Exports No Longer Drive China’s Growth

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I’m no economist, but I can recognize an inconsistency when I see one.

I had just finished reading Andy Rothman’s latest report in which Andy said that his full year GDP forecast of 9.5% for China assumes a “zero net export contribution,” when I came across an article that quoted Robert Zoellick, head of the World Bank, as saying that China needed to rebalance its export-driven economy. “It’s hard for me to see that a continued reliance on export-led and investment-led growth will work for China over the next 10 years,” Mr. Zoellick told journalists at the end of a five-day official visit to China.

In making his point, Mr. Zoellick warned that the global economy is heading into a new “danger zone” and that all countries, not just China, need to re-think their growth models. “I believe this autumn will be a sensitive time for many of the major developed countries,” Mr. Zoellick told reporters.

Andy’s conclusion is quite a bit different. He believes that China is better placed to ride out the global storm this time because net exports play a much smaller role in China’s economy today. In 2007, net exports accounted for 18 percent of 14.2 percent GDP growth, according to Andy, but in the first half of 2011, they contributed a negative 0.7 percent of 9.6 percent growth.

As MTD readers know, Andy Rothman is the China Macro Strategist for CLSA Asia-Pacific Markets and someone I look to regularly for common-sense, factual analyses of the Chinese economy. Mr. Zoellick may have an army of economists to support him at the World Bank, but I instinctively put greater trust in Andy’s conclusions because they always seem to be on the money.

Here are Andy’s main points:

• During the last global recession, China’s exports collapsed, from a 26 percent growth rate in 2007, to 17 percent in 2008 and a negative 16 percent in 2009.

• At the same time, fixed asset investment in the manufacturing sector slowed far less dramatically, from growth of 35 percent in 2007 to 31 percent in 2008 and 27 percent in 2009.

• The global financial crisis and the collapse of exports also did not have a dramatic impact on the growth rate of retail sales of consumer goods in China, which hovered around 20 percent in 2007, 2008 and 2009. (I found particularly interesting a chart in Andy’s report that showed that consumer spending in China is growing at 20 percent plus per year today, compared to just 10 percent in 1998.)

According to Andy, the main reason why exports play such a small role is that most of China’s exports contain very little value that is added in China. To demonstrate, Andy cited a study of the iPad value chain conducted by the Personal Computing Industry Center of the University of California.

Some excerpts from the study include:

• In the case of the iPad, Apple keeps about 30% of the sales price of its low-end $499 16GB, Wi-Fi only model, and more if the unit is sold through Apple’s retail outlets or online store.

• The next biggest beneficiaries are Korean companies such as LG and Samsung, who provide the display and memory chips, and whose gross profits account for 5 percent and 7 percent, respectively, of the sales price for the iPhone and iPad.

• U.S., Japanese and Taiwan suppliers capture 1-2 percent each. But overall, the story remains the same, with Apple’s success benefiting its shareholders, workers, and the U.S. economy more generally.

• It is a common misconception that China, where the iPad is assembled, receives a large share of money paid for electronics goods. That is not true of any name-brand products from U.S. firms that we’ve studied.

• This study also confirms our earlier finding that trade statistics can mislead as much as inform. Earlier we found that for every $299 iPod sold in the U.S., the U.S. trade deficit with China increased by about $150. For the iPhone and the iPad, the increase is about $229 and $275, respectively. Yet the value captured from these products through assembly in China is around $10.

Andy also cited a study by the San Francisco branch of the Federal Reserve System that analyzed the U.S. content of “Made in China” and concluded that goods and services from China accounted for only 2.7 percent of personal consumption expenditures in the United States in 2010. Of that amount, less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label.

If Andy is right, and the facts certainly seem to be on his side, then someone should inform the World Bank, as well as those who tend to blame China for all that ails the American economy.

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