Op/Ed Commentary: Chris Devonshire-Ellis
Jan. 13 – The news that China’s exports increased by 17.7 percent in December year-on year is impressive. So too, the statistic that China has now overtaken Germany as the world’s largest exporter. In turn, this has lead to commentary about the position of the RMB against other globally traded currencies such as the Euro and the U.S. dollar. However, in announcing that China has overtaken Germany, analysts have been jumping the gun – Germany has yet to release its own export figures for December. As in the news that in 2009 China overtook the United States as the world’s largest vehicle market make for interesting headlines, there is the matter of sustainability. Are these positions sustainable? Let’s examine both of these situations.
2009 China vehicle sales up 46.2 percent
This is an astonishing statistic. Yet under normal circumstances, would it have occurred? During 2009, China took the one off step of introducing a massive fiscal stimulus plan into the economy, and arranged for banks to make cheap loans available. Yet what should have been a planned, orderly program of fiscal initiatives to provide long term, sustainable growth appears to have turned into a spending spree of unimaginable proportions. China, in many ways, has spent money that would have better been allocated to sustained development projects such as education, high tech industries, and infrastructure development, has instead allowed citizens in the more well off cities to splurge on cars, houses and invest in the stock market. Vehicle ownership went up by 13.6 million last year, primarily the reasonably well off. House prices are at record highs, while the stock markets, dominated by China’s own state owned enterprises, are also at record highs. I question whether this is sustainable development.
In terms of overtaking the United States as a vehicle market, the U.S. economy contracted and vehicle sales fell 21.2 percent. They also fell 9.3 percent in Japan, both figures on the back of the global downturn. Both economies however, will in time recover. China’s attempt to boost consumer spending by offering cheap credit and loans will merely have resulted in a massive market for second-hand cars and apartments sold at discounts five years hence. By 2012, I predict the used car market in China – now virtually non-existent – will become a major feature of most Chinese cities. China’s massive fiscal stimulus plan will spawn a huge second hand industry from used cars, old apartments, and possibly even penny or cheap stocks. Home repairs, do-it-yourself and all the normal businesses associated in the West, and currently notably absent in China, will begin to emerge. This may not be a bad thing – if prices for second hand goods and products are lower, it may well be a route through which China’s less well off can finally acquire property and transport.
In stating that China has overtaken Germany as the world’s number one exporter, it is prudent to look at exactly what this means, as there are exports, and there are re-exports to factor into the equation. In lumping both together, the picture can become blurred, as the actual value added between exports and re-exports varies significantly. Much of China’s exports are in the processing trade business, in other words, assembling component parts manufactured elsewhere. This is especially the case in China’s true economic powerhouse, Guangdong Province. For example, in terms of added value, it is famously known that a US$150 iPod shipped from China’s factories contains just US$4 of value added by China. Overall however, it is generally acknowledged by the U.S. International Trade Commission that added value of Chinese exports is about 50 percent. However, when compared with Germany, the value added is higher, at 70 per cent, according to the Organization of Economic Cooperation and Development. This means that while the total export value of China’s exports may now be higher than Germany’s, the actual added value may not be as great. And if one looks at the export figures in terms of contribution of added value, Germany adds up to US$690 billion for last year, while China equals US$600 billion. China accordingly has not overtaken Germany in terms of where it really matters – wealth and value generation.
China’s export boom
Also overlooked in the export equation when it comes to China figures is the matter of manipulation of taxes to encourage exports. Again, this is not a sustainable situation in the longer term. China needs tax revenues to pay for the extraordinary cost of continuing its development. Yet here is where the real truth lies: China’s export boom has come largely as a result of the huge incentives given by China’s export rebate program, speeding up repayments of VAT and widening the quantity of products that could be reclaimed. China has enhanced this by extending claim deadlines widened VAT scope to assist with R&D, extended VAT refunds to overseas contractors, abolished VAT altogether in certain construction situations, and increased refund rates.
The argument, when looking at China’s growth, is how much of this is truly sustainable. Massive fiscal handouts for vehicle and property purchases, a stock market that appears fed by loose cash rather than underlying fundamentals from its companies, and exports driven by massive tax incentives is going to be a tough act for China to keep up.
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