Nicholas Lardy talks about the link between Yuan and China’s Trade Surplus in Parsing China’s Trade Surplus. Included are interesting statistics on imports vs export and foreign company trade figures in China.
What’s driving China’s trade surplus?
The big driver isn’t on the export side but on the import side. Export growth fell a bit, but import growth was barely half what it was in 2004, so there has been this ballooning of the trade surplus.
Based on the data available so far, it looks like the biggest decline in imports is in machinery and equipment. Parts and components that go into export processing are still growing at 25% to 30% annually. But machinery and equipment is running at about a third the rate of 2004 — that’s to say at 10% rather than the 30%-plus growth seen in 2004. So what we’re seeing in 2005 was some slowing in the pace of domestic investment.
And a lot of those goods are produced by Western multinationals exporting from China, right?
About 55% of all exports are from foreign-owned companies or joint ventures. That share has been growing about 1 or 2 percentage points annually in recent years but may be stabilizing now. It looks like foreign capital coming into China in 2005 is going to be down slightly — the first time in many years that it will have fallen. That may mean the share of foreign-produced goods won’t grow as fast as it has in the past.
But even if you take out all the foreign-owned exporters, Chinese domestic companies have been growing their exports. Their share has been declining, but many companies are exporting more and more. And a lot of people don’t recognize that about half of all the goods produced by foreign companies in China are sold in China. The auto sector is the best example — 95% of the autos sold there are made by foreign companies or JVs.
How much would a further revaluation of the Yuan affect the situation?
I’ve been in the camp that has said the Chinese currency is undervalued and that the adjustment last July was far too modest. But even if China were to revalue its currency significantly, it would continue to have a trade surplus with the U.S. The fact is, most of the goods that are produced in China used to be made somewhere else. If you look at the overall U.S. trade deficit, Asia’s share has been declining.