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Tuesday, September 03, 2002


Anyone with any doubt that China is one of the contributory factors (not the only one) in global deflation should not miss this post from Andy Xie:

Incremental export to GDP ratio was at 54% in the first half of 2002, which is more than twice as high as export to GDP ratio last year at 23%. This clearly demonstrates that China's economy is export-led. Export momentum is still quite good, growing by 27.6% in July. Cyclically, China's exports are at most two months away from peaking, mainly due to the base effect. How quickly they decelerate depends on global demand. Roughly one third of China's exports goes to the US. Another one third goes to Japan and Europe. The US market has undoubtedly led China's export growth this year, contributing about 40% of the total growth. The other sources of demand for Chinese goods must have had much to do with the recovery of trade with the US. While it is difficult to estimate this US multiplier on China's exports, my guesstimate would put it at 1.5%. This would make 60% of China's export growth attributable to US final demand.

In addition to the impact of the global trade cycle, global redistribution of production to China appears to have elevated China's export growth potential. China's exports grew by 13.1% on average during the 1980s and 16.7% between 1990-97. Growth slowed considerably to 9.8% between 1997-2001. However, during this period, China's exports went through significant restructuring. It is now positioned to becoming the leading electronics exporter, while retaining the lead in light manufacturing products.
Massive FDI inflow has made this transformation possible. European and Japanese manufacturers have been shifting production to China to survive declining prices. China's export growth through such FDI comes from replacing production elsewhere and isn't dependent on final demand in the global economy. Assuming that there isn't significant final demand growth outside of the US, the structural shift of production to China accounts for 40% of export growth this year.

The above guesstimates would put China's export growth at 7% per annum in a flat global economy. For every one-percentage point of growth in the global economy, China's export rate should increase by about two percentage points. If the global growth rate is between 3-3.5%, China's export could sustain 13-14% annual growth rate. China has entered a new export boom, in my view.
Source: Morgan Stanley Global Forum

In case this all seems incredibly complicated lets just get some things straight: (i) China's exports are growing at a faster rate than growth in GDP, (ii) 40% of the growth in China exports comes from the US, (iii) this accelerated growth is not coming from new demand in the US, but from restructuring existing demand, ie China's exports would grow even in a stationary world economy, and (iv) this restructuring is taking place because products originating in China are cheaper, ie the global impact is deflationary, pushing prices down.

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