There is no question that China is affected by the global economy, and that the dramatic fall in exports in February is a sign of weak demand in the United States and Europe. But what does a year of soft exports mean for China’s economy and its chances for recovery in 2009?For the answer to this question, I turn, as I often do, to Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets, based in Shanghai. I have known Andy for many years and consider him to be one of the most insightful of the China economists. He combines thoughtful analysis with thorough, on the-ground research. In his latest Sinology report entitled Explaining Optimism, which is available only through CLSA, Andy analyzes the impact of exports on China’s economy.
He begins the discussion with a rhetorical question that he then answers:
Can China grow during a global recession? Yes, because China is a continental economy driven primarily by domestic investment and consumption. Exports are important, but much less so.
How can he make such a statement? Andy points out that about half of all Chinese exports are processed or assembled products where, on average, only 4 percent of the export price represents value created in China. Only that small share contributes to China’s GDP.
By way of illustration, he uses the example of the 30GB video iPod that went on sale in 2005 with a US retail price of $299.
When an iPod leaves China it has a factory cost of $150, but only 5% of that - - $7.50 - - was value created in China, as the high-value components were imported from other Asian countries and just snapped together in China. This is a key reason why economists use net exports (exports minus imports) rather than the gross value of exports to calculate GDP.
In recent years, according to Andy, net exports - - the part of trade that actually contributes to the Chinese economy - - has accounted for only 6 to 8 percent of the country’s GDP.
Andy concludes this portion of his report with a chart showing that the fluctuations in China’s GDP growth since 1990 are not highly correlated to changes in either export or net export growth. Changes in GDP over these years have instead been driven primarily by changes in domestic investment and consumption.
At the beginning of the annual session of China’s legislature last week, Premier Wen Jiabao expressed confidence that the government’s GDP growth target of 8 percent for 2009 would be achieved. At the same time, many independent economists have predicted 2009 growth rates for China as low as 5 percent; the International Monetary Fund has forecasted 6.7 percent; and the World Bank is at 7 percent.
Who will prove to be more right when all is said and done? If Andy’s analysis is correct, Premier Wen’s prediction will carry the day.
Let's hope that Andy - and Wen Jiabo - are right.