Last updated: 12:16 / Wednesday, 25 June 2014
Column by Matthews Asia

China is Not Export-Driven

China is Not Export-Driven

Yes, nearly everything does come from China. But exports contribute relatively little to its economy.

It is easy to see why most people think China is dependent on exports. After all, almost everything in your neighborhood shop does come from China. But many of those goods are just processed or assembled in China, adding little value and contributing very little to its GDP. Moreover, exports are a small share of output: most of what China makes, China consumes.

Assembled, not really ‘Made in China’

Although the share of China’s exports that are just processed or assembled there has been declining, it still accounts for 38% of the total, down from 50% in 2001.

A good example of processed exports is Apple’s iPad, which is assembled  in China but creates little value there. In 2011, the Personal Computing Industry Center of the University of California, Irvine took apart an  iPad and worked out its value chain.

Net vs. Gross exports

You may remember from Econ 101 that GDP = investment + consumption + exports minus imports. This formula, which applies to all economies, is designed to ensure that GDP excludes, for example, the value of a hard drive that is made in Japan, imported into China and snapped into an iPod, which is then sold overseas. That hard drive cost US$73 (back in 2005, when Apple still used hard drives) and accounted for half of the factory value of an iPod, but it was not made in China and did not contribute directly to the Chinese economy. The indirect contribution—including the jobs for the assembly and testing of the iPod—added up to US$3.70 and was counted in the net export calculation.

During the decade prior to the Global Financial Crisis, China averaged about 10% annual GDP growth, with net exports contributing only about 1 percentage point of that growth. Today, China is even less dependent on exports. Last year, net exports actually posed a -4.4% drag on GDP growth, and in the first quarter of this year, net exports left a -19% contribution to growth.

From the perspective of GDP, as opposed to GDP growth, net exports also play a relatively small role. In 2007, net exports accounted for 8.8% of China’s GDP, but this share fell to only 2.4% in 2013. Additionally, we estimate that only about 10% of China’s industrial output is exported, with 90% consumed domestically. (It is also worth noting that last year, 47% of China’s exports were produced by foreign firms.)

Our message is not that exports do not matter. They do, especially to the tens of millions of workers assembling iPads and other gadgets. But it is important to understand that China is a continental, domestic investment and domestic consumption-driven economy, where exports play only a supporting role. The overwhelming majority of goods made in China stay in China.

Is China still competitive?

Despite rapid wage growth and currency appreciation, China's remains competitive, with the Chinese share of total U.S. goods imports rising to 19% last year from 13% in 2004.

Andy Rothman, Investment Strategist at Matthews Asia

Please see the attached document for full column.