My Blog

April 30, 2008

The Shanghai stock market had a good day today – its last trading day before the May holiday and the very long four-day weekend.  The SSE Composite is up 4.84% and trading volume was up substantially too.  What seemed to propel the market today was a bunch of companies reporting good earnings, especially the banks – three of the Big Four reported very healthy first quarter earnings growth, perhaps a consequence of January’s huge jump in loans.  There are also more rumors about things the government might do to keep the market from falling.

Meanwhile it seems the fight over the currency is intensifying. Chinese Academy of Social Sciences economist Li Yang, formerly a member of the PBoC monetary policy committee and currently an advisor to the powerful NDRC, was reported by Market News International to have said in a lecture today that the government should stop allowing the RMB to appreciate because of the pain it is bringing to export companies.  He said that the RMB is currently at a “balanced level,” and elaborated: “One important factor to decide whether we're at a balanced level is that our companies are making losses on this appreciation. So we shouldn't move it any more.” 

I am not sure I understand his reasoning.  I have seen very little in the academic literature that suggests that a currency has reached an equilibrium level when some of its exporters are losing money.  I would have thought that any definition of equilibrium would have focused instead of the level of the trade surplus, the amount of central bank intervention, the growth rate of exports, or on any of a number of other factors that suggest that RMB is still not near an equilibrium level, but I suspect that Li’s argument actually has more to do with the terms of the debate within China than with economic reasoning.

There is a very deep, and reasonable I think, concern that a significant slowdown in the exporting sector might not be matched by a sufficiently large increase in domestic consumption in the short term, and so the result may be that China will not grow fast enough to absorb new entrants into the labor market.  If we see slower growth in fixed asset investment on top of that, the reduction in Chinese growth may be significant and may have adverse unemployment consequences – something the government does not want to have to deal with, especially right now.  I think there is a lot of pressure from exporters, provincial leaders and Ministry of Commerce officials to reduce the appreciation rate as a way of making life easier for Chinese exporters.  They are worried about its impact on growth, even though this probably reflects an excessive focus on the dollar – as has been pointed out many times, the RMB is not appreciating in general; it is only appreciating against the dollar.

By the way, and to support the argument that it is not the rising RMB that is hurting Chinese exporters, Gene Ma of ISI-CEBM sent me an interesting piece today.  In it his team argues that “he main driver behind China’s narrowing trade deficit is not slowing exports, but the changing terms of trade. In particular, prices of imports are rising much faster than exports.”  They also note that China’s export engine is moving northward.  “The share of the Pearl River Delta in total exports fell from 47% in 1995 to 30% today.  The share of the Yangtze River delta rose from 20% to 40%.”

What this suggests to me, as I have discussed often on this blog, is not so much that China’s exports are getting clobbered.  It suggests that China is evolving – very naturally I might add – so that its export performance is shifting as a consequence of development differentials across the country.  China itself is not losing out to other countries as much as exporters in the Pearl River Delta think.  China’s export competitiveness, instead, is shifting north.  If you keep your eyes to firmly focused on the performance of the southern exporters, it would be easy – but of course very mistaken – to conclude that something awful is happening to China’s export capability.  It isn’t.  Not yet, anyway.

I do think however that we may be seeing a gradual, and very positive, shift in the importance of exports to China.  I am currently reading a very interesting April 29, 2008, report by Credit Suisse called “China: the Beginning of the End of an Era.”  In the report the authors say:

We think the end of an era in terms of China’s mighty export industry has just begun. Current conditions will likely go beyond the cyclical slowdown caused by the US recession, in our view. After years of currency appreciation, wage increases, and material cost surges, we think the Chinese export sector has started to crack. The introduction of the Labor Contract Law this year is probably the straw that broke the camel’s back.

As part of their argument they note:

China’s private consumption is seemingly on the rise, led by service consumption and rural consumption. The “one-child generation” is emerging as an influential new force that may redefine Chinese consumer behavior. Our projections show China leapfrogging the US as the world’s largest consumer market before 2020.

If they are right, and their argument is certainly plausible, we may be at the beginning of a process of rebalancing the Chinese economy away from the export sector and towards the domestic market.  This is obviously a very healthy and necessary part of China’s long-term development, but it is worth noting that there is no reason to expect the process itself to be an easy one.  I have mentioned several times before on my blog how it took the very deep and painful crisis of 1798 to turn the US economy away from its dependence on exports towards a healthier domestic focus.  China’s refocus may also come with a difficult adjustment period.  Part of the reason for the fight over the appreciation of the RMB is, I suspect, the reluctance to pay the cost of this adjustment.

There is one fascinating piece of information that comes from the report that gives a sense of the scale of the demographic adjustment that China is undergoing: “Thirty-five years ago, for every one hundred people, representing new labor worldwide, thirty came from Chinese. Today, the number declines to thirteen and    is projected to be only three in thirty-five years.”  Wow!  This is a huge slowdown in the rate of growth of the working population – one of the inevitable consequences of the one-child policy.

One other thing worth noting that has nothing to do with trade: according to today’s China Daily a senior official from the NDRC, Xu Zhimin, director of the NDRC's economic operations department, said that the government will not increase the price of refined oil or electricity until inflation is brought under control.  The NDRC has reportedly wanted for a while to deregulate the price of energy and resources, but they are too worried about inflation to do so now.

Needless to say, if you believe the inflation problem is largely a problem of expectations, they may be right to postpone deregulation.  If you believe it is a monetary problem, however, freezing prices of electricity will only cause the momentary pressure to show up in other kinds of inflation.

P.S.  For those who read my blog directly, once again the firewall here in China seems to have gotten worse, making it very hard for me to participate in the “Comments” section.  Sorry for not responding to comments, although of course I do read them.

Comments (6) for "Exporters are complaining lo...

I tend to believe China's export is indeed slowing down as I have access to performance numbers of a big transportation company. The number I saw shows the growth of the company slowed from 10+% to below 5% since January, especially to US (negative growth), which is about one important pillar of China's exportation. By RedFive - 4/29/2008 11:13 PM

Just wanted to comment in general on the overall quality of your writing here. While I'm not particularly interested in the going-ons in China, I still find the reading to be interesting and entertaining. Keep up the good work. By Eddie - 4/29/2008 11:50 PM

By chance, do you have a link to that Credit Suisse article? I'd be very interested to read it. Regards By Brendan - 4/30/2008 1:27 AM

Thanks Eddie. No, Brendan, I don't have a link. I am on their email list. By Michael Pettis - 4/30/2008 2:57 PM

Off topic but I'm particularly interested in the impact of declining investment productivity due to chronic resource misallocation in China, which some economists now believe is down to the levels prevailing under Mao (over 5:1 investment to incremental GDP), I've written a bit about this on my blog http://deadcatsbouncing.blogspot.com/ but was wondering if you have written on this previously here or have any reliable stats? Very lucid and insightful blog by the way, keep it up! By Sean Maher - 4/30/2008 5:31 PM

The recent spate of comments by Li Yang, Zheng Jingping, and Zhu Hongren accurately reflect the current plans and outlook of those in power in China. They are afraid of the potential for a significant slowdown leading to high unemployment and will fight this in any way they can, including placing a halt/slowdown on RMB appreciation and relegating inflation concerns to the back burner. Whether or not their views conform to (or find acceptance in) classical Western economic models/thought is largely irrelevant in their eyes. The NDRC statement of April 29th readily admits that the government's highest priority is the "severe challenge to keep steady and sustained economic growth.'' The Chinese see the what is happening all around them, especially in Asia, and are rightly alarmed. The Korean Finance Ministry reported a 1st Q GDP growth of +0.7%, less than half the 1.6% growth since the 4thQ of last year and less than half of the average gain posted over the last TEN years. Final Consumption figures were down more than 75% yr-yr. Gross Domestic Income fell at the fastest pace in 8 years while their CPI has doubled since August 2007. Exports of Goods and Services were NEGATIVE -0.40% as compared to + 7.0% in the 4thQ. New Zealand reported that yr-yr growth rate of exports are collapsing: March 2008.......+3.7% Feb....................+30.1% Jan.....................+24.1% Dec 2007...........+25.0% Taiwan reported export growth to the U.S. fell by 43% in March as compared to February, while Industrial Production (which had been expected to post a yr-yr increase growth of +13.9% in March following February's 14.8%) instead came in much less than expected at 8.2% Singapore's Non-Oil Exports plummeted to a yr-yr contraction of -5.9%, a complete collapse from +6.2% yr-yr posted in February and the +6.5% in the 4thQ. Non-Oil Exports to the U.S. have collapsed into an accelerating deep deflationary spiral: March 2008............down -27.5% Feb.........................down -8.0% Jan..........................down -4.4% Dec 2007.................up +3.0% (btw, the Singapore dollar is looking very toppy and the chart appears eerily similar to the one preceeding the 1197-98 Asian Fx-Debt crisis.) Japan's exports to China hit their lowest levels since June 2005 while falling for the past seven consecutive months to the U.S., plunging by 11.0% yr-yr in March, almost double the February decline. Japan's exports to the EU and Asia significantly declined as well. Japanese Industrial Output plunged by - 3.1% as compared to February's growth rate of +5.1%; Shipments fell by 3.9% compared to February's growth of 5.8%; Inventories rose while Total Inventory-Sales Ratio soared by 6.7%. Job offers declined steeply in fourteen out of the 16 industries detailed. Japanese Retail Sales fell -2.3% for the month. Household spending fell -5.1% over the last two months. Singapore's Quarterly Monetary Outlook Statement blandly stated what all Asian countries fear: ...."Given the weakening external outlook, some moderate slowdown in growth momentum is likely to take place over the next two to three quarters. If there is a more widespread decline in global and regional activity, Singapore's GDP will be more significantly affected." Bottom line: the decoupling theme is getting whacked. China is scared. By KFischer - 4/30/2008 10:57 PM