Yesterday, I wrote about how China watchers’ longtime focus on Beijing’s practice of artificially cheapening its currency to gain trade advantages has often blinded them to all the other ploys that Chinese leaders can and frequently have used to rig markets. Today, let’s look at a broader question: whether China still needs to engage so much in exchange-rate and other forms of protectionism in the first place.
A large chorus of influential voices says “No,” pointing to evidence they claim reveals that China no longer relies so heavily on exports to generate growth, and that a shift to a domestic consumption-led national business model is already underway. Two of the leading pieces of evidence: Examinations of the shrinking role exports have actually played in boosting the Chinese economy, and the dramatic decline (from 10.1 percent in 2007 to two percent in 2013) of its overall international surplus as a share of its economy. (This year it’s likely to rebound to 3.1 percent.)
These are all important trends, but the definitions of export-led and consumption-led are incomplete. Presently, they seem simply to reflect the export or current account share of the economy at any given moment. I think they need to look at another indicator, too: the actual growth rate itself. The reason? If a shrinkage of the growth-generating role played by exports is accompanied by a shrinkage of growth itself, it doesn’t follow that exports have become less important engines of growth. Instead, it strongly suggests that the engine remains crucial, but that it’s weakening.
At this point, I need to note that exports and domestic consumption aren’t the only ingredients in the recipe for economic growth. Government spending and business spending are required, too, and in China, the latter has been especially important in the last few years. But the actual data (which come from the World Bank) show clearly that, through last year, when exports have surged, so has China’s growth, and when their expansion has slowed, so has China’s. As a result, they suggest that, for the time being, China will struggle to quicken the pace of growth without a big export boost.
Below are the figures for China’s actual annual growth rates since 2000, and for exports as a share of its economy year for each of those years. Exports as a share of the economy (gross domestic product) are not identical to the current account surplus as a share of the economy. And they boost growth only if the balance of trade improves. But since China does run trade and broader current account surpluses, exports’ share of the economy is a reasonable proxy for trade’s growth role.
What these numbers make clear is that, between 2000 and 2007, this export share jumped more than 65 percent, and China’s growth rate soared by more than 69 percent. As the Great Recession swept over the world, China’s growth remained strong even though the export share plummeted – because Chinese leaders filled the gap with a massive stimulus program. As the effects of the stimulus faded, and in fact, Chinese authorities became worried about inflating a credit bubble, the export share of the economy continued declining – and by 2012, growth had fallen dramatically.
If China can maintain even current, historically modest growth rates despite a significant drop in the export share of the economy, we’ll know that it’s relying for growth on something else. But as the data demonstrate, China remains a long way from achieving that goal – and that Beijing’s incentives to maximize its exports and trade surpluses by hook or by crook remain strong.
China exports as share of GDP Annual GDP growth (%)
2000 23 8.4
2001 23 8.3
2002 25 9.1
2003 30 10.0
2004 34 10.1
2005 37 11.3
2006 39 12.7
2007 38 14.2
2008 35 9.6
2009 27 9.2
2010 29 10.4
2011 29 9.3
2012 27 7.7
2013 26 7.7