In my previous pieces, I have argued that Euro zone is not only likely to break-up, but it is also beneficial for the survival than the European Union as a whole. Over the last couple of months, I have participated in a number of conferences, attended debates and exchanged opinions with a number of Chinese scholars and thinkers. My perception is that the generally accepted consensus is that “Europe needs to solve its problems by themselves, and, in any case, China’s dependence on exports is declining very quickly – next year it may even be a trade deficit! – and, therefore, a collapse in demand from Europe will not have a dramatic impact on Chinese GDP growth”.
I am afraid that this view may be over-optimistic and may show Chinese over-complacency in addressing the issue. I found out that, when analysis China, at every new step of the study, the conclusion is totally opposite to that obtained in the previous step..it is almost like a glass ball that every time one spins it, it gives different answers. So, deciding when to stop is key to the conclusions.
Let’s first review briefly China evolution of trade statistics. Most people –generally abroad – believe that China’s economy depends heavily on exports. This view is re-enforced by the fact that almost everything we buy and wear – not eat, for now, at least – in the West is made in China. I recently saw newspapers articles arguing that Foxconn (富士康)alone, with 1.2 million employees makes 40% of all consumer electronics sold worldwide. These figures may or not may be true, but the concept still holds.
Now, we spin slightly the China ball and look at some hard numbers. Trade surplus in China, as a % of GDP, peaked in 2007, when it reached 7.6% of GDP. Since then, it has steadily fallen – on a relative basis – reducing to 3% of GDP in 2010. According to preliminary figures, total trade balance for the year 2011 was only US$155bn, equivalent to just over 2% (?) of GDP. After looking at these figures, one would conclude that, actually, China economy’s dependence on export is very limited, it has decreased over time, and there is talk that the country may well reach a balanced trade next year.
However, this conclusion is still mis-leading for, at least, three reasons:
Firstly, China is achieving an apparent trade balance, not because it is re-balancing its economy away from exports and more on domestic demand. Rather, the trade balance shrinkage is all due to falling net demand from US/Asian and Europe. In other words, China is not on the driving seat of this re-balancing process, but it is a passive actor that can only observe, but not control it. This is not good for the economy.
Secondly, while the overall country trade balance may approach to zero contribution of GDP, the same is not true when we look at individual provincial break-down. Using data from 2010 (2011 break-downs are not available yet), trade surplus was a major force in the economic development of Zhejiang, Guangdong, Fujian and Jiangsu. In these four provinces, trade balance accounted for 26%, 18%, 15% and 12%, respectively. Clearly, a deterioration of trade figures may be goodhave relatively mild effect for the country as a whole, but would have dramatic negative effects on the economies of those, and other, regions.
Thirdly and, perhaps, most importantly, a balanced trade is always the result of several bilateral exchanges with several countries. The 2011 figure of US$ 155bn, is composed of two main positive contributors (US and Europe) and several negative contributors. Europe trade surplus is US$144bn, by coincidence, almost exactly the same as the entire country net trade balance. Some scholars argue, that should demand for Chinese product diminish, hence shrinking the value of gross exports, then China could ‘re-adjust’ its trade policies by reducing its imports, thus maintaining a somewhat management overall trade balance. This ‘strategy’ is not going to be so easy to implement, to say the least, since the nature of the goods that China exports (textile and electronics) is not the same as the nature of imports (raw materials and energy). In other words, if demand for European goods from Europe were to collapse, China entire trade balance would be wiped out, knocking about 2% of China’s GDP. The problem would be concentrated in the above mentioned four provinces with both economic and social implication that is best not to even imagine.
Chinese policy makers should pay close attention to the European crisis and act proactively in their own interest. It is true that Europe must help itself, but since they have no good means to achieve that, then a second best solution – that is a China intervention – will be better than letting the boat sink. People in Europe are bracing themselves for a possible break-up of the Euro, a prolonged recession, high employment, increasing public deficit and so on. Is China ready to face all this?