China's Exports

An interesting piece by Kevin Gallagher on what he calls China's "unsustainable growth model". Most interesting is research he cites from Yilmaz Akyuz about China's exports.

The paper shows empirical evidence which suggests that in recent years the average import content of Chinese exports has been between 40 and 50 per cent. In spite of this, about one-third of growth of income in China is estimated to have been due to exports because of their rapid growth reaching 25 per cent per annum. This figure goes up to 50 per cent if spillovers to domestic consumption and investment are accounted for. The sharp contraction of exports in 2009 resulted in a swing of almost 6 percentage points from 2002-07 in their contribution to growth and this could only be partly offset by a massive intervention package.

China cannot return to pre-crisis export growth rates at a time when growth in the US and Europe is below potential, unemployment remains high and sticky, and reduction in global imbalances is seen as the key to global stability. It needs to shift from export-led to consumption-led growth and reverse the downward trend in the share of consumption in national income. This calls for a higher share of wages in value-added and significantly greater government transfers to households, and large public spending on social infrastructure.

Export dependence in most other developing economies participating in the Sino-centric East Asian production network is no less than that in China. They are vulnerable to slower expansion of markets in the US and Europe not only directly, but also through China. For these countries China cannot replace the US even if it maintained rapid GDP growth based on domestic consumption: its GDP is about one-third of the US, the share of Chinese households in GDP is much smaller, they save a much higher proportion of disposable income and the import content of household consumption is much lower than the US. These countries, even the smaller ones, cannot easily redirect their exports to third markets or absorb them domestically. They not only need to increase domestic spending but also restructure industries so as to change their product mix.