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China, From Shrinking Exports To Currency Devaluation

Workers producing glasses cases in a factory in Hebei Province
Workers producing glasses cases in a factory in Hebei Province
Fan Junlin*


BEIJING — The numbers are decidely mixed. Year-on-year, China's exports fell in September by 10%, which was a 0.5% further drop over August. Meanwhile, the National Bureau of Statistics showed that third-quarter Chinese GDP growth steadied to a solid 6.7%.

But putting aside the short-term trend lines, the longer-term outlook shows alarming signs of a major decline in China's exports.

According to World Trade Organization data for major economies (those that represent about 90% of international trade), in the first seven months of this year, China's exports accounted for 13.9% of worldwide trade, compared with 14.9% last year. Since China started reforming and opening-up, only once, in 1996, did the Chinese share of the global export market ever drop, and then only by 0.1%. Considering that internal and external economic development conditions changed this year, China's significant decline in its share of exports may suggest an important turning point.

Changing times

The balance of payments value is a snapshot of a country's global competitiveness. It is an important indicator that reflects the current state of the economy and long-term expectations. Perhaps more than other factors, trade reflects its relative global competitiveness, while the change in capital accounts depends more on psychological factors such as investor expectations.

Therefore, along with commodity prices, trade is the thermometer of the condition of any major national economy. The fluctuation of trade is an indication of whether the economy is above or below its potential output, whether exporting its production capacity is necessary, or the "leakage" of foreign exchange reserves is taking place. This will affect further adjustment of domestic policy.

Not only has China's global export market share shrunk, so has its trade surplus. According to data released by the State Foreign Exchange Administration, in the first eight months of 2016, China's trade surplus, including goods and services, has decreased by as much as 18.9%, year-on-year.

China's economy can also be gauged by comparing its export situation with Asian competitors. Though India's export growth this year is still negative, the decrease has narrowed. Its merchandise trade deficit has decreased and its services trade surplus has increased. Overall, India's economic situation is better than that of China.

Compared with India, China's services trade surplus also grew by 18.7%, not so little in terms of growth, but its trade deficit has significantly expanded, suggesting that China has yet to establish an advantage in its transition to the service sector.

Meanwhile, Vietnam is doing even better than India. Despite the fact that growth in world trade is lower than GDP growth rates, Vietnamese exports have enjoyed rapid growth. Between the 2008 financial crisis and 2014, Vietnam maintained double digital export growth. Last year it dropped to 8.1%, while in the first nine months this year growth has been accelerating again.

[rebelmouse-image 27090484 alt="""" original_size="640x536" expand=1]

Rolling out the vases in Vietnam — Photo: Zabaraorg

Of course, the scale of Vietnam's economy is too small to fundamentally shake China's position in world trade; still, the contrast of the trend demonstrates that China is gradually losing its advantage in exports.

Three factors

So, what brought China's foreign trade to this turning point? Three key points are worth noting.

The first is demographic. The year 2012 marked the tipping point in China's overall working-age population: For the first time, a net decrease of its working population appeared. This year includes another turning point, where the young population (20-29 years old) has reached 235 million. After reaching this peak, the highest ever for the past two decades, this population sector will start to decline next year. The young population is the main force of demographic movement and labor for coastal provinces. It's also an important support for China's competitive advantage in exports. Once this population group starts to diminish, that will further increase labor costs and reduce the competitiveness of export goods.

Secondly, property prices have risen sharply. This adds to rising costs at every stage of the manufacturing process to further reduce Chinese export's competitive edge and accelerated the relocation of processing enterprises. In the first nine months of this year, China's foreign direct investment in manufacturing has dropped by nearly 10%.

Third is the government's policy of cutting excessive industrial capacity. Attempts to reduce overcapacity has lowered production in sectors such as steel and coal, and this has led to significant relief from their falling prices. Certain product prices even rose sharply, making it more attractive to sell them domestically than exporting them.

In the current context of continued capital project outflow, an ongoing deterioration of current accounts revenue and expenditure will undoubtedly lead to a policy shift. In the past, a period of falling surplus usually corresponded with a tightening of China's monetary policy cycle. Devaluation pressure on the yuan (RMB) is increasing. The global competition for currency devaluation, which started in mid-2014, has seen the yuan remain strong, but has also accumulated a large depreciation pressure as a result.

In view of the accelerating decline of China's global share of exports, coupled with declining demographics, an orderly release of RMB depreciation will certainly not be easy for anyone.

*Fan Junlin is a senior analyst of the Strategic Planning Department at the Agricultural Bank of China.

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