The global media have been making a great song and dance about China’s latest trade figures, which were released on Sunday.
With December’s exports up a stunning 17.7 per cent compared with December 2008, news organisations lost no time in announcing that the mainland has now overtaken Germany as the world’s No 1 exporter.
Inevitably the reports have once again highlighted the role of the yuan’s exchange rate in supporting China’s export sector, prompting fresh calls for a speedy revaluation.
As usual, however, the picture is rather more nuanced than the headlines would lead you to believe.
That’s not to denigrate China’s export performance over recent months. As the first chart shows, the rebound in mainland shipments has been nothing short of remarkable, lifting China’s monthly exports almost back to the levels reached immediately before the 2008 implosion of Lehman Brothers.
But to proclaim China’s export ascendancy over Germany is a little premature. For one thing, Germany has yet to release its own export numbers for December.
This willingness to jump the gun recalls uncomfortable memories from four years ago. Then the international media announced that China’s economy had overtaken Britain’s during 2005, moving up into fourth place in the global league table - well over a month before Britain released its own figures.
Alas, when the data and their various revisions were all out, it emerged that Britain’s gross domestic product was still ahead of China’s, if only by a nose.
Still, that’s hardly the point. As the second chart shows, if China’s headline export figures did not overtake Germany in 2009, they undoubtedly will this year.
What’s less certain is whether the headline figures are particularly important.
According to the Organisation for Economic Co-operation and Development, about 18.6 per cent of Germany’s exports in 2005 consisted of re-exports of foreign-made goods. If that proportion has remained constant, then we can conclude that in terms of domestic exports, China overtook Germany as an exporter as long ago as 2006.
Except that, in any meaningful sense, it didn’t. That’s because a large proportion of China’s export business consists of processing trade: assembling components manufactured elsewhere. As a result, the value added by Chinese industry is relatively low. Famously, each US$150 iPod shipped from Chinese factories contains just US$4 of value added on the mainland.
That’s an extreme example. Overall, economists at the US International Trade Commission estimate the domestic value added of Chinese exports to be about 50 per cent.
In contrast, despite lots of talk about Germany becoming a bazaar economy that merely packages and markets goods manufactured in Eastern Europe, the value added in Germany’s domestic exports is much higher. According to the OECD, it’s about 70 per cent.
As a result, the contribution of local value added in domestic exports to Germany’s economy last year was about US$690 billion, whereas for China the figure was about US$600 billion. Germany, it seems, is still a bigger exporter than China where it actually matters.
This isn’t simply number juggling. The low proportion of domestic value added in the mainland’s exports means that changes in China’s exchange rate have only about half the impact on the export sector that the headline figures imply.
So the legions of China-bashers lining up to cite December’s export data as evidence that the mainland is competing unfairly in global markets by deliberately undervaluing its exchange rate are taking aim at the wrong target.
The roughly 3 per cent trade-weighted depreciation of the yuan over the course of last year barely helped mainland exporters at all.
Far more important, and a far greater contributor to China’s spectacular export rebound, was Beijing’s massive program of rebates of value-added tax on exported goods. But that hardly makes for eye-catching headlines.
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Don’t read too much into China’s export rebound
Tom Holland
12 January 2010
The global media have been making a great song and dance about China’s latest trade figures, which were released on Sunday.
With December’s exports up a stunning 17.7 per cent compared with December 2008, news organisations lost no time in announcing that the mainland has now overtaken Germany as the world’s No 1 exporter.
Inevitably the reports have once again highlighted the role of the yuan’s exchange rate in supporting China’s export sector, prompting fresh calls for a speedy revaluation.
As usual, however, the picture is rather more nuanced than the headlines would lead you to believe.
That’s not to denigrate China’s export performance over recent months. As the first chart shows, the rebound in mainland shipments has been nothing short of remarkable, lifting China’s monthly exports almost back to the levels reached immediately before the 2008 implosion of Lehman Brothers.
But to proclaim China’s export ascendancy over Germany is a little premature. For one thing, Germany has yet to release its own export numbers for December.
This willingness to jump the gun recalls uncomfortable memories from four years ago. Then the international media announced that China’s economy had overtaken Britain’s during 2005, moving up into fourth place in the global league table - well over a month before Britain released its own figures.
Alas, when the data and their various revisions were all out, it emerged that Britain’s gross domestic product was still ahead of China’s, if only by a nose.
Still, that’s hardly the point. As the second chart shows, if China’s headline export figures did not overtake Germany in 2009, they undoubtedly will this year.
What’s less certain is whether the headline figures are particularly important.
According to the Organisation for Economic Co-operation and Development, about 18.6 per cent of Germany’s exports in 2005 consisted of re-exports of foreign-made goods. If that proportion has remained constant, then we can conclude that in terms of domestic exports, China overtook Germany as an exporter as long ago as 2006.
Except that, in any meaningful sense, it didn’t. That’s because a large proportion of China’s export business consists of processing trade: assembling components manufactured elsewhere. As a result, the value added by Chinese industry is relatively low. Famously, each US$150 iPod shipped from Chinese factories contains just US$4 of value added on the mainland.
That’s an extreme example. Overall, economists at the US International Trade Commission estimate the domestic value added of Chinese exports to be about 50 per cent.
In contrast, despite lots of talk about Germany becoming a bazaar economy that merely packages and markets goods manufactured in Eastern Europe, the value added in Germany’s domestic exports is much higher. According to the OECD, it’s about 70 per cent.
As a result, the contribution of local value added in domestic exports to Germany’s economy last year was about US$690 billion, whereas for China the figure was about US$600 billion. Germany, it seems, is still a bigger exporter than China where it actually matters.
This isn’t simply number juggling. The low proportion of domestic value added in the mainland’s exports means that changes in China’s exchange rate have only about half the impact on the export sector that the headline figures imply.
So the legions of China-bashers lining up to cite December’s export data as evidence that the mainland is competing unfairly in global markets by deliberately undervaluing its exchange rate are taking aim at the wrong target.
The roughly 3 per cent trade-weighted depreciation of the yuan over the course of last year barely helped mainland exporters at all.
Far more important, and a far greater contributor to China’s spectacular export rebound, was Beijing’s massive program of rebates of value-added tax on exported goods. But that hardly makes for eye-catching headlines.
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