China: Exports and the Path Ahead

Chinese exports registered growth in year-on-year terms in December 2009 for the first time since October 2008, according to figures released Jan. 10 by the Chinese General Administration of Customs. Exports grew by 17.5 percent, reaching $130.7 billion, compared to $111.2 billion in December 2008. Exports are the critical factor in the Chinese economy, accounting for 40 percent of the gross domestic product (GDP) in 2007. They accounted for 32 percent in 2008 due to a large drop following the global economic crisis. Throughout the global recession, Beijing has relied on stimulus policies (central government infusions and state-driven bank lending) to keep headline GDP figures buoyant, while the ailing export sector weighed down on these figures. Since emergency policies cannot be maintained forever, the single most important worry on Beijing's mind has been the question of when the export sector would recover. But the robust December 2009 export growth figure belies the fact that December 2008 is a relatively low base of comparison, since that was a low point in global trade after the onset of the financial crisis. When assessed by month-on-month changes, exports have waxed and waned throughout the year; and while December 2009 exports grew 15 percent above those of November 2009, similar rises were recorded in July and September 2009 — and March 2009 saw a 39 percent rise over the previous month. A better way of looking at the December 2009 data is to take the 12-month average over the past few years. From this vantage, the slump after November 2008 bottoms out in late 2009, and December 2009 marks the first point where a genuine rise is visible. The December 2009 numbers do not, however, provide a solid basis to conclude that export growth is here to stay. Typically, China's exports surge in the final months of the year, notably filling orders during the high consumption holiday period for Western markets. This includes last-minute orders in December. However, also typical is a large dip in exports in January and especially February. Therefore, it will not be possible to see whether China's exports have truly been recovered until more data become available in the coming months. (click here to enlarge image) Beijing faces deeper problems in the long run related to its export dependency. The Chinese policy of propping up exporters is designed to maintain employment and social stability, since China's massive population makes it politically untenable to allow the forces of supply and demand to increase the unemployment rate. The problem is that, over time, this policy prevents the sector from evolving and becoming more efficient — as labor costs rise, employers are forced to cut costs not by laying off employees but by lowering prices, and hence sacrificing profit margin. Dependent on government subsidies, the export sector becomes incapable of surviving on its own, while inefficiencies drain capital out of the financial system. Hence, even assuming exports are on the path of recovery, the question remains on how long they will enable China to delay the reckoning.