Is China Export-Led?

Monday, October 1, 2007 0:42

UBS Managing Director Jonathan Anderson recently released an excellent report entitled Is China Export-Led? that is a must read. It is one of those documents where everyone will learn something or have a myth busted

Part of their Asia focus, Jon and his team have 1-2 reports that come out each week, and this week they have decided tolook at one of the biggest myths (“The Granddaddy”) surrounding China and its development… that it is led by exports.

Peeling the layers of the onion off, Jon and his team structured the report to address the following issues (many of these issues are supported by their own reports) to understand the actual contribution of exports to China.. and more importantly what that means in terms of global exposure should something occur (US recession…)

Please note: as I am not a master or PhD in economics and as it has been 10 years since I have looked at an econ book, I would suggest you read the report yourself as what I am about to write may not fully reflect what UBS found… but here goes.

1) How “big” are China’s exports?

For anyone who has been to China, it is clear that exports have historically played a large role in the macroeconomic picture. The cities on the east coast have outgrown the cities in the west, central, and northeast, and that phenomenon has defined China. But counter to the thoughts of many, this report shows that China actually may not be as dependent on growth from exports.

In building this, the first thing the report does is address the statistics, and how looking at a pure export/ GDP ratio is not the best way to measure. After all, were that the true measure, then HK would have exported its economy twice over (exports/ GDP = 2 in HK).

So, to get to the real figure they:

we need to restate the headline export figure in valueadded terms, and this means two things: (i) stripping out the associated import content to find out how much of export revenue actually accrued to the domestic economy, and then (ii) converting that domestic content share into value-added terms by subtracting input purchases from other domestic sectors.

and what they found through their exercise (read report for to understand adjustments), they found that the 40% figure was reduced to under 10%.. a much different perspective

2) How fast is the share expanding?

Next, the team looked to answer the myth/ question:

So even if the “true” export share of current GDP is on smaller side, aren’t exports still contributing a disproportionate share to overall Chinese growth?

Again.. what they found was that the numbers didn’t support the myth.

Like determining the true contribution of exports to GDP, the traditional way that this expansion is being measure also has a bit of fluff in there (I am always fascinated by how the same stats can be read very differently).

As you can see, the estimated domestic content in traditional light manufacturing sectors is two to three times higher than for electronics, even after accounting for a trend increase in the latter figure over time. And this helps explain why the rise in the actual export share of the economy has been much less than the increase in the headline export/GDP ratio: China has been shifting from goods with a high domestic content in favor of new export sectors with a much bigger imported input share.

3) What about the rising trade surplus?

In addressing this, the report switches gears a bit byb moving from gross figures to net to show that while there has been a net increase of 20% y-o-y, and that this rise have resulted in 35pp of nominal growth to GDP.

However, that does not mean that GDP is anymore reliant, nor does it mean that this growth means that China is any more exposed to the global hiccups that may occur

net exports may be contributing an unusually strong amount to overall growth, but this has nothing to do with export demand or growing external dependence. Instead, it’s all about rising domestic supply displacing import suppliers … i.e., about reducing exposure to the global economy.

4) The proof is in the pudding – exports and growth

At this point, you need to read the report as Jon and his team run through some models that show just how the relationships between GDP and export growth act during a downturn, and then runs the same model for China to show how very different they are from other regional economies.

The proof is in the pictures…

In the end, what is most interesting is that there is a fairly broadbased assumption that China needs the U.S. market more than the other way around, or at the very least that they need each other… and this report tends to turn that on its head.

I am sure it is probably too much to ask, but perhaps Jon will work on the model that shows this from the U.S. side and its reliance on imports…

for those that have reached this point and not downloaded the report, you have one more chance. While I am sure there are a number of economists (amateur and professional) that may challenge some of the underlying assumptions, I think that there are many on the ground now who are living proof that China is not a 100% export economy anymore. American companies are setting up more now for domestic sales than export, the cities of Chengdu, Chongqing, and others are growing at a torrid pace, and for anyone on the consumer (as opposed to the industrial side) the China market is finally turning positive for many…

So… once again, I ask… who needs whom more?

Update: the Economist has just released an article entitiled How Fit is the Panda, and it too (although using the 40% of GDP figure) also says that China is not as tied to exports as others think… and it gives a few good examples of just what should be worrying Beijing.

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12 Responses to “Is China Export-Led?”

  1. Chris Corkery says:

    October 1st, 2007 at 7:47 am


    “In the end, what is most interesting is that there is a fairly broadbased assumption that China needs the U.S. market more than the other way around, or at the very least that they need each other… and this report tends to turn that on its head.”

    You may have missed one key element to this discussion. China may indeed no longer be dependent on exports for growth. That should be frightening enough to Americans who cling to the thought that the surplus is out of control, but at least they still need us as much as we need them. Even more frightening might be that the ocean and air trade lanes to and from Europe have largely been growing more rapidly than those to and from the U.S. Check out the major routes. Or, look no further than the efforts fto link China up to Central Europe (daily direct flights PEK-Budaoest, ocean routes through the Suez and then via ground to Slovakia, etc.). Throw in a highly appreciated currency Euro vs Dollar/Yuan and the time seems ripe for exports to the EU to expand as rapidly as labor laws in the EU will allow. So, perhaps is the U.S. not only no longer as important for China as China is for the U.S., but it also may be the case that the EU is becoming an increasingly important trading partner as well.

  2. Rich says:

    October 1st, 2007 at 8:27 am

    hi Chris,

    Thanks for that. To be honest, I had not research that, but I am not surprised given the fact that many Chinese prefer E.U. to U.S. when it comes to business (easier visas).

    One question… if the goods are to central Europe, is it possible that these goods are Chinese branded items that are going to Central and Eastern Europe? In my experience, those areas are becoming very hard for Western brands… and if the volumes are increasing, this could be very interesting.. and frightening.

    Have a good week

  3. Chris Corkery says:

    October 1st, 2007 at 12:13 pm


    First, know that volumes to Frankfurt, Rotterdam and London are also increasing! On CEE, my sense, and this is not my area of focus the last few years, is that there are a variety of things happenening. 1) Chinese companies like Huawei, and European firms like Siemes, have set up in these new EU countries. They aren’t necessarily cheap areas compared to China, but if you can import Chinese parts and put on some finishing touches, you may be able to avoid a good deal of taxes and tariffs when the finished products head for Germany et al. These new EU countries can act as something similar to the machilladora region across the U.S. border. 2) These CEE countries have grown quite fast and thus their imports have naturally grown. 3) The old Soros is at the root of all theory: Soros has a good interest in Malev (the Hungarian national airline flying to PEK) and Hainan Air (also reportedly increasing freight and passenger movement China-Hungary). He seems to essentially be betting on or willing Hungary to take a leading role in the China-CEE-Western Europe trade. I am sure there are other reasons as well but nothing is coming to mind.

  4. Rich says:

    October 1st, 2007 at 10:04 pm

    Chris – Thanks again. Some interesting insights.

    the import in pieces and assemble is something I think will become more popular in the States as well as VAT, duty restrictions, quotas, etc will all change the game for many on both sides of the pond.

    A new Soros conspiracy in Asia… hmm… I like it.

  5. David A says:

    October 4th, 2007 at 11:05 am

    Gentleman –

    I was also very intrigued by the ‘myth busting’ of the UBS white paper. Chris makes great points regarding the rate of growth in EU-China trade. A few thoughts.

    1. EU-China trade is much more balanced than US-China trade. The Germans and Swiss may even export more than they import.
    2. China’s trade with the rest of Asia is also booming. This further erodes US influence in China re: trade leverage.
    3. Understanding the magnitude of China exports to the US is only half the picture. How about Chinese exports ‘controlled’ by American firms but ultimately sent directly from China to a 3rd country. The Japanese firms call this ‘out-out’ production. While this trade does not generate the same leverage as direct US-bound exports, it seems that it would allow some US influence (e.g., Nike exports from China to Japan). Nike or it’s contractor must still operate a ‘properly run’ factory.
    4. Finally, assuming the UBS report is true (China isn’t export led), any observer of Chinese port expansion, exponential air and ocean freight growth, non-stop building and manufacturing in FTZ’s & BLP’s, expat proliferation in Shanghai, and so on…. must take note of the massive, less-understood domestic portion of the Chinese iceberg that lurks below the surface. In the end, given my personal experience, I find it hard not to think of China as export-led — regardless of the UBS math.

    BTW. Funny to cross paths with you guys on the ARLTC comment board.

    — David

  6. Rich says:

    October 4th, 2007 at 12:44 pm

    Hi David,

    What can I say.. we bring people together!

    Thanks for your comments. I am particularly interested in the implications of #3 as I am not sure how that is counted (Chinese product, US product, etc)., and that could be one of the blips… but I don’t think the percentages are big there in the grand scheme of things.

    Like I said, I am not a PhD in econ, but I can see that China’s economy is relying more and more on domestic markets. you can see this in that many foreign groups are not investing for export, but for domestic sales, and if you see the growth in the 2nd tier markets… it is easy to see where the build up is coming from.

    Hope all is well and thanks for the comments. I would be interested if anyone had something as a follow up on #3


  7. Pierre says:

    November 18th, 2007 at 6:58 pm

    It may be all true, but sometimes one does not see the forest because one is lost among the trees. the huge currency reserves of china which account for nearly 50% of gdp show the impact of exports to china’s economy.

  8. Michael says:

    January 4th, 2008 at 9:54 am

    I am new to this, but I would like to say something to Pierre’s observation: Increasing currency reserves are the product of inflows of money into China, of which Exports are only one portion. The biggest portion of this inflows, however, are inflows associated with the low value of the RMB and the still rather fixed exchange rate (when demand for RMB is higher than demand for USD, whcih is currently the case, the central bank has to buy USD to keep the “price” of RMB/USD at a rather constant), FDI and other foreign investment, remittances, etc. Hence, the ratio of currency reserves to GDP is not a very good gauge of exports from China.

  9. Ravi Kiran says:

    October 6th, 2008 at 6:34 am

    This is a very fascinating discussion. I wonder whether it is possible to compare China and India on the basis of dependence on value and direction of exports, FDI, currency strength, internal demand growth etc, to arrive at the vulnerability of each country to western financial turmoil. I am also wondering whether the balance of industrial power will irreversibly shift to China and India during these trying times. Will Indian and Chinese companies invest in each others’ corporations instead of western corporations investing in these two countries?

  10. Nice says:

    October 7th, 2008 at 10:55 am

    Nice job copying the Economist article

  11. Rich says:

    October 7th, 2008 at 11:03 am


    Actually the economist article came after mine, and the reason I know that is that they linked to this article. thanks for stopping by though.


  12. Changes in China says:

    February 19th, 2013 at 12:47 am

    […] Recent worldwide condemnation of Chinas human rights violations have prompted a tit-for-tat revocation of Chinas easy-to-acquire business visa (which, mysteriously, hasn’t been officially acknowleged by Chinese officials) and both underscore a growing ideological divide between China and the West. The economic climate in this region will also undergo massive changes over the next 5 years as a confluence of economic and social forces steer China away from the manufacturing powerhouse that it’s been in recent history. The yuan continues to gain value, making exports increasingly expensive which is slowly driving manufacturing into cheaper countries like Vietnam and India – leadership is also affecting new labor laws in favor of workers which will raise the cost of labor, further elevating associated costs for overseas investors. This will likely have a dramatic effect on an economy as export-driven as this one, although the extent of that assertion itself is debatable. […]