China’s exports (by $billions)

Now You Know It – Now You Don’t

Kyle Spencer in his article in Seeking Alpha focuses on today’s “point of Western fear” of Asian business – Chinese exports. China’s rise to power has supposedly been its export sector:

In 2010, The New York Times ran an awe-stricken editorial praising the ability of China’s “resilient, low-cost manufacturers to keep selling abroad despite a slump in global consumer demand as a result of the financial crisis.” The Economist raved that Chinese factories “have made so much, so cheaply that they have curbed inflation in many of its trading partners.” The date given for China’s assumption of America’s throne depended on who you asked. Deutsche Bank predicted that China would become the world’s largest economy in 2040. HSBC said 2050. The World Bank said 2030. Goldman Sachs said 2020.

A survey conducted by Pew Research Center shows that the perception is that China has now surpassed the West is held by majorities in many Western nations, including:

  • 62% of Germans
  • 57% of English, French and Spanish.

However, only 29% of Chinese nationals believed that China was #1. Something doesn’t add up.

What Does “Made In China” Really Mean?

Spencer shows that the notion that China’s current growth is due to its export sector is false. The Chinese economy has not been ta primary beneficiary of its export growth, and, despite the growth of China’s export share, the actual contribution of exports to the Chinese GDP has barely risen.  Here’s why:

Today, “Made in China” doesn’t usually mean the product was actually manufactured there. Rather, it was only assembled in China.

The assembly of products like the iPhone in China accounts for a tiny fraction of the input cost, as shown below. No more than the $8 Foxconn charges to assemble the iPhone actually goes towards the Chinese GDP. Where does the rest go? To Taiwan, South Korea and Japan.

Retail Price Memory Chips Touch-sensitive display screen Wireless Chips Camera Total Cost of Materials Foxconn Assemblycosts
$599.00 ($199 w/2-year contract) $28.20 $37.00 $23.54 $17.60 $188.00 $8.00

Net Exports Fall

While the chart below shows Chinese exports as a percentage of GDP (red) towering over U.S. exports as a percentage of GDP, appearances can be deceiving.

Figure 1:

The export/GDP ratio greatly overstates the actual export share of China, for two reasons:

  1. China has been shifting from goods with a high content of domestically-sourced components toward a much larger percentage of imported components, which decreases the domestic share of export revenues.
  2. The export/GDP ratio calculation is inaccurate, and includes “rampant double counting.” Thus the increases noted do not actually correspond with an increasing export share.

A look at net exports provides a much different picture. Net exports have actually been negative over the past two years:

Figure 2:

The Figures Are Deceiving

Annual surveys show:

  • 45 million of the 228 million Chinese industrial employees work in the export sector.
  • But there are 795 million in the work force (out of a total population of 1.35 billion.)

The point: 45 million Chinese workers in companies that operate on small margins like Foxconn’s cannot possibly produce $1 out of every $3 in China (33%), as shown in Fig. 1 above.

In plain English, the chart (Figure 1) is deceiving. Figure 2 is a more accurate indicator of the export sector’s contribution to the national economy.

Spencer then pulls out this table from the China Statistical Yearbook, that “dispels any lingering faith we might have left in the Chinese export myth.” In 2010, trade contributed a mere 6.4% toward the Chinese GDP, while 52% of it came from investmemt

Fig. 3: Investment vs. Trade as a % of China’s GDP

Takeaways

In judging the health of the Chinese economy, disregard  he Chinese export/GDP ratio. Investment, not exports are what drive the Chinese economy. Measurements such as non-performing loans, rather than exports are a much better determining factor when gauging the health of the Chinese economy.

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