in concrete
construction, that China has gone from a shortage of rebars to a glut,
and Chinese rebars are now being exported all over the world.
China became the largest foreign supplier last year of steel tubing
and casing for oil wells in the United States, another technologically
simple steel product that Chinese mills have mastered. Over all, China
remains a net importer of steel, but by a shrinking margin. In 2004,
steel imports fell 11.3 per cent, to $3.82 billion, while exports rose
389 per cent, to $2.62 billion.
These changes are also mirrored in the direction of trade, which has
shown less dependence upon the United States in very recent times, and
more concentration of Asia. This is reflected in Charts 3 and 4, showing
the destination of exports and the source of imports respectively in
2004.
This is part of a conscious policy of the Chinese government, to diversify
trade patterns and increase interaction not only within Asia (as exemplified
by the China-ASEAN deal of late last year) but also attempts to reach
out to Latin American and African countries.
All this indicates the hard-headed and practical nature of the Chinese
economic leadership, which has so far resisted the increasingly oppressive
calls for currency revaluation and tried alternative methods like an
export tax, which it has already imposed on garments exports. Clearly,
the Chinese trade strategy is one which involves far greater and more
consistent state intervention than almost any other country, and its
current expansion must be seen in that light.