Extraordinary Export Boom
9th 2005, C.P. Chandrasekhar and Jayati Ghosh
story of the expansion of China's exports is a remarkable
one by any standards. In 1978, China's exports were
valued at around $20 billion, and its rank among world
exporters was 32nd. Since then, exports have grown at
an average annual rate of 30 per cent, such that in
2004 China overtook Japan to become the world's third
largest exporter, with exports of nearly $600 billion.
2005, export growth has continued unabated, with even
more breathtaking increases recorded in the first quarter
of this year. Exports grew by more than 35 per cent
compared to the same period last year, while import
growth slowed down to 15 per cent. As a result, the
Chinese economy posted a trade surplus of $16.6 billion,
compared to an overall trade deficit of $8.4 billion
in the first quarter of 2004.
extraordinary growth has already given rise to backlash,
especially in the United States, where protectionist
pressures and anti-Chinese sentiments are on the rise.
There have been calls for China to revalue upwards its
currency the yuan (or RenMinBi), which is currently
pegged at 8.28 per US dollar, not only from the US administration,
but from the OECD, the G-7, and the IMF.
What is the story behind this apparently unstoppable
export growth? Many observers have attributed this to
the benefits of international economic integration,
which is why the Chinese economy is typically cited
as the great success story of globalisation. There is
no doubt that such integration has played an important
role, but the point to remember when analysing the Chinese
experience is that this integration has not been purely
market-led, but has been closely monitored, regulated
and indeed controlled by the state.
This is clearly evident from a look at the external
trade policy regimes in China, which have gone through
several major phases. For two decades after Government
Administration Council adopted the Interim Regulations
on Foreign Trade Management in 1950, China's trade was
based on complete state monopoly and dominated by trade
with the former Soviet Union and other Eastern European
countries. From 1979, along with various internal reforms
especially related to the peasant contract system in
agriculture, there was some opening up of trade.
From 1979 to 1987, there was a process of delegating
authority with respect to foreign trade to lower levels
and decentralising the highly concentrated planning
management system. National purchase and allocation
plans were replaced instructive plans with market regulation
and implementing import and export licenses and a quota
system. The pattern of trade was also diversified to
include compensation trade, processing with supplied
materials, trade on commission basis, border trade,
local trade, small-deal trade, processing and assembling
with imported materials, processing for export, chartering
and leasing trade.
Between 1988 and 1990, foreign trade subsidies were
frozen and a contract responsibility system in foreign
trade was implemented. From 1991 to 1993, the foreign
exchange mechanism was readjusted and a double-track
exchange rate was adopted. Foreign trade enterprises
(still dominantly State Owned Enterprises) were allowed
to retain part of their foreign exchange earnings, but
all financial subsidies to them were stopped and they
were made to take on the responsibility for their own
profits and losses.
In 1994, the unification of the dual rates in foreign
exchange and adopting a unified floating exchange rate
for Renminbi on the basis of market need and supply
effectively meant a substantial devaluation of the RenMinBi.
At the same time, the practice of allowing foreign trade
enterprises to retain part of their foreign exchange
earnings was abolished. The tax refund system for exports
was implemented, and the range of import and export
quotas and licenses was substantially cut.
On July 1, 1994, the ''Foreign Trade Law'' was officially
put into effect, which stated that China practices a
unified foreign trade system and, while giving appropriate
protection to domestic enterprises, adopts such internationally
conventional anti-dumping, anti-subsidy and guarantee
practices. Controls were lifted over more than 90 per
cent of export commodities, where market prices were
to be dominant, and a bidding system was introduced
for some important export commodities.
The WTO Accession Agreement of 2002 marked a new phase
of intensified liberalisation of trade, with China making
sweeping commitments to reduce quota controls, tariffs
and so on especially with respect to agricultural products.
Nevertheless, despite the apparent drastic trade reforms,
the Chinese government retains substantial control over
trade through two important levers.
First, nearly half of all exports are still accounted
for by State Owned Enterprises, although the share of
foreign owned enterprises has been increasing recently.
Second, control over the banking system and the ability
to direct and regulate the allocation of credit has
been the most important instrument both of macroeconomic
control and of direction of investment and production,
which has had direct effects on both exports and imports.
The recent deceleration in import growth, for example,
is a clear result of the controls on credit implemented
by the Chinese authorities on fears of overheating in
These various phases have also been associated with
different degrees of integration into the world economy,
based on indicators like trade dependence in GDP. The
share of total trade (imports and exports) in GDP rose
in a stable fashion from 9 per cent in 1978 to 25 per
cent in 1989. In the 1990s, influenced by the dual impact
of the RMB's devaluation and the accelerated growth
of GDP value counted in terms of RMB, China's foreign
trade dependence ratio experienced great fluctuations.
From 2000, the rise in trade shares of GDP has been
very rapid, going up from 43.8 per cent in 2000 to 60
per cent in 2003 to 70 per cent in 2004.
Despite the past experience of major exporters of the
20th century like Japan and South Korea, this experience
is historically unique in its rapidity and extent, since
no other country has been through such a massive increase
in trade shares in such a short time. This can be attributed
to a number of special features of China's current trade,
which is particularly based on the globally integrated
production which is a relatively new feature of the
The proportion of processing trade is rather high in
the makeup of China's foreign trade, which accounts
for high imports being associated with high exports.
Further, the Chinese expansion is still dominantly driven
by manufacturing, and the tertiary sector still accounts
for only one-third of GDP.
It is also true that China's GDP has probably to some
extent been devalued because of statistics reasons.
The overall GDP value of the country is lower than the
summation of the production values of all regions, which
suggests that the aggregate GDP data could be underestimates.
The sums of the regional GDP values were 8.7, 9.7, 11.7
and 15.6 per cent higher respectively than the overall
GDP values in the years from 2000 to 2003. This would
make the trade share of GDP appear to be higher than
it actually is.
This is the context in which the recent trends in China's
trade have to be viewed. Chart 1 shows the pattern of
overall trade since 1994. It is evident that both exports
and imports have been rising rapidly, but the trade
surplus (on the right axis) has been relatively moderate
and indeed has declined from its peak of 1997. The perception
of overvaluation of the yuan is not justified from the
point of the of the overall trade balance, which is
currently showing a surplus of only around $32 billion,
or only 2.3 per cent of GDP, which is hardly large by
is of greater interest is the pattern of recent trade.
The conventional view is that it has been driven by
export of textiles and clothing, after the withdrawal
of MFA quotas and the entry of China in the WTO. But
Table 1, which indicates the top ten categories of export,
suggests that apparel or garments has been only one
of the factors behind the big export push. Toys, which
was the other great export success of the 1990s, is
also relatively less important in recent exports, which
have been dominantly driven by capital goods.
This indicates some shifts in trade pattern. Toys, clothing,
furniture and television sets have dominated Chinese
exports for years, but now newer products like portable
electric lamps and even radio navigation equipment are
now being shipped in growing quantities to countries
ranging from Britain and Spain to Brazil and Indonesia.
At the same time, China is becoming a large exporter
of industrial commodities like steel and chemicals,
importing fewer cars and less heavy machinery as Chinese
companies and multinationals manufacture more of these
These changes are reflected in imports, which are again
dominated by capital goods rather than raw materials.
Even though China became the most significant marginal
consumer in the world oil market in 2004, oil imports
are only the third largest element in the total import
bill, as Table 2 indicates.
The changes in the steel industry are perhaps the most
illustrative of what is going on. China has become the
world's largest steel consumer, because of its massive
construction boom and investment in road infrastructure.
But Chinese steel production has risen even faster,
as practically every province has erected steel mills.
So many of these mills produce steel reinforcing bars,
known in the industry as rebars and used in concrete
construction, that China has gone from a shortage of
rebars to a glut, and Chinese rebars are now being exported
all over the world.
China became the largest foreign supplier last year
of steel tubing and casing for oil wells in the United
States, another technologically simple steel product
that Chinese mills have mastered. Over all, China remains
a net importer of steel, but by a shrinking margin.
In 2004, steel imports fell 11.3 per cent, to $3.82
billion, while exports rose 389 per cent, to $2.62 billion.
These changes are also mirrored in the direction of
trade, which has shown less dependence upon the United
States in very recent times, and more concentration
of Asia. This is reflected in Charts 3 and 4, showing
the destination of exports and the source of imports
respectively in 2004.
2 >> Chart
This is part of a conscious policy of the Chinese government,
to diversify trade patterns and increase interaction
not only within Asia (as exemplified by the China-ASEAN
deal of late last year) but also attempts to reach out
to Latin American and African countries.
All this indicates the hard-headed and practical nature
of the Chinese economic leadership, which has so far
resisted the increasingly oppressive calls for currency
revaluation and tried alternative methods like an export
tax, which it has already imposed on garments exports.
Clearly, the Chinese trade strategy is one which involves
far greater and more consistent state intervention than
almost any other country, and its current expansion
must be seen in that light.