Will the Chinese export rate drop?

Since the economic crisis hit the Western countries, many have thought that unfavorable course of events may be somehow reverted by the positive influence of the growing Chinese economy. It swiftly recovered after 2009, reacted well for the governmental stimulus pack and regained its previous growth rate. For many years the export was the Chinese economy main driving force, but will it be the same in the future?

chinese export

In 1979 China has started walking on the pathway of Reform and Opening Up. The country allowed many foreign investments, for the first time after the establishment of Communist China, in the beginning, only in the form of joint-venture companies. The companies took advantage of low labor costs and dedicated workforce, started to export tons of products, mostly those easy to manufacture such as slippers and T-shirts. The influx of cash helped to change the situation, local enterprises were constantly developing, they put a lot of money in R&D and were able to manufacture and sell more sophisticated products. Now, China exports almost everything: from clothes to advanced machinery, from traditional art to modern weaponry. Thousands of foreign entrepreneurs took a chance to outsource their production to China and were able to reduce dramatically their own costs, but the question is, will this trend last forever?

At first some hard data: at the turn of the century the Chinese economy has expanded at historically unprecedented rates. Its share in the global export was around 2% in 1998 and 10.4% in 2010. Over the years 1998 to 2009 China’s export grew by an annual average of 23%. Various factors contributed to this growth: 2009 crisis may have limited the aggregate demand, but meanwhile clients turned to less complicated and cheaper products from China.

But the end of “cheap China” is near. In less than a decade, wages of Chinese workers have increased thrice. In many sectors of industry (especially basic products) the Chinese has lost the competitive edge and many of the Western corporations decided to relocate to other Southeast Asian countries, because Vietnam, Burma and Bangladesh offer less costly workforce. Due to one research, around 30% of American manufacturers were considering moving the production out of China. Major manufacturers, such as Foxconn, were forced to raise the wages drastically; otherwise they may face disruptions in production. Furthermore, some reports claim that contrary to the popular saying, the numbers do lie. Surprisingly good export growth figures from the first half of 2013 are believed to be modified for propaganda reasons.

Another risk for Chinese exporters is the appreciation of renminbi (yuan). Most of the Chinese suppliers rely hard on the current exchange rate, which is changing quite fast and the outcome is detrimental (we no longer pay 10 RMB for 1 EUR like five years before, it is more like 7RMB). In order to keep their profits, they will have to increase prices, and increasing prices may affect the demand.

Meanwhile the Chinese government is making many efforts to change the orientation of the economy and increase the internal demand. It may be seen as a way of rebalancing shrinking demand for Chinese goods abroad, but will the demand be shrinking? We need to realize that not necessarily.

First of all, the Chinese have more chance to deal with growing wages than other countries, which had the same problem in the past (f.e. Japan). Not every part of China is equally developed and the production can be still moved inland, to more impoverished regions. It will not only help to develop economically backward Western China, it will also help producers to retain price advantage.

Secondly, the quality of Chinese products rises, and the price is still good. Notable examples include solar panels, import of which caused European Commission to start anti-dumping procedure, computers (Lenovo just has become the biggest producer of personal computers) and other hi-tech equipment. Although most of the Chinese brands are still perceived by consumers as unreliable, we must remember what was said of Japanese or Korean products, when they entered the Western markets for the first time.

Finally, we should be aware of the fact that major Chinese companies receive big government support. Of course the state owned enterprises, such as Sinopec or CNOOC, are directly controlled by the government and encouraged to “go global”, but a lot of reports confirm significant support for private companies such as Huawei and ZTE, the support may include direct subsidizing and preferential, large credit lines. With government backing, Chinese companies can offer competitive prices and export more goods.

So, will the Chinese export rate drop? A sensible answer is: it probably will not rise so quickly as before, but Chinese exports will still continue to develop.