It is official. China exported more goods than the US in August – and most likely in September too. It is pretty clear which part of the dollar zone benefited most from dollar depreciation. For those retro analysts who want to match export trends to currency changes, the dollar block started to depreciate against the euro, other European currencies and the loonie in 2002.
The preceding graph shows monthly exports – and it isn’t perfect. US exports are seasonally adjusted; China’s exports aren’t. But if you look at the rolling 12 month sum, the story doesn’t change much. China won’t overtake the US this year. But it should overtake the US next year.
And don’t tell me it all reprocessing. That is a factor, no doubt. There is no other way China’s exports could have increased so fast. But the Chinese content in Chinese assembled goods is also rising. JETRO:
Japanese manufacturers operating in China, in particular makers of personal computers and digital home appliances, continued to expand their production bases in 2005. Manufacturers also aggressively increased local procurement of parts and materials, with a growing number of Japanese firms procuring from Japan only essential items that are difficult to source locally.
Incidentally, the charts showing German imports from the US, China and France in Alexander Koch's most recent report (for HVB) tell much the same story as the global data. German imports from China have been growing faster than German imports from France and the US for some time. But their pace of growth really accelerated after 2002. WTO? Euro/ RMB? Or both?
In some sense it doesn't matter. If the WTO made China a more attractive export platform, the natural market response would be for the RMB to appreciate. Chinese policy -- not market forces --let it to depreciate instead.
Current numbers suggest that China’s 2007 trade surplus will only be a bit smaller than China’s total exports in 2001. Remember, lower oil prices will help China, not just the US. China now consumes about 1/3 as much oil as the US with an economy (at market exchange rates) about 1/6th the size of the US economy. Of course, on a per capita basis, China’s energy consumption is just a tiny bit lower than US consumption. And I suspect China’s high oil consumption to GDP (at market rates) ratio is itself partially a function of the fact that market rates understate China’s GDP.
I won’t editorialize more. Suffice to say that if you asked me in the fall of 2004 if Chinese exports would be growing at a 30% y/y rate in the fall of 2006, I would have said no. And if you asked me in the fall of 2004 if China could double its reserves – China will soon reveal that they have increased from around $500b at the end of q3 2004 to about $1,000b at the end of q3 2006 – and also bring its inflation rate down, I would have said no.
That calls into question my credibility. China has a great capacity to surprise.
But I do think that China will have trouble sustaining its current 30% y/y export growth rate (see the August and September data) for the next four years. Hell, I would say for the next two years. To sustain 30% y/y growth, China would export $150b in goods in September 2008. And (gulp), $257b of goods in September 2010.
Nothing seems impossible with China. But that doesn’t seem likely. Whether or not it changes its exchange rate, China will likely have to change its growth model.
I suspect that China is putting itself in a position where it will have to add huge sums to its reserves -- at a significant cost to China's taxpayers -- just to sustain its current level of exports. That is a bit different than buying export growth by adding huge sums to your reserves.