Will the Chinese export rate drop?

Since the economic crisis hit, many have thought that the positive influence of the Chinese economy may somehow revert the unfavorable course of events. It swiftly recovered after 2009, reacted well to the governmental stimulus pack, and regained its previous growth rate. Another major hit was in 2020 when lockdowns lowered production capacity in China and disrupted supply chains. Chinese export rate bounced back again and rose higher than ever before. For many years export was the Chinese economy’s main driving force, but will it be the same in the future?

Will the Chinese export rate drop?

In 1979 China introduced economic reform known as Reform and Opening-up. The country allowed many foreign investments, for the first time after the establishment of the People’s Republic of China, in the beginning, only in the form of joint-venture companies. The companies took advantage of low labor costs and dedicated workforce and 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 into R&D, and they were able to manufacture and sell more sophisticated products. Now, China exports almost everything: from clothes to advanced machinery, from traditional art to weaponry. Thousands of foreign entrepreneurs took a chance to outsource their production to China and were able to reduce their costs dramatically, but the question is, will this trend last forever?

First, some hard data: at the turn of the century, the Chinese economy expanded at unprecedented rates. Its share in the global export was around 1% in the 1970s, 3% in 1995, and 10.4% in 2010, reaching 14.7% in 2020. China is no. 1 and the only developing country in the top 5 export countries. In 2020, China’s export value was over ten times higher, and its export volume was eight times higher than in 2000.

Why are Chinese products popular?

Why is everything made in China? Importing from China is a profitable business because of the following:

  • mass production – cheaper production cost per piece
  • low-cost labor force
  • permissive regulatory environment
  • implementation of automation and robotics
  • high-quality products thanks to the infrastructure
  • accessible manufacturing materials
  • expertise in design – total customization of a product (ODM)
  • network.

China is a manufacturing powerhouse due to cheap labor and China’s business ecosystem.

“Cheap China”

But the end of “cheap China” may be near. In the last decade, the wages of Chinese workers have doubled. In many sectors of industry (especially essential products), the Chinese have lost their competitive edge. Many Western corporations decided to relocate to other Southeast Asian countries because Vietnam, Burma, and Bangladesh offer a cheaper workforce. According to one research, around 30% of American manufacturers were considering moving production out of China.

Major manufacturers, such as Foxconn, were forced to raise wages drastically; otherwise, they may face disruptions in production. Furthermore, some reports claim that, contrary to popular belief, the export growth figures could be “modified.”

Yuan and Chinese exports

Another risk for Chinese exporters is the renminbi (yuan) appreciation. Most 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 years before, it is more like 7-8 RMB). To keep their profits, they will have to increase prices, which may affect the demand.

Keeping mass production in China

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

First, the Chinese have more chances to deal with growing wages than other countries, which had the same issue in the past (like Japan). Not every part of China is equally developed, and the production can still be moved inland to more impoverished regions. The minimum wage varies from region to region, and moving manufacturing to other areas may be profitable. It will not only help to develop economically backward Western China, but it will also help producers to retain the price advantage.

Secondly, the quality of Chinese products rises, and the price is still a competitive edge. Solar panels from China are still popular despite the EU anti-dumping duty. Top China’s exports are broadcasting equipment, computers (Lenovo is the biggest producer of personal computers), integrated circuits, and other hi-tech equipment. Although consumers still perceive most Chinese brands 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 that major Chinese companies receive extensive government support. Of course, state-owned enterprises, such as Sinopec or CNOOC, are directly controlled by the government and encouraged to “Go Global.” Still, many 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? There are always some fluctuations, but China will keep its title as the world’s factory for some time.