According to this week's Economist, China "is less dependent on exports than is commonly believed". More specifically, exports supposedly make up 18 % of total domestic value-added, which equals roughly 45 % value-added content of China's exports (based on exports = 40 % of GDP). I wonder how The Economist knows this exact number is true, considering there is ongoing heated debate on the subject. But 18 % is indeed within the range that most observers consider to be realistic.
Now here's the thing: The Economist also claims that exports were only a secondary factor in the slowdown of the Chinese economy, with a "collapse in the property market and construction" being the more immediate reason. I don't disagree, but I wonder if the export slowdown is really so "secondary":
Assuming a "normal" growth-rate of 10 %, and taking into account that Q1 exports droped 20 % year-on-year, the export slowdown from 10 % growth to 20 % decline equalled -5.5 % of GDP (0.18 * 30 %). So assuming everything else had stayed constant, the export slowdown alone would have slowed the Chinese economy from 10 % growth to 4.5 % growth.
In fact, it grew 6.1 % (according to the GDP release). So the rest of the economy must have grown faster than 10 % to keep it growing at that speed, no? (Otherwise, total growth would have had to be less than 4.5 %, not 6.1 %)
So what happened to the famous domestic slowdown? The one everyone seems to agree on? Well, as already discussed in previous posts, it's nowhere to be seen in the GDP release data: Investments and consumption are supposed to be up strongly. So based on that, it's a pure export-led slowdown. The domestic slowdown may have existed in late 2008, but according to the official numbers, it was already over in Q1.
But let's revisit the export dependency assumption once more:
Thursday's FT had yet another article on the mystery of China's export dependence. It quoted a study, according to which a 150 $ Made-in-China IPod only contains 5 % Chinese value-added, and only 2 % of all related wages are paid to Chinese workers.
(Tried to locate the article, and found different versions here, here , here and here )
While it is obviously pointless to try and deduce China's overall export-exposure from the study of one particular product, I think this once again drives home an important point:
A headline number like "China's exports are down 20 %" can tell us very little without further info:
- If the drop is mostly due to vanishing demand of Ipods, the impact on China's economy will be close to negligible.
- But if the drop is due to vanishing demand for labor-intensive toys, textiles, steel, etc., the impact on the economy is huge.
(Earlier discussions on this topic here)
Oh, and on a more wonkish note:
The studies quoted above set me thinking about a detail with potentially important consequences: Apparently, the main component of the IPod is the harddrive, which is made by Toshiba. The study assigns the "gross margin" of 26 % of the sales price to "Japan", because Toshiba is headquartered in Japan. However, if it is manufactured by a Chinese subsidiary, the "gross margin" would presumably be recorded in the books of the Japanese subsidiary as part of the sales price of the harddrive. It could then be distributed as dividends back to Japan (which would be repatriated profits; in other words, the trade surplus would be articificially inflated, but the current account would not be affected due to offsetting profit repatriation), or reinvested in China for expansion (which would have no impact at all in the current or capital account of China). The gross margin of this one component is estimated at 20 $, as compared to 7 $ for the complete Chinese value-added of the finished IPod. If it is recorded in the Chinese subsidiary's books and reinvested in the country, it counts as Chinese value-added for the purpose of China's GDP calculation. Even though it has nothing to do with what is being produced in China, and even though the money belongs to the Japanese shareholders of the Japanese mother company, China's GDP suddenly goes up by an extra 20 $, or 30 % of the sales price of this particular component. If the same holds true for other components, the Chinese value-added of the IPod for GDP-purposes might reach 25-30 %, and the current account surplus of China would increase accordingly, even though the real value-added after stripping out this special effect is only 5 % (and the real trade surplus is also only 5 %).
It can be so confusing to figure out what data really tells us...
Hard Money Men
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