Will China's 'Soft' Landing Be 'Hard' On Global Exporters?
China is best known as the world's export driver as the hopes of every exporting nation in the world are pinned on the eventual transition of the economy to domestic consumption and hence greater imports. While China has contributed most to Global GDP growth in the past few years, some argue that this growth is not as 'helpful' as US growth to other countries - since China does not import much other than commodities (and less steel now). However, as UBS' Tao Wang points out today, that claim is not quite as valid now as before the financials crisis. China's imports have far outpaced exports in the past 4 years, and trade surplus has shrunk from 9% of GDP in 2007 to 3.3% in 2011. China's 2011 import data shows two sets of information that should be common knowledge by now: 1) China imports a lot from East and Southeast Asian economies (and is the largest market for almost all major economies in the region); and 2) China imports a huge amount of energy and resources (metals and minerals) benefiting Australia and Brazil significantly. But exports to China have become increasingly important for developed economies such as Japan, Germany, and the EU in general and perhaps more concerning is the fact that large emerging market economies may find it increasingly difficult to 'decouple' from China. These two charts show just how large an impact any slowing in Chinese growth and demand will have on some of the largest and most 'decoupled' growth nations - it is clear the BRICs are increasingly self-reliant (and potentially self destructive).
UBS: China, The World's Importer
China is known as the world’s export machine. As for its importance as an importer, much of the world is supposedly still waiting for the country to reorient its economy to domestic demand and import more. Although China has contributed the most to global GDP growth in the past few years, many people would argue that China’s growth is not as “helpful” as US growth to other countries, since China does not import much other than commodities.
However, this claim is not quite as valid now as before the global financial crisis. For one thing, China’s imports have far outpaced exports in the past 4 years, and trade surplus has shrunk from 9% of GDP in 2007 to 3.3% in 2011.
Also, as the numerous stories in financial newspapers can testify, China has become an increasingly important market for investment goods and certain high end consumer goods.
China’s 2011 import data still show two sets of information that should be common knowledge by now. First, China imports a lot from East and Southeast Asian economies and is the largest market for almost all major economies in the region. However, as the region is highly integrated in the global supply chain, a large share of exports from economies like Taiwan, Thailand, Malaysia and Korea to China are processing components that will be assembled in China and re-exported. These economies’ exposure to China is largely an indirect exposure to developed markets. Second, China imports a huge amount of energy and resources (metals and minerals) mainly for its domestic use, which has benefited commodity exporters such as Australia and Brazil significantly.
We would like to highlight two additional points on China as the world’s importer.
First, exports to China have become increasingly important for some large developed economies such as Japan, Germany and the EU in general. For Japan, the case is pretty clear – exports to China account for about 23% of Japan’s total exports and about 3.5% of its GDP. For other large countries, although their exports to China are relatively smaller, they are the parts that are growing faster. German exports to China only account for 6% of its total exports, but because they grew faster, we estimate that exports to China have contributed to about 20% of German GDP growth in 2011. For the EU, again exports to China account for only 1.2% of its GDP, but they have contributed to about ¼ of one percent of GDP growth in 2011. Among the large economies, the US is an exception – we estimate that exports to China have contributed to only 0.1 percentage point of GDP growth in 2011, partly because overall exports as a share of US GDP are relatively small.
Second, some large emerging market economies may find it increasingly difficult to “decouple” from China. We have often heard from investors who are concerned about the sustainability of China’s growth that they prefer some other large emerging economies. However, trade data suggest that the correlations between other large emerging economies and China have increased. For a country like Brazil, it may be easy to see – we estimate that China’s import demand has directly contributed to about 0.9 percentage points of Brazilian GDP growth in 2011, not adjusting for any terms of trade effect. For Indonesia, another economy with a large domestic market, exports to China contributed to 1.3 percentage points of the 2011 GDP growth. For India, an even larger economy that is not known as a main commodity exporter, China’s domestic demand contributed to about 0.6 percentage point of its GDP growth in 2011, according to our estimate. For Korea, the direct impact is estimated to be about 1.2 percentage points.
So while everyone's expectations for a nirvana-like Chinese soft landing and US decoupling remain 'priced in', with last night's iron ore demand (and implicit Chinese growth expectations) along with our earlier comments on the overstated nature of US growth that perhaps once again traders (and economists and extrapolators) have got a little ahead of themselves with this self-sustaining we-don't-need-no-QE recovery.