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Reading tea leaves for signs of China's recovery

David Dollar's picture

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What to make of it when, within a few hours last week, the statistical bureau depressed us with a 26% decline in exports for February and then elated us with a 27% increase in urban fixed asset investment? These two figures capture nicely the struggle that is going on within the Chinese economy.

We launched our China Quarterly report today with our take on how to reconcile the conflicting data. Clearly, the global economy is in very poor shape. Global GDP declined at an annualized rate of 5% in the fourth quarter of 2008, and global industrial production declined at a 20% rate. These are shocking numbers that those of us born after the 1930s have never seen. Naturally this has had a large effect on China, which is an open, export-oriented economy. China's seasonally adjusted monthly exports peaked at around $120 billion last fall, and then fell off a cliff – dropping by about one-third (see chart).

Debating Cambodia's growth: A tsunami in 2009?

Stéphane Guimbert's picture

The global slowdown is hurting Cambodia's tourism industry, with fewer visitors in late 2008 than in the same period of 2007. Image credit: flydime at Flickr under a Creative Commons license.
Cambodia was one of the few Asian countries saved from the December 2004 devastating tsunami. But, a few days ago, at the Cambodia Economic Forum, panelists suggested that the economic tsunami – or various synonyms – would not spare Cambodia.

It's been a couple of months since the World Bank prepared the "perfect storm" report on the recent economic developments in East Asia. Our view at the time was that the crisis would reveal some of Cambodia's economic vulnerabilities – i.e. its lack of export diversification and its extreme reliance on foreign investment for growth. I think that this is an important lesson from our recent analysis on growth in Cambodia (more on this later).

Our projections for 2009 at the time were just below 5 percent GDP growth. This is consistent with the projections of the Government, the IMF, the Asian Development Bank, and an International Labor Organization (ILO) report on the impact of the crisis released yesterday. The Economist Intelligence Unit has a more pessimistic projection of 1 percent.

So who is right?

Regional roundup: Finance in East Asia – Jan. 16

James Seward's picture

Unfortunately, we start this roundup as we did the last – with more economic bad news. Exports dropped 2.8 percent and imports declined 21 percent in China on annualized basis in December. Also, China reported the first slowdown in growth of its foreign reserves since 1998, although reserves still rose by $45 billion in the fourth quarter of last year to about $1.95 trillion. Debate is also now swirling about rate of China’s economic growth for 2009, and even the central bank governor now is publicly setting expectations that the target rate of 8 percent may not be achievable.

Considering China's options in weakening global economy

David Dollar's picture

The December export numbers for China showed a 2.8 percent decline from the year before. This was the worst showing in a decade, but better than the 4-5 percent decline expected by the business press. There is still plenty of cause for worry, as economist and blogger Brad Setser wrote in a recent post, "This really doesn’t look good". While Setser is talking about the breath-taking drop in Korean and Taiwanese exports in December, some of those exports normally would be on their way to China for further processing and re-export. So, the grim news from those economies in December probably presages more tough times ahead for China's exports.

In this deteriorating global environment, the Ministry of Finance and the World Bank's Beijing office last week held a seminar with some very good international and Chinese economists to discuss China’s macroeconomic policy options. While the economists had a wide range of views, I took away a pretty strong consensus from them on three things

Cautious optimism about condition of Chinese exports

Louis Kuijs's picture

We cannot be too optimistic on China’s exports, even though we think the country’s competitiveness is still strong. Image credit: scobleizer at Flickr under a Creative Commons license.
As we were looking at recent developments as background for our China Quarterly Update, which was released yesterday, we had to make up our minds about how well China’s exports are doing. This was necessary because there are conflicting answers to this question. On the one hand, we are reading many reports from the coastal provinces, Guangdong in particular, about how bad things are there in the export industries, with factories closing and migrant workers going back to rural areas. On the other hand, the data on overall export developments suggests exports have held up reasonably well so far, with overall exports in real terms still far outgrowing overall world import growth, implying continued gains in global market share for China (see left hand figure below).

An important part of the answer lies in the fact that the export performance differs markedly between sectors. Exports of light manufacturing products, such as textiles and toys, are by now lower than a year ago in real terms (see right hand figure below), while real exports of (higher value added) machinery and equipment are still growing by over 30 percent year-on-year. Exports of light manufactures have been hit by cost increases as well as weak overall foreign demand—which matters a lot because China now produces the bulk of global production in certain sectors, such as toys. On the other hand, China’s exports of machinery and equipment still occupy modest market shares globally, and China’s strong underlying competitiveness means that its exporters can continue to gain market share even in more challenging global circumstances.

Anxiety and hope in Guangdong, China

David Dollar's picture

A large number of export-oriented processing firms have already closed in Guangdong, the heart of China’s export machine. Image credit: lylevincent at Flickr under a Creative Commons license.
I visited the Pearl River Delta in Guangdong this week, the heart of China’s export machine. A large number of export-oriented processing firms have already closed in Guangdong in sectors such as toys and footwear. Of course, firms close all the time in market economies, while others start up. This churning is part of the normal cycle in a market economy and is one of the key sources of productivity growth. Less productive firms die off while the successful new firms have especially rapid productivity growth. As the global economic crisis hits China, it is hard to keep track in real time of the balance of closings and openings.

Entrepreneurs and local officials here are certainly aware that demand for China’s exports has dropped sharply, and they wonder when the global economy will pick up again. Still, at the same time I was impressed at how many see this as an opportunity for China to pursue its rebalancing agenda. These discussions took place at a workshop in Jiangmen on Investment Climate, Innovation, and Industrial Transfer. The phrase “industrial transfer” refers to the fact that the most labor-intensive activities are moving away from the highly successful coastal cities, either to inland China, or other countries (Vietnam, Bangladesh) with lower wages.

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