Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Is Chinese export growth accelerating once again?

by Brad Setser
June 11, 2008

Most of the headlines reporting on China’s May trade data focused on the small y/y fall in China’s trade surplus. Given the rise in the price of oil, China’s surplus should be falling. The surprise is that it isn’t falling more.

The real surprise in the May data was the strength of Chinese export growth. May exports were up 28% year over year. That is quite strong. Exports were only up 22% in April.


My projections suggest that if import growth stays at its average pace over the last three months (around 30%) and export growth stays at its average pace over the last three months (about 27%), China’s trade surplus would actually grow in dollar terms this year. China’s $260 billion goods surplus in 2007 (customs basis) would rise to around $280 billion in 2008. Throw in a rise in the interest income on China’s growing stockpile of foreign assets, and China’s already large current account surplus — $371 billion, or over 11% of China’s GDP — would get even bigger. Total exports would increase to a bit over $1.5 trillion, and imports would rise about $1.2 trillion (with soaring commodity prices explaining most of the rise)

If the recent rise in export growth is a blip and the 22% increase in China’s year to date exports (January-May 2008 v January-May 2007) is projected out along with the 31% import growth, China’s trade surplus would shrink, but only modestly. It would still clock in at $240 billion.

What might explain the surprising strength of China’s export growth? It is quite clear that the current increase in China’s exports — and the reacceleration in export growth — hasn’t been driven by the US.

The obvious point to make is that China’s currency remains weak against most other currencies. The RMB is at weak against the euro as it was at the end of 2004. In real effective terms, the IMF’s data indicates that the RMB is no stronger now than in 2000. Nothing else about China is anywhere close to its 2000 level. Productivity is way up. Exports have gone from $250 billion in 2000 to a projected $1500 billion in 2008. The RMB should be much stronger in real terms.

It doesn’t take a rocket scientist to figure out why China’s exports to Europe are growing three times as fast (28% v 9%) as its exports to the US. Li Yanping and Nipa Piboontanasawat report:

Exports to the U.S. rose 9.1 percent in the first five months from a year earlier, up from the 6.9 percent gain through April, the customs bureau said. Shipments to the European Union climbed 27.4 percent, an increase from 25.4 percent.

But that may not be all. The RMB, while weak, is appreciating in real terms for the first time in a long time. Higher inflation is one mechanism for real adjustment. The oil exporters are booming, but the US is not. Overall, it isn’t precisely the kind of environment that should produce a return to 30% y/y export growth.

What other explanations are there?

Base effects are one possibility. Bloomberg reports that May exports and imports both were on the low side last year because of an usually large number of vacation dates. Low 2007 exports in turn helped push up the y/y growth rate. Some of the apparent acceleration may disappear with the June data. China’s data isn’t seasonally adjusted, and the various holidays can play havoc on the data.

The other possibility is that Chinese exporters are over-stating their exports in order to create the legal basis to move money into China (an exporter has the legal right to sell dollars for RMB). Strong export growth in May — according to this theory — would be a response to China’s efforts to tighten its controls on capital inflows. Michael Pettis reports that some folks have found quite ingenious ways to get money in.

I generally have been skeptical of the argument that China’s trade surplus is overstated by disguised capital inflows. That argument always crops up when China’s exports surprise on the upside. And most of the growth in China’s exports over time seems to be real. But given the strong incentives to move money into China created when US rates are lower than Chinese rates, I am no longer quite as confident that all of the surplus is real.

But if it is, it almost goes without saying that the apparent reacceleration in China’s export growth is inconsistent with a necessary adjustment in the world economy. If China’s surplus rises this year in the face of a massive oil shock, the deficits of the other oil importers have to be correspondingly bigger. Right now China’s surplus should be falling, not rising. And right now China’s own domestic conditions also call for a stronger not a weaker RMB.

NOTE: The last paragraph has been edited; it initially said deficits of oil exporters when I meant the deficit of the oil importers. Mark Williams’ comment suggests — persuasively in my view — that a reduction in the May holidays likely explains the year over year export increase. The June data should settle this.


  • Posted by Alessandro

    Brad, can there be a component coming from the stimulus checks? The PBoC has financed a big chunk of it and quite some money goes back to buy Chinese exports.

    In effect China shipped an extra load of goods in exchange of an extra load of IOU. That’s relatively easy to pump up export when you ship stuff for free (does anybody really expects the IOUs to be worth the nominal value?)

  • Posted by bsetser

    alessandro — quite possibly. I haven’t gotten my check yet, so the explanation didn’t occur to me.

  • Posted by Dave J. Chiang

    Reportedly last month, the Apple Corporation unloaded 120 shipping containers full of the next generation 3G Apple iPhones. For $199 retail price, the 3G Apple iPhone is contract manufactured in Zhuhai China by the Chinese Foxcomm corporation. The world’s consumer electronics industry is mostly clustered around Dongguan China. Even the Japanese companies have shifted manufacturing and assembly to the Pearl River Delta region between Hong Kong and Guangzhou.

    The high-tech iPhone and Mac computers are almost entirely contract manufactured in China. The US Intel Corporation recently opened a multi-billion dollar semiconductor Fab in Dalian China for computer motherboard chipsets. Intel microprocessor chips for the Apple Mac are packaged in Chengdu China. It is not just lower labor costs, but the industrial clustering of all electronic suppliers in southern China for components. The Chinese comparative advantage in consumer electronics manufacturing won’t be offset by even another 20% devaluation of the US dollar.

  • Posted by bsetser

    DJC — that sounds like an argument for a 40% revaluation v the dollar. after all, we know that a 40% (or more) move in the rmb v the euro did have an impact on China’s trade …

  • Posted by Mark Williams

    A large chunk of the acceleration will almost certainly be unwound in June’s data. May’s Golden Week was cancelled this year and replaced by a single day’s holiday. While May Golden Week never caused as much disruption to activity as the Chinese New Year holiday, it did lead to some lull in activity. In the past, exports have usually dropped by around 5% from April to May. This year they rose by 1.5%, roughly 20% at an annualised pace. That’s strong for most countries, but normal for China.

  • Posted by Gabor

    Is the Chinese export growth in real or nominal terms?
    PPI is quite strong at 8.2% yoy in May.
    Dont know about export PPI though.

  • Posted by bsetser

    Mark — thanks for the details on the reduction in Golden week. Makes sense.

    Gabor. The data is in nominal dollars.

  • Posted by Howard Richman


    Interesting thought piece. I think you have identified two of the major reasons why Chinese exports continue to grow as fast as its imports, despite the rising price of oil, but have may have missed the third. Here are two that you got which are clearly major contributors:

    1. Chinese productivity growth. As you noted, Chinese productivity is increasing. High profits of the past leads to high investment in the past which leads to greater efficiency in the present.

    2. Weak Chinese currency. As you noted, the RMB is no stronger vs. the euro than it was in 2004. This is due to continuing Chinese Central Bank purchases of foreign currencies, especially the euro and the dollar, as part of their mercantilist strategy designed to increase exports and reduce imports.

    Here is my theory of the major reason that you didn’t mention: Growing exports to oil exporting countries. This theory is quite testable. Just compare China’s exports to oil exporting countries in the present with those last year.

    This third reason could also help explain US growth in exports. The basic idea is taught in the economics textbooks, that trade is balanced by market forces in the absence of international capital flows. Therefore, according to theory, as the price of oil goes up, oil exporting countries have more to spend on imports, including imports from the US and China. If they don’t spend all of that money, then, in the absence of international capital flows, their currencies would rise relative to other countries and the change in currency values would cause the adjustment.

    It is simplistic to attribute the rising US trade deficits to the rising cost of the oil. The natural situation is balanced trade, not imbalanced trade. If it weren’t for international capital flows, trade would always be balanced.

    My theory is easily testable. It predicts that US and Chinese exports should be especially rising with oil exporting countries.

    Howard Richman

  • Posted by Gabor

    Vow, thanks. I thought it was in nominal RMB.
    So it is not so big an increase in nominal RMB and even less in real terms given the strong PPI.

    Maybe as the RMB apreciation was blocked at the end of March, producers could raise their prices to offset domestic inflation. Just speculating.

  • Posted by Dave Chiang

    The wage differential for low skilled labor intensive employment is 30-1 between the United States and China. If the economic goal of US policymakers is to equalize wages for low skilled workers in both nations, the US Dollar will be further devalued into worthless toilet paper. No nation in world history has ever devalued its currency into to economic prosperity. What now even CNBC’s Larry Kudlow refers to as the American peso, the systematic devaluation of the US Dollar versus the Mexican peso, Russian Ruble and Chinese yuan is a national disgrace.

  • Posted by mheck

    If China’s surplus rises this year in the face of a massive oil shock, the deficits of the other oil exporters have to be correspondingly bigger.

    Probably you mean ‘other oil *importers*’. You may correct this, if you want to publish this elsewhere.
    But even then, one could as well say, the surpluses of oil exporters have to shrink correspondingly…

  • Posted by Dave Chiang

    The continued focus on the China yuan (is US inflation not high enough) is a questionable idea that somehow the Chinese are saving too much money – that they should become rampant consumers like their bankrupted American peers. The high Chinese savings rate, is not an issue that is structurally more problematic than the average Joe6pack in the US just being fiscally irresponsible with their money. It is apples to oranges, and this is an issue that really should be addressed as an US domestic issue. Another area where I think Paulson is a bit off in his pointed criticism of China’s economy being opaque to foreign investment. It is interesting that some 70 billion in FDI is making it into China on a yearly basis (not including the 40 billion in hot money), yet the Chinese rules are somehow opaque.

  • Posted by bsetser

    Howard — both US and Chinese exports to the oil-exporting economies are growing rapidly. Their import bills just happen to be growing more rapidly.

    Mheck — thanks for catching my error. If China makes up for its rising oil import bill with a rising surplus with Europe, i think europe ends up being the region that absorbs the biggest swing in its current account position: higher oil, offset in part by higher exports to the oil-exporting economies and a larger deficit with China.

  • Posted by Howard Richman


    Thank you for checking into the growth of US and Chinese exports to oil-exporting economies.


  • Posted by david_in_ct

    The US trade deficit is going to take a huge turn for the better over the next few years.
    Oil has priced itself out of the transportation fuel market and the technological fix will be to eliminate its use entirely. Once this starts happening (18 months till the GM volt kicks off the parade) the change will be breathtakingly fast. I believe that the adoption of all electric vehicles will occur virtually overnight, especially in the US.
    It will be like ipods, zero to complete market saturation in a few years.

  • Posted by Rien Huizer

    “china” does not export, Exporters residing in China do. Many of these exporters are subsidiaries of or contract manufacturers for foreign (Taiwanese, American, Japanese, Korean, European etc) companies, often fairly recently established. These firms tend to have brand- and market share strategies and expect their Chinese operations to be competitive. Given the still existing cost flexibities and earlier mentioned increasing efficiency of production, even a big RMB revaluation would not have much effect. Imports are dominated by raw materials and intercompany (equipment and components) trade. It is definitely not 100% under the control of “China”, if that means the state.

  • Posted by bsetser

    Rien — I liked your points on SWFs, though Wall street would scream if “tribal” SWFs were precluded from trading actively. ADIA generates a lot of business …

    I fail though to see why exchange rates don’t matter to contract manufacturers. The recent trend (see the world bank’s work on this, and the IMf’s work) has been to subsititute Chinese components for imported components. This presumably has something to do with the exchange rate. And if the RMB rises, contract manufacturers would look elsewhere. If the cost savings on production in China are not large enough, US and European MNCs would source production in their home markets (see the Wall Street Journal story in my next post).

    Finally, the empirical evidence strongly suggests Chinese — meaning goods production in China, whether by Chinese firms, Asian contract manufacturers or US/ european firms — exports does respond to the real exchange rate. Goldman found that a fall in the real value of the RMB significantly increased China’s export growth. And the pattern of Chinese trade with Europe provides prima facia evidence that the exchange rate matters. Do you really think China’s (with China defined in the BoP sense to include goods produced in China by foreign enterprises) current export surge to Europe is unrelated to the huge fall in the RMB v the Euro?

    finally, China’s export model has moved beyond the Asian norm. Other Asian economies never ran 10% of GDP current account surpluses during the investment phase of their development. such large surpluses are also new for China — and perhaps not coincidentally, they emerged only after the rmb joined the dollar in a broad based depreciation against the world.

  • Posted by Andy

    I went to Guangzhou to get some supply for my business on April this year. Indeed, the prices have gone up because the yuan is stronger, but I have no choice. China is still cheaper than many nations and the trading system is more sophisticated there.

    What I noticed was that Chinese government really organized things really well to support their trade. Sure, US and Europe are still the main destination for Chinese goods. But China has built connection all over the world, even in Iraq and Afghanistan. Even without US or Europe, China will still be able to sell their goods to emerging markets and their own domestic market. Recently, there is also news that China and Germany will launch a rail cargo between two nations.

    As good leadership is not enough, the Chinese productivity is also amazing. They’re willing to work longer hours. Some people say they’re enslaved, but that is just pure ballooney. They should go to the factories in China and talk with the workers themselves.

  • Posted by Rien Huizer

    Thanks Brad, patience pse with a retiree and hobby scholar. My expertise is in institutions, finance and political economy of East Asia, that combination tends to look at numerical analysis with some caution.. But, I don’t think the IMF guys and me are too far apart. I agree that net exports are becoming less of a processing spread and more of a residual of two variables with different FX elasticities. But I believe that there is still a lot of cheap labor to be mined by the traditional sweatshop&pollution operators (moving inland, facilitated by improving transport and utilities) whilst at the oppositie end of the development ladder there are emerging clusters of manufacturing capabilities (with global dominance) that can not be moved easily, are extremely competitive and may be on the verge op price setting capacity. A much longer piece on this topic would have used a sort of parabolic pattern of FX sensitivity, with positions on the development ladder as horizontal axis. As China as a whole climbs that ladder, sensitivity will first increase and later decrease again as more and more industries and locations become short term price setters and sweatshops move to India. Given the potential scale of Chinese firms’ (assuming a Japanese level of openness) domestic markets, the victors (locally/HK/ROC owned) as well as entrenched MNCs will have tremendous global pricing power. By then of course financial markets in China will have grown up, firms will have developed normal sensitivities for price-based monetary policy and the RMB become a normal currency. It is all matter of time, subject to political continuity and a benevolent external trading regime. It may not be in the US’ long term interest to let that happen, but hat is another story.