China's Dependence on Exports: An Old Chinese Myth?

I love it when prevailing myths are exposed, especially when I have my own doubts but don't have the wherewithal to prove otherwise. So it was no surprise that I throughly enjoyed this article from last week's Economist.

The myth in question deals with China's dependence on exports. The most often quoted statistics is the ratio of total exports to GDP which is something like 40%. Herein lies the fallacy: "Exports are measured as gross revenue while GDP is measured in value-added terms." The article quotes a study by UBS that conclude the "true" export share is just under 10% GDP.

This is highly pertinent to resource investors as China is by far the dominant user of commodities. If this conclusion were true, it would be a strong argument to continue holding base metal and energy companies or even add to them as others worry about the prospects of global growth in the face of a U.S. slowdown.

It has to be noted that this argument says nothing about how Chinese financial markets may react in the short run. Stocks in resource companies should be a safer bet than Chinese stocks which may have troubles of their own. And I'm not saying this because Asian stocks are awash in red tonight with the exception of Taiwan after a landslide victory by the China-friendly KMT in the parliamentary elections.

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I should have been clearer in my characterization of the iMCSI Emerging Markets Index Fund (EEM) chart the other day. It's in a triangle rather than a clear downtrend as there isn't lower lows. But if we break below 141, then look out below! (See Martin Goldberg)

Comments

[J.D]

GDP describes economic activity but doesn't explain it. Take exports as a proxy for China's integration into global markets and it becomes apparent that China's performance is strongly dependant on two-way flows of goods, services, and investment. As that catalyst now fades, China's downside looms large.

[All Roads]

As metioned in my original posting, Jon Anderson at UBS was not trying to say that China is not dependent. Through his article he is trying to show that China has become less and less dependent on trade, and that unlike some have said, China will not simply implode should the US market retract.

With that said, a lot of the wealth in China is linked to trade and will continue to be so. Therefore if trade takes a big hit, there will be ripple effects.

Will it spell disaster for China? I think the answers is no. that perhaps 10 years ago China was much more sensitive, but that in the past 10 years China has built in some economic stability and dependence from trade that would allow it to weather the storm much better.

R
allroadsleadtochina.co...

[J.D]

As a component of GDP growth, exports have actually grown immensely in the last few years thanks to China's large trade surplus. That said, most GDP growth remains linked to domestic investment. However, as I can observe from the numerous half-empty office and residential buildings, and the innumerable sites which are in the final stage of construction, there is clearly something amiss. China hype aside, analysts need to take a second look. Unfortunately, banks are too busy chasing fees, and too scared of offending the Chinese authorities, to do a good job.