Chinese Exports: Can Emerging Markets Replace the U.S. Consumer?

After the credit crisis last year, China is increasingly focusing more on developing markets for growth. Chinese companies have been making large investments especially in developing resource-rich Middle East and Africa.

An interesting article in the Der Spiegel titled Reluctant Partners - Global Crisis Makes US More Dependent on China than Ever discusses the trade relationship between the USA and China and the rising power of China.

From the article:

When US President Barack Obama visits China this weekend, he will encounter a rival that sees the financial crisis as more of an opportunity than a threat. America, on the other hand, has been fundamentally weakened by the global crunch — and is more dependent on the goodwill of the rising superpower than ever.

The scientists at the National University of Defense Technology in Changsha, China, had plenty to celebrate: They had developed a supercomputer that could perform more than a quadrillion calculations per second.

The announcement, released just in time for US President Barack Obama’s visit to China this weekend, had symbolic value: With their new computer, dubbed “Tianhe” (”Milky Way”), the Chinese claim they will be the first country to become a direct rival to the superpower.

China is bursting with self-confidence. The new world power sees itself as a winner in the financial crisis, with its economy growing by an impressive 9% in the third quarter, while the economies of the West struggle to recover from a deep recession. And while the Americans are focused on their own problems, China is expanding its influence, both in Asia and among resource-rich African countries.

Writing about the American consumption of Chinese goods the authors write:

“Suddenly the crisis hit China, whose economy had been oriented almost completely toward the United States. In Dongguan, home to one low-wage factory after the next, entire neighborhoods have died out. “We have lost a third of our orders,” says Li Zhaoyuan, who owns Dongguan Singyan, a company that makes metal parts. He has laid off 40% of his workforce.

The remaining workers sit at outdated machines on the two floors of the plant, punching and pressing pieces of metal into objects like fishhooks and housings for Motorola mobile phones. “We used to work 24 hours a day,” says Li, “but now one eight-hour shift is enough.” He doesn’t believe that American consumers will soon be buying Chinese products as enthusiastically as they did before the crisis. He prefers to follow the advice of the strategists in Beijing, namely to focus on new markets in Asia, the Middle East and Africa.”

I agree with Mr.Li 100%. The once free-spending American consumer will not be going back to old ways any time soon with real wages in the private sector going down and rising unemployment levels. The American consumer is in belt-tightening mode now. Most of the Chinese-made cheap goods were bought with credit. As consumers shop less, credit growth has slowed for many months consecutively. China’s strategists have clearly understood that they need to rely less on America as the main export destination and focus more on emerging markets.

Chart - Key Economic Figures Comparison between China and USA (Click to Expand)

Chart - China and USA GDP Growth

Source: Der Spiegel

While China’s economic growth since 1990 is astonishing, China has a long way to go before it can beat or overtake the US economy. Despite the strong growth the Chinese economy still is relatively small compared to the US economy. So in that sense it may be premature to call China as the rising superpower.

Emerging markets in Asia, Africa, etc. may not be able to consume as much of the Chinese goods as the US did simply because consumers in those markets do not have the purchasing power as Americans do. For example, it would be wrong to assume that many Asians such as Indonesians, Indians, Vietnamese, etc. would spend as frivolously as Americans did in buying Chinese products. So the answer to my title question is that it is too early to tell whether China will be able to successfully replace USA with new markets in Asia, Africa and the Middle East as its main exports destination.

Comments

[Dave Wrixon:]

May be they will and may be they won't but the American Consumer is not coming back because the Chinese won't bankroll him anymore and the real heroes behind that epic expansion the US Consumer Banks are now bankrupt.

Financing other consumers to take his place is going to be tough, because whilst China put in the Money, it was American banks that generated all that Credit. It is going to be a hard act to follow to find a sucker group of consumer lending banks that is anything like that accommodating.

Nov 13 01:06 PM

[Billy Gee:]

The manipulation by China of its currency also makes China's exports to emerging markets have an unfair advantage of U.S. exports in these markets. Yuan manipulation allows a significant advanatage for Chinese products both in China and other markets where U.S. products compete with Chinese goods and services.

Will Barak Obama press China to allow the Yuan to float against the U.S. Dollar? Does the U.S. president even realize the devastation of jobs lost in the U.S. do to unfavourable market conditions for U.S. goods and services in export markets?

Nov 13 02:14 PM

[Glen88:]

I am waiting to see how mercantiilst Japan is going to have a trade surplus with mercantiilst China, and vice versa.

Nov 13 02:46 PM

[Tom Huang:]

China has lot of GPD wasn't count by its system. I don't know why it wasn't counted, maybe because is countryside economy. I beleive China GPD is much large than it shows on the paper.

Nov 13 04:02 PM

[silver-bug:]

Good charts and diagrams, but I would like to see the demographics of the Chinese population, because that is the driving force of their economy. China has a growing middle class, as opposed to the shrinking middle class in America. It has a labor force of over 800 million people, and these are hard-working people who save money to buy things instead of using credit. China has $2.3 trillion worth of reserves to spend, and it spends this money wisely, developing infrastructure and obtaining vast amounts of natural resources for growth. And Chinese government is also providing a fiscal stimulus for it's people, which is also being spent wisely by the people.

So, I think China has the ability to soak up the export slack with an increase in domestic consumption. It may slow down a bit, but it won't be significant. Most of the economic growth in the world will be driven by China and then followed by India, and other smaller eastern emerging market nations.

I would put my bets on China.

Nov 13 05:17 PM

[Wildebeest:]

The Der Spiegel article ignores the data that shows US exports making up just under 20% of total Chinese exports (pre-crash). For a quick snapshot:

wolframalpha.com/i...

Also, the decline in US imports from China has been much less than the decline in US imports from other countries. It looks like finishing the year somewhere between 2005 and 2006 levels. So if the US fails to recover at the same rate as China's other key export markets they'll feel an impact but, all other things being equal, it (the US component) won't be as severe as some expect.

Nov 13 05:20 PM

[HaavBline:]

The author raised an interesting question but failed to dig into it meaningfully.

By volume and value terms, China-EM trade is and will continue to be only a fraction of China-US trade. But China is pursuing this trade because from China's viewpoint, they see much opportunity that foreign observers can not see from trade volume stats alone.

China-EM trade is growing at a much faster pace then China-US or China-EU trades. For example, China-Africa trade grew at 40% pace in 2008 while trades to OECD countries were tanking. So the China-EM trade growth volume could be comparable in the near future even though total trade volume remains much smaller. This is the part stat and chart readers can easily project and comprehend.

The qualitative element is this: China enjoy much better terms and quality in its China-EM trades comparing to China-US or China-EU trades. China-US trades, for example, consist of a very high percentage of foreign owership, in the form of brand names, sales channels, IP, even export factory management. In this trade relationship, US gets the tuna steak while China gets the fish bones, so to speak.

In China-EM trades, on the other hand, much of Chinese owership is involved. From financing, infrastructure service to brands, to IP to factory, there are much less western involvement ('taxing' from Chinese standpoint). It may be lowly smelts, comparing to pricey tuna, but China gets much of the fish meat rather than just the bones.

Nov 13 05:45 PM

[dw57:]

they also having an aging population, similar to Japan.
to drive growth either they find another large market (EU) or they grow internally. some thing that their culture seemly won't do


On Nov 13 05:17 PM silver-bug wrote:

> Good charts and diagrams, but I would like to see the demographics
> of the Chinese population, because that is the driving force of their
> economy. China has a growing middle class, as opposed to the shrinking
> middle class in America. It has a labor force of over 800 million
> people, and these are hard-working people who save money to buy things
> instead of using credit. China has $2.3 trillion worth of reserves
> to spend, and it spends this money wisely, developing infrastructure
> and obtaining vast amounts of natural resources for growth. And
> Chinese government is also providing a fiscal stimulus for it's people,
> which is also being spent wisely by the people.
>
> So, I think China has the ability to soak up the export slack with
> an increase in domestic consumption. It may slow down a bit, but
> it won't be significant. Most of the economic growth in the world
> will be driven by China and then followed by India, and other smaller
> eastern emerging market nations.
>
> I would put my bets on China.

Nov 13 05:52 PM

[dw57:]

I think you over looked that its easy to grow some thing fast if its small. but its a lot harder to grow some thing if its really large.
I.E. that 40% growth in EM, maybe relate to 5% growth in US or EU growth. or less

On Nov 13 05:45 PM HaavBline wrote:

> The author raised an interesting question but failed to dig into
> it meaningfully.
>
> By volume and value terms, China-EM trade is and will continue to
> be only a fraction of China-US trade. But China is pursuing this
> trade because from China's viewpoint, they see much opportunity that
> foreign observers can not see from trade volume stats alone.
>
> China-EM trade is growing at a much faster pace then China-US or
> China-EU trades. For example, China-Africa trade grew at 40% pace
> in 2008 while trades to OECD countries were tanking. So the China-EM
> trade growth volume could be comparable in the near future even though
> total trade volume remains much smaller. This is the part stat
> and chart readers can easily project and comprehend.
>
> The qualitative element is this: China enjoy much better terms and
> quality in its China-EM trades comparing to China-US or China-EU
> trades. China-US trades, for example, consist of a very high percentage
> of foreign owership, in the form of brand names, sales channels,
> IP, even export factory management. In this trade relationship,
> US gets the tuna steak while China gets the fish bones, so to speak.
>
>
> In China-EM trades, on the other hand, much of Chinese owership is
> involved. From financing, infrastructure service to brands, to
> IP to factory, there are much less western involvement ('taxing'
> from Chinese standpoint). It may be lowly smelts, comparing to
> pricey tuna, but China gets much of the fish meat rather than just
> the bones.

Nov 13 05:55 PM

[Ricard:]

Good article, although most of the information in it has been public knowledge for several years.

The questions that remains unanswered are 1) CAN emerging markets replace the US consumer, and if they can, 2) why is China the only nation considering it?

Nov 13 09:55 PM

[dingding:]

Before anyone puts all the blames for America's problems on the level of the Chinese Yuan, please realize that the value added by the Chinese factories is not a high percentage of the final cost of the products. An undervalued Yuan actually allows US corporations to source the same products at lower prices, and theoretically the American consumer is the ultimate beneficiary. If anything, the Yuan helps the US fight inflation.

Nov 13 11:15 PM

[surfgeezer:]

That rhetoric has proven to be completely wrong and your TV station is showing. No one blames currency as the source of all America's problems. Credit addiction, like drugs, cannot be blamed on the supplier. Free trade theory depends on comparative advantages and yes they have a larger supply of workers which is an advantage. It is NOT a VALID comparative advantage to have state owned companies that have jailed workers for organizing for better wages, flaunt or openly disregard environmental damage, copyrights, and not reciprocate with open trade rules. The deliberate Yuan manipulation is obvious and easy, but our addiction to debt has left us open to currency manipulations from all countries that we have a trade deficit with. Whatever gain the consumerhas gotten from cheap junk has been far surpassed by the pain of lost jobs and loss of strength for America as we shift to an economy based on financials and services and away from manufacturing and exporting.


On Nov 13 11:15 PM dingding wrote:

> Before anyone puts all the blames for America's problems on the level
> of the Chinese Yuan, please realize that the value added by the Chinese
> factories is not a high percentage of the final cost of the products.
> An undervalued Yuan actually allows US corporations to source the
> same products at lower prices, and theoretically the American consumer
> is the ultimate beneficiary.

Nov 14 12:18 AM

[chennian:]

but you have to note the fact that for every dollar exported to U.S., China only gets about 6 cents. For exports to EM, it could be the other way around. That is a huge difference.


On Nov 13 05:55 PM dw57 wrote:

> I think you over looked that its easy to grow some thing fast if
> its small. but its a lot harder to grow some thing if its really
> large.
> I.E. that 40% growth in EM, maybe relate to 5% growth in US or EU
> growth. or less
>
> On Nov 13 05:45 PM HaavBline wrote:

Nov 14 12:36 AM

[Paul Harper:]

I think that you have hit it on the head here.
China plays things long term, so looking at where it is setting up bilateral trade agreements & implementing infrastructure for resource accords is their future growth market ... oh & what growth. SE Asia, Africa, Latin America ... in 15 years time, China manufacturies won't need the West.


On Nov 14 12:36 AM chennian wrote:

> but you have to note the fact that for every dollar exported to U.S.,
> China only gets about 6 cents. For exports to EM, it could be the
> other way around. That is a huge difference.

Nov 14 02:19 AM

[robert.b.fe...:]

That would be true if they pay a living wage but they don't. What is the minimum wage in rural China these days?


On Nov 13 05:17 PM silver-bug wrote:

> Good charts and diagrams, but I would like to see the demographics
> of the Chinese population, because that is the driving force of their
> economy. China has a growing middle class, as opposed to the shrinking
> middle class in America. It has a labor force of over 800 million
> people, and these are hard-working people who save money to buy things
> instead of using credit. China has $2.3 trillion worth of reserves
> to spend, and it spends this money wisely, developing infrastructure
> and obtaining vast amounts of natural resources for growth. And
> Chinese government is also providing a fiscal stimulus for it's people,
> which is also being spent wisely by the people.
>
> So, I think China has the ability to soak up the export slack with
> an increase in domestic consumption. It may slow down a bit, but
> it won't be significant. Most of the economic growth in the world
> will be driven by China and then followed by India, and other smaller
> eastern emerging market nations.
>
> I would put my bets on China.

Nov 14 02:51 AM

[stockratease:]

China and India's combined domestic consumption at the peak of the markets was around 2.5 trillion Dollars. Against that the mighty US consumer banged out 10.4 trillion.
Now you see just how important the US consumer really is and why everyone on the planet is concerned.
There is absolutely no way China can pick up the slack if the US consumer falters. At least not for several years.
The graphic illustrating the rise in China GDP is undoubtably impressive and also a little terrifying. It is reminiscent of the united states at the turn of the 20th century.
My history is not that great but i seem to remember there were a few pit falls along the way, no doubt this will be the case for china which has been burning 'white hot' now for quite some time.
Lets hope they don't have a blow out anytime soon....

Nov 14 06:22 AM

[Moon Kil Woong:]

No other country in the world would put up with persistent trde deficits as large or as long as the US has. Actually for the US to allow it to go on was and is sheer folly. If it goes on until it collapses it will be sheer folly on China's part too since all their work will turn into worthless paper when the US implodes financially.

To think 3rd world countries can make up for the US is ignorance. However, 3rd world countries are very fertile ground for rich countries to rob them of their natural resources. China seems to have taken notice and aim there.

Nov 14 12:55 PM

[bluesky123:]

demand from China is Wisconsin's entire economy

www.msnbc.msn.com/id/3.../

Nov 15 01:15 AM

[Carlos Lam:]

On Nov 13 05:17 PM silver-bug wrote:

> China has a growing middle class, as opposed to the shrinking
> middle class in America. It has a labor force of over 800 million
> people, and these are hard-working people who save money to buy things
> instead of using credit.

Right on. China's population is about 1.3 billion; India's is 1.1 billion. Together, their populations are roughly EIGHT TIMES ours. Such a large consumer base cannot be ignored. Moreover, you are correct that their people save, in some years nearly 30% of their income. Like you said, they have millions entering the middle class.

I hear the anti-ChinIndia comments already forming:

1) They save because they have to spend on healthcare, education, etc. So what? While the savings is occurring, it can be used as capital by entrepreneurs to grow companies and acquire capital. In America, people keep stock portfolios so that they can spend that money either on family or their senior living centers.

2) They have demographic problems. China yes, India not as much. China will have a Japan-like demographic winter, but not for 20 years; in that time, their economy will continue to grow. Moreover, I admit that a continuing unstable male/female ratio may cause increased crime and civil disturbance. India's fertility rate is still above 2, but the government foolishly IS celebrating those states where it has fallen below 2. So, yes, the demographic problem exists, but the growth possibilities exist DESPITE the problem.

Nov 15 06:52 AM

[rick12345:]

I don't think China expects developing markets to completely replace the US as their biggest customer, but I do believe it would like to expand its presence in these regions, if only to pick up some of the slack created by the financial crisis. Initially, they will concentrate efforts on building stronger ties with the EU , India, South America and Russia, however ultimately a country which is export driven cannot ignore a market the size of America. Demographics are the same all over the world; We had a war in the 1940's which created a baby boom throughout the whole of the western world; To say that China or Japans population is older would be ignorant. A growing skills crisis is slowly emerging throughout all of the developed world, the result of improved education and peoples general unwillingness to work in any environment other than the office. Will there be another industrial revolution based on technology and computers? Probably, but that is another story all together.

Nov 15 07:58 AM

[Nettligent:]

Dear fellow Americans, Live within your mean and stop being consumers of the world.

Nov 15 01:56 PM

[Brad Ferris:]

Emerging markets won't replace the US consumer in the next 5 years, but certainly the trends in population & economic growth indicate that they'll play a much bigger role in how goods and services are targeted by international companies. The US consumer (and government) has many problems right now, but EM's aren't in a position, yet, to take over as the dominant consumer over the next few years.

Nov 15 10:38 PM

[Anandakos:]

Silver-bug,

Unfortunately, you <b>can't</b> put your bets on China. They won't let you. While they have certainly welcomed investments by foreign corporations with open arms -- providing that they brought lots of technology to steal -- they do not actually allow foreign individuals to invest in their stock market.

When you buy a "China" fund you're buying shares in businesses that have factories or other operations in China, not Chinese companies themselves.

So good luck betting on China. When they're satisfied that they have bled those foreign companies dry of technology, they'll tax them out of existence and you'll lose your entire investment.

On Nov 13 05:17 PM silver-bug wrote:

> Good charts and diagrams, but I would like to see the demographics
> of the Chinese population, because that is the driving force of their
> economy. China has a growing middle class, as opposed to the shrinking
> middle class in America. It has a labor force of over 800 million
> people, and these are hard-working people who save money to buy things
> instead of using credit. China has $2.3 trillion worth of reserves
> to spend, and it spends this money wisely, developing infrastructure
> and obtaining vast amounts of natural resources for growth. And
> Chinese government is also providing a fiscal stimulus for it's people,
> which is also being spent wisely by the people.
>
> So, I think China has the ability to soak up the export slack with
> an increase in domestic consumption. It may slow down a bit, but
> it won't be significant. Most of the economic growth in the world
> will be driven by China and then followed by India, and other smaller
> eastern emerging market nations.
>
> I would put my bets on China.

Nov 15 11:22 PM

[Mad Hedge F...:]

gtr I have long sat beside the table of Mckinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients. These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up, sadly letting my bacon and eggs grow cold and congeal. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China’s GDP will triple relative to our own from current levels. A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this doesn’t work, they have another $500 billion package sitting on the shelf. But with GDP of only $4.3 trillion today, don’t count on China bailing out our $14.4 trillion economy. China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC’s, and to live in big cities. Asia has a huge edge over the West with a very pro growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75 story skyscraper is going up there every three hours! Some 1,000 years ago, the Silk Road was the world’s major trade route, and today intra Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths. Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth. To me this all adds up to big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

Nov 16 05:34 PM

[surfgeezer:]

"To say that China or Japans population is older would be ignorant"
Ignorant is not understanding math, what don't you get about a 1 child policy especially one that is likely a male.


On Nov 15 07:58 AM rick12345 wrote:

> I don't think China expects developing markets to completely replace
> the US as their biggest customer, but I do believe it would like
> to expand its presence in these regions, if only to pick up some
> of the slack created by the financial crisis. Initially, they will
> concentrate efforts on building stronger ties with the EU , India,
> South America and Russia, however ultimately a country which is export
> driven cannot ignore a market the size of America. Demographics are
> the same all over the world; We had a war in the 1940's which created
> a baby boom throughout the whole of the western world; To say that
> China or Japans population is older would be ignorant. A growing
> skills crisis is slowly emerging throughout all of the developed
> world, the result of improved education and peoples general unwillingness
> to work in any environment other than the office. Will there be another
> industrial revolution based on technology and computers? Probably,
> but that is another story all together.

Nov 22 09:55 PM