In the January 10, 2010 edition of the yahoo.com news, it was promulgated that China has overtaken Germany as the world’s biggest exporter even though full confirmation is expected in February 2010 when the final figures for Europe’s biggest economy is released. The assertion from the perspective of the author of the article is a reflection of the economic strides China has made to reach a pinnacle of an economic super power and also a vivid sign of a gradual shift of power from the West to the East. According to the article, the total export in 2009 for China was more than $1.2trillion as against $1.17 forecasted for Germany.
Really, this is not the first time China has overtaken Germany with regards to economy issues. More so, this is germane and a memento to what happened in 2007 with regards to the two countries. Recall in 2007, China overtook Germany as the world’s third biggest economy and obviously it should have served as a signal that the country is on course to unseat Germany as the world’s largest exporter. At least, the incident should not preposterous to the world considering the fact that the symptoms were evident enough.
In my article titled “Another Economic Bubble Burst Ahead- China, I prognosticated the possibility of China becoming the locomotive engine driving the world economy as it is predestined to lead the world in the industrial sector, technology sector and the financial sector. Believe it or not, the attainment of the status of the world’s largest exporter coupled with technology and strong financial base suggest a paradigm of the country being the “locomotive” engine driving the world economy. If China continues to maintain its GDP growth rate of over 8% whilst that of the western world hovers around growth values of less than 3%, it is likely China will dethrone Japan as the world’s second biggest economy by the year 2015 and if possible in the years after overtake United States as the world’s largest economy. This hypothesis is based on the 2008 GDP growth estimates where China recorded 9.6% with Japan having -0.4%, Germany 1% and U.S 1.1%. Optimists argue that it is not possible for China to overtake United States as the world’s biggest economy and they could be partially right. However, the world did not envision China would overtake United States in Auto sales in 2009. Again, analyst did not envisage China overtaking Germany so soon and here we are it has happened. Indeed, the moment may be right and China could be said to be on its way to the throne. As an analyst, I am of the view that China can overtake Japan but not United States. There are several factors involved here which will be discussed in a later article. But for now, I will touch on one of the factors namely the economic statistic GDP (purchasing power parity) per CAPITA which is only an indicator of the standard of living. Though this is not a true measurement for standard of living it can be used as a proxy for accessing the standard of living of countries. China has a population of about 1.3 billion with an estimated growth of 0.655 % (2009 estimate) whilst the U.S has a population of about 307 million and an estimated growth of 0.975 % (2009 estimate). China has estimated GDP (ppp) per CAPITA of $2,033 and is ranked 131th out of 207 economies in the world in terms of per capita income. United States value is $44,155 and is ranked 8th also out of 207 economies. Hypothetically, the standard of living of the people in the United States should be about ten times better than that of China. Doing the math here, it presupposes that the ability of the citizens to impact the economy (in terms of GDP growth) through their purchasing power is ten times more. This also means the ability of the United States to maintain its economy size judging from the fact that the U.S economy depends much on domestic consumer spending is more predictable as against China. If China’s economy is to be dependant on domestic spending in the midst of global slump in exports, then the low GDP (ppp) per CAPITA signals a disadvantage compared to United States. China may increase its GDP growth but it would have to leverage its per capita by bridging the wide purchasing power parity gap between its urban and rural population segments. Subsequently, it may call for policies that would increase the standard of living of its people across all segments.
How be it, China cannot overtake the U.S in terms of economy size until this population segment factor and other factors are diligently pursued and completed. Meanwhile, in terms of global competitiveness they are ranked nearly the same (U.S is 5.59/134 whilst China is 4.73/134). However, in terms of attracting and retaining investors or Foreign Direct Investment, U.S is better ranked than China. Reminder is the growing impasse between Google and China about the internet security breach prompting threats of Google leaving China. What is not clear is whether China would accept the departure of Google. If Google should leave, what effect will it have on the credibility of companies or nations doing business with China? Now, proponents of GDP per CAPITA economics may argue that the GDP per CAPITA statistic is not a good measure for standard of living and personal income levels in a country. Nevertheless, all things being equal there is a systematic level of correlation between GDP per CAPITA and standard of living in most countries. That is to say GDP per CAPITA decreases as the standard of living decrease and vice versa.
Strangely, the yahoo.com news article attributed the feat of China to its ability to enact policies to deal with the world recession. The article emphasized that its policies were able to cushion the economic shock from the global economic crises whilst other nations were overwhelmed by the crisis. It must be stressed here that much as the policies and global recovery were contributing factors, the real cause of China’s survival and stronger emergence is bottled up in its exchange rate policies and government subsidies and financial assistance package from the stimulus. In fact, the combine policy framework of exchange rate manipulation and government subsidies promotes low pricing strategy for its exports ultimately increasing the attractiveness of its products and also its market share of the world’s export. Now, the global imbalance cannot be completely removed as the Chinese government would want to enact policies and strategies that will give Chinese products an edge in exports in addition to promoting less import. Really, in the midst of all these developments there are two questions that would need to be addressed by the world and they are
1. Whether China the current locomotive engine of the world economy would bow to another currency revaluation pressure
2. Whether the trade imbalance between China and the world is a threat in terms of monopoly and whether the world has other options to deal with it.
The objective of this two part article is to discuss in circumspect the ramifications of the unanswered questions and what it means for the world.
Currency revaluation issue
In the next few months and perhaps years there is expected to be a growing pressure on China by the United States, Germany and the other economies of the world about the urgent need for China to revaluate its currency the Yuan to correct for and curtail the growing trade imbalance between China and these economies. It is an undisputable fact that China has trade surplus with almost all these countries as these economies are drowning in mounting trade deficit with no end in sight. The fact is China has been through such barrage of criticisms before with regards to the impact of its low valued currency on exports. Recall in 2005, China under growing criticism of the impact of its low valued currency on international trade was compelled to revalue the Yuan by a whooping 2% against the dollar. Additionally, a policy change of pursuing a floating exchange rate system for its currency was effected. The corollary was the creation of a currency (the Yuan) whose value was based on a set of major currencies which could deviate as much as 0.5% within a day. Yet again, the western world in the nearest future may be agitating for another round of revaluation. Europeans and the United States may be perturbed because competition with China is becoming difficult primarily due to the Yuan being relatively low in value which makes the products from China less expensive for foreign countries and that of EU and U.S more expensive. However, criticisms may not be feasible this time. It is likely China may not vouchsafe to the western countries led pressure to revalue its currency. Apparently, the world may be forced to seek for other options of dealing with the situation which could call for inferior tactics such as imposition of trade tariffs, quotas e.t.c. on Chinese exports. But one wonders if such option will yield the expected results as well judging from the fact that an action plan of this sort may seem more visionary to China than pragmatic and results-producing. On the other hand, China may argue that revaluation of the yuan will have marginal impact on the exports trend and subsequently the global imbalance using the developments in 2005 as the basis for argument. In retrospect, the revaluation of its currency in 2005 produced a marginal effect on the attractiveness of its exports and consequently China may not yield to the exchange rate policies again. Analytically, revaluation may not reduce the competitiveness of Chinese products neither would it correct the international trade imbalance due to the fact that there are other factors other than exchange rate policies that contribute to the attractiveness of its exports. These are factors that are contributing immensely to the low priced exports therefore exacerbating the global trade imbalance.
Now, the factors other than exchange rate that make its exports superior in terms of global demand are government subsidies, expansion of China’s trade horizon and piracy problems. Government provides subsidies for exporters which culminate in lower cost of production. These firms and investors receive free loans and some free factors of production such as land which has led to lower cost of production and lower pricing of exports. There are also cases of other government fiscal inputs such as increased tax rebates on exports, increased tax refunds and improved export credit insurance during the year 2009. Let’s not forget also the 4 trillion yuan ($586 billion) stimulus package injected into the economy by the government. All these factors are incentives that culminate in a lower cost of production and substantiate lower pricing of its exports in addition to making it more competitive. Ultimately, if China should revalue its currency again to make its products expensive, the effect on trade imbalance would be marginal. But the question that remains is whether the government would remove these incentives for its exports to be expensive and to plummet.
Currently, China has judiciously widen its trade horizon with several countries in the world and should the western world reduce their imports of Chinese goods, there is the possibility of China expanding its trade with the East (The Asian block), South America (predominantly Brazil based on BRIC alliance), and Africa where it has made unimaginable strides. This is even against the background that the western world is the major trading partner of China. Turning their attention away from the western world will be a desperate move as the country would want to maintain its superiority in exports. On the other hand, people in the western world attracted to China’s low priced products because of the propensity to make some savings in this era of economic hardships. So the situation is very paradoxical with regards to the export between China and the western world.
Another factor that has contributed to reduction in market share for the western world is the lack of restrictions on piracy in China. Individuals engage in fictitious production of products that are similar to those produced by EU or United States firms operating in China and abroad. For example low-tech goods or electronic gadgets such as CDs and DVDs can easily be produced by individuals and this is taking market share from other countries. The other serious defect of this problem is the reduction in imports as well for China. China much as it exports lots of low-tech goods also imports many as well. However, due to piracy products in the system, there is less import demand compared to actually what the import should have been. This is to the advantage of China obviously increasing its net exports and GDP as well.
All in all, the demand by the world on China to pursue exchange rate policies to correct the imbalance in trade may not suffice because of these factors and secondly China would want to maintain its position in the world economy. Nevertheless, on a positive note the growth of China is good for the world. Like a German analyst said, growth in China is good for the other economies of the world as the country’s demand for capital goods such as machinery, raw materials, oil and high value products used in its industrial sector also stimulates exports from other countries such as Germany and United States. However, what remains to be known is whether future policies would seek to monopolize the world economy by promoting vertical integration in the Chinese industrial sector. An action plan of vertical integration will ultimately reduce the importation of heavy duty or high valued products by firms in China. Read the next segment of this article!
Author: Charles Horace Ampong [MSc(Eng), MBA]
GLG Councils Consultant
Blog: http://www.charliepee.blogspot.com
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