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The World Bank estimates that net exports contributed 3.3 percentage points to China’s growth in q1, “broadly the same as in the second half of 2006 and higher than expected.” And from the accompanying figure (Figure 1), it sure seems like net exports contribution to growth is going up over time – not down.
I don’t know, but just maybe the RMB is undervalued in real terms? Big current account surplus. Large and growing contribution from net exports to growth. Merchandise exports up 30% y/y in the first four months of the year. Strong growth in Chinese exports to Europe (I don't need to mention that the RMB hasn't been stable against the euro over time), very rapid reserve growth …
That is why Martin Wolf’s eminently reasonable policy suggestions imply a very large change in Chinese policy. Right now, Chinese policy tends to restrain domestic demand growth to keep the economy from overheating while net exports contribute heavily to growth. Wolf – echoing Nick Lardy – thinks China should stimulate domestic demand to offset the potential drag on growth from a stronger RMB.
Wolf’s policy course makes sense to me. I increasingly suspect that China’s ability to hide the long-term costs associated with using the balance sheet of its central bank to provide a de facto subsidy to its export sector contributes to China’s ability to sustain its current policy regime. The benefits are visible (strong contributions from exports to growth, strong export growth, limited pressure on the least efficient tradables sectors because of the protection offered by an undervalued exchange-rate) and front-loaded, the costs are hidden and back-loaded.
But I still suspect that China is likely to respond to signs that the economy is over-heating – whether rising share prices or rising food prices – by taking administrative steps to try to curb lending, not by allowing much more RMB appreciation. That effectively means more of the same, not something new.
The World Bank makes another important point: a surplus from the processing trade is still a surplus. Sure, foreign firms get some of the profits – but that should show up in the balance of payments. Suppose a US firms sets up shop in China, importing some components from abroad, buying some components in China and exporting the finished product. China still exports more than it imports. That is positive for its balance of payments. The profits from this operation do go to the foreign investors – but that should show up in the income balance, which is part of the current account.
The World Bank’s Beijing team looked at the data, and found that the profits foreign firms operating in China earn aren’t big enough to offset the surplus on the processing trade. The Beijing office notes: “these profits appear modest, compared to the size of the trade surplus” before concluding “the economic impact of the trade surplus does not seem to depend much on the source.”
True. From a balance of payments point of view, China isn’t the same thing as Chinese firms. US firms operating in China who export more from China than they import into China from the rest of the world contribute to China’s trade surplus, not to the United States' trade surplus!
As usual there is much more in the World Bank Quarterly – including a discussion of the pace of RMB appreciation (slow through April, though it clearly picked up in May), China’s ongoing efforts to sterilize its rapid reserve growth (the central bank seems not to have done as much sterilization as it should have in January and February … ) and a long discussion of rising grain prices …