Cautious optimism about condition of Chinese exports

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.

These sharply differing performances illustrate the kind of upgrading of the production structure that we are starting to see, and of which we are likely to see much more in the coming years.

Unfortunately, exports are likely to fare worse in 2009 than in 2008. The World Bank is forecasting very weak total world imports next, expecting that they will shrink for the first time since 1982. This means that we cannot be too optimistic on China’s exports, even though we think China’s competitiveness position is still strong.

Read more about the China Quarterly Update, download the full report, or listen to an audio interview by clicking here. You can also share your thoughts by leaving a comment here, or by joining me and David Dollar on Dec. 1 in a live online discussion.