Is China Export Lead?: Part 2

Wednesday, November 7, 2007 1:47

Following a recent post called Is China Export Led, I recently found another paper written by Albert Kiedel of Carnegie Endowment for International Peace, who wraps up his summary of his article China’s Looming Crisis – Inflation Returns (PDF HERE) by saying:

U.S. intelligence analysis of this overheating risk should refute the conventional wisdom that China’s growth is export-led—it is clearly domestically driven.

Policy makers need to realize that China’s rapid economic rise is homegrown and sustainable. The United States should quietly remind China that harsh handling of inflation-related unrest could seriously damage U.S.-China relations—especially in a U.S. election year.

Far more aggressive than Jon Anderson in attacking common wisdom, Kiedel’s audience is obviously policy makers who he see are looking at China though McCarthy eyeglasses (tinted with Lead painted Barbie)… and that gives his analysis a much different feel (both reports are well written and as a lay person I have no trouble following the logic of either)

Carnegie China Trade Chart

In his article, the tied between exports and the economy is actually a secondary concern as his primary concern is that inflation is a real threat to the Chinese economy (he pulls out a lot of stats in support).

with regard to the importance of exports to China’s economy, Kiedle takes a different approach from Anderson by focus on the trade statistics themselves, but on the importance and size of the domstic econnomy to GDP and GDP growth. … and this leads him to argue that while exports are an important piece of the overall picture, they should be secondary or tertiary concern for plicy makers trying to head off inflation.

Interestingly enough, he actually puts forward a set of conditions that could lead to a devaluation of the RMB. .. not a revaluation.

Essentially, in his mind, the focus of U.S. policy makers on China’s revaluing of the RMB and belief that China is export reliant are incorrect (I am sure Jon would agree). This is something a number of readers allude to in my posts Would 6RMB/ USD Be A Good Thing?: Part 1 and Would 6RMB/ USD Be A Good Thing?: Part 2 , and it is something that I hope policy makers are paying attention to in D.C.

For anyone interested in reading more, you can download the full PDF file here.

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5 Responses to “Is China Export Lead?: Part 2”

  1. JD says:

    November 7th, 2007 at 5:50 am

    China’s growth is not export-led and it is not domestically driven. China’s accelerated expansion is a result of opening to global markets, technology, and know-how, which is closely associated with its global two-way trade.

  2. Rich says:

    November 7th, 2007 at 6:53 am


    Surely without one there would not be the other, and I would agree with you. What I think is important though, is that persons outside China need to understand that the conditions have changed.. and that should the U.S. or others play hardball, the Chinese might fight back knowing that their economy can withstand the economic blow of a downturn in exports.

    The question in my mind (and I posted this before) is what would the impact on the U.S. side be?


  3. JD says:

    November 7th, 2007 at 2:59 pm

    There certainly would seem to be some element of “chicken and egg”, but the external flow is central to China’s continuing expansion. The domestic investment expansion has hit, and likely surpassed, its limit.

    China is in no real position to play hardball. A slowing economy would reveal numerous systemic weaknesses and justifiably panic Chinese policy makers.

    The US is already feeling the impact through the credit crunch and plunging dollar. It may not be fun, but there’s no panic, and the economy will respond appropriately. Global imbalances are causing re-adjustment, though China is looking too rigid to respond effectively. The result is rapidly increasing risk.

  4. Duncan says:

    November 8th, 2007 at 4:08 am

    The arguments about export-led growth are all somewhat misleading. Of course China’s growth is technically domestic led. Investment is the overwhelming driver. And it would take a bold man to argue that even if one factored in the production for export firms that the external side is driving growth (foreign invested firms, which dominate exports, employed just 4.6% of the urban workforce in 2005). The real question is would China catch a cold if US consumer sneezed and there the arguments about external vulnerability are much more valid. Externally oriented firms play a disproportionate role in stimulating consumption and determining domestic consumer and investor confidence – their higher paid employees are proportionately more important in key demand centres like the Eastern seaboard. More importantly, if exports to the US fell we’d likely see a rise in trade tensions in other markets and more goods flowing onto the domestic market – cue a return to deflation, struggling profit margins and NPLs.

  5. Rich says:

    November 8th, 2007 at 6:26 am

    JD & Duncun,

    you both raise interesting points, and if there is one thing that I love about statistics and analysis is that it is all in the eyes of the beholder.

    For me, the most important message that should be taken from these rports is that the U.S. needs to stop thinking China is solely reliant upon the U.S.. It may have been true 5 years ago, but as the economy balances between export and domestic, that the way policies are formulated need to take that into consideration.

    If you look at recent events, it is quite clear that it is a two way street now. Look at the effect China can have on the US market when they say that it may be time to diversify its currency portfolio. They were not talking about a major change, and it sent a cold chill down the NYSE.

    There are definately arguments for both sides, but again, what is important is that the reliance on exports for China is diminishing while the reliance on imports and currency support in the US is increasing…

    Any and all thoughts are invited