If current trends continue, China might swing to a trade deficitin the not-too-distant future. Given that China has enjoyed morethan a decade of strong exports, this may sound a bit far-fetched.But even if it happens, this would not necessarily be something forthe world to worry about.Some economists have recently sounded alarm bells about thepossibility of a Chinese trade deficit. They argue that if theChinese current account surplus shrinks, it would leave Beijingwith less spare cash to buy U.S. Treasury bonds. Then who wouldfund the U.S. budget deficit — and, by implication, U.S.consumers?Those worries are largely misplaced. First, it is unlikelyto happen any time soon. In order for China to have a tradedeficit next year, imports would have to outgrow — or shrinkless than — exports by at least 23 percentage points.In August, exports fell 23.4 percent while imports fell 17percent. So while the trade surplus is diminishing, a deficit isnot around the corner.If China’s trade surplus shrinks, it will most likely becaused by a contracting U.S. deficit, in which case Americanswill be saving more and the U.S. will be less dependent onoverseas investors to finance its government debt. That would bea sign that the long-overdue rebalancing of the global economywas beginning to take place.It would not be so bad for the Chinese economy either,because China is a lot less dependent on exports than manypeople assume. Although exports have accounted for a whopping 50percent of the economy in the past few years, the contributionof net exports to economic growth is actually much smaller,because a lot of what China sells abroad is low value-addedassembly work.In the same way, one cannot just look at China’s largeimports number and jump to the conclusion that China is a bigend-user of the world’s goods. China’s imports accounted for athird of its gross domestic product last year, versus about 17percent in the U.S. during the same period. But this is becausea lot of what China imports, such as computer parts, eventuallyfinds its way abroad.On average, net exports contributed 1.4 percentage points toannual GDP growth between 1979 and 2007, according to theStatistics Bureau, much less than the contribution from theother two drivers — consumption and investment.The transition to a more balanced trade account will taketime. In particular, it will need a push from foreign exchangereforms, as the currently undervalued yuan encourages exportsand discourages imports. China allowed the yuan to risegradually for a few years after 2005, but has re-pegged it tothe dollar since the start of the credit crisis.It will take time before Beijing is confident enough toremove some of the export incentives, or at least not pile themup as it has done in response to the crisis. A more equalisedtrade account will probably not hurt China’s overall growth thatmuch, but will help in making the world economy more balanced.
– Wei Gu is a Reuters columnist. The opinions expressed are her own — If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit — and, by implication, U.S. consumers?Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow — or shrink less than — exports by at least 23 percentage points.In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.If China’s trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.In the same way, one cannot just look at China’s large imports number and jump to the conclusion that China is a big end-user of the world’s goods. China’s imports accounted for a third of its gross domestic product last year, versus about 17 percent in the U.S. during the same period. But this is because a lot of what China imports, such as computer parts, eventually finds its way abroad.On average, net exports contributed 1.4 percentage points to annual GDP growth between 1979 and 2007, according to the Statistics Bureau, much less than the contribution from the other two drivers — consumption and investment.The transition to a more balanced trade account will take time. In particular, it will need a push from foreign exchange reforms, as the currently undervalued yuan encourages exports and discourages imports. China allowed the yuan to rise gradually for a few years after 2005, but has re-pegged it to the dollar since the start of the credit crisis.It will take time before Beijing is confident enough to remove some of the export incentives, or at least not pile them up as it has done in response to the crisis. A more equalised trade account will probably not hurt China’s overall growth that much, but will help in making the world economy more balanced.– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —
- Wei Gu is a Reuters columnist. The opinions expressed are her own. -The U.S.-China tire dispute threatens to spill into other sectors and squeeze Chinese exporters’ already razor-thin margins further. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.But there are structural reasons why the grass is greener outside China. The risk of not getting paid, or getting paid late, is significantly lower when dealing with foreign buyers. The cost of international shipping has dropped so much that it can be cheaper to send goods over the Pacific Ocean than across the country.In addition, selling to large buyers such as Wal-Mart creates volumes large enough to compensate for weak margins. Moreover, Chinese exporters get all sorts of export rebates and local government incentives which help to lower their costs.But as the tire spat has illustrated, Washington can slap punitive duties on Chinese imports simply by pointing to a significant increase in imports from China. By imposing penalties in this case, President Obama has opened the door for a slew of similar complaints against Chinese goods. It will only be a matter of time before other countries, worried about where those displaced Chinese exports might end up, start to follow suit.That’s why Chinese policy makers need to get more serious about stimulating domestic spending. It is time for Beijing to revamp a system built over the past three decades that explicitly and implicitly favours exports and to encourage manufacturers to prioritise selling to the domestic market.A good first step would be to reduce some of the export incentives China offers to certain industries. These effectively subsidise foreign consumers at the expense of domestic customers. For example, Chinese tyre-makers get a tax rebate of about 9 percent on the value of the products they sell abroad. That’s why tyre makers can afford to price exported tyres more cheaply than ones sold at home, according to Xu Qiyuan, a researcher at China’s Social Science Academy.To date, however, China’s response to the credit crunch has been to boost incentives to prop up export markets. Beijing raised export rebates on 3,802 items from April 1. Textile exporters also got an increase in their rebate to 16 percent from 15 percent. This activity is not illegitimate and many countries subsidise exports. But the U.S. enforcement action shows that this policy may have practical limits.China needs more than just a change of heart on subsidies. Longer term, Beijing needs to foster the development of a healthy credit culture for suppliers so they can get paid on time, and to improve China’s transportation infrastructure in order to reduce the cost of moving goods around the country, and most importantly, to break down local protectionism that discriminates against suppliers from other provinces. It may seem odd but China needs to create a single internal market.Despite all the talk about Chinese consumers being unwilling to spend due to a lack of a social safety net, one important reason that they don’t buy much at home is because prices are often too high . When “frugal” Chinese consumers go to Hong Kong or London, they immediately become big spenders, splashing out thousands of dollars on clothing, cosmetics, bags and watches. The irony is that a lot of the things they buy are actually made in China, but are simply not available there, or cost much more.Moreover, the lack of a single market hampers foreign companies seeking to sell to China. Although foreign executives might fancy China as a giant market with 1.3 billion customers, the reality is that it is extremely fragmented, so economies of scale are hard to achieve. Transporting goods from one province to another can incur hefty tolls levied by local governments keen to raise local revenue and make it harder for companies to break into their local markets.The credit problem also needs to be addressed. Big Chinese retailers only pay for goods on delivery. An exporter, by contrast, gets a letter of credit when the order is placed, and this can be cashed in to finance production.China’s rebalancing away from export dependence has barely begun, and it will take a long time to change attitudes. But now would be a good time to make a start. The recent trade disputes over Chinese tyres and toys should serve as warning shots. China’s leaders must start to make the domestic market more friendly to suppliers and consumers.– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —
Google’s former China head Kai-Fu Lee wants to create China’s next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest business people and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?Lee’s plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google searches that lead to pornographic sites. It has drawn strong support from investors. Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics, Legend Group, New Oriental Education and venture firm WI Harper Group. They believe that as China embraces a start-up culture, Lee’s business, which is a mix of venture capital and development lab, will be well positioned to capitalize. Lee’s plan is to hire 100 to 150 young engineers, help nurture their ideas, then spin off 50 to 75 of them a year withfunding from his venture, whiling hiring new people to make up for the loss. However, it looks as if his company, called Innovation Works, has yet to line up ideas or engineers. This kind of “incubator” model became popular in the U.S. and Europe during the dot-com boom, but most of them just burned through a lot of money and then folded. Lee and his backers believe that China’s market is more favourable, as it is at a crucial point regarding “cloud computing” and mobile technology, and there is a strong need for early-stage funding. The new fund is still starting off, but Lee plans to expand from its base in Beijing to places such as Taiwan, the Asian hardware manufacturing base and his hometown.Investors are attracted by Lee’s reputation as the single largest magnet for talent in China. Lee, who went to school in the United States, has won a loyal following from Chinese studentsthrough his numerous coaching books, public speeches and blogs, although critics say he has spent too much time promoting his personal brand.An expert in speech recognition technology, he founded Microsoft’s China research lab in the late 1990s. When he left to join Google, Microsoft sued him for violating a promise not to join a competitor.Nimbler local rival Baidu now dominates China’s search market with 75.7 percent in terms of total search queries, dwarfing Google’s 19.8 percent share, according to iResearch. At Google, Lee was caught between the Beijing authorities who insist that foreign web companies censor theInternet and his U.S. bosses who demanded he drum up more business in China. He has wanted to break away from his corporate role to start his own company for a decade, but it looks as if he is stuck in the corporate mindset. Lee is adopting an almost a plannedeconomy approach to an industry that has always relied on markets to determine who is the fittest to survive. Indeed, he is even promising to tailor-make companies for interestedforeign investors. A factory model lowers the risk for investors as they will enjoy more control, but that also means less incentive and ownership for entrepreneurs, since their roles are reduced tothat of employees. Why would young people take their ideas to Lee rather than make a go of it themselves? Unlike Silicon Valley, China does not have an ecosystem where start-up companies can easily find angel investors. Even though China is a hotspot for venture capital, with $50 billionchasing mid- to late-stage projects, less than $1 billion in total is earmarked for early-stage projects.Lee prides himself on his doggedness in chasing after talent. One year while at Google he made offers to graduates, only one of which was initially rejected. He called the student, found out that his girlfriend thought Google was a bit of a start-up, then asked for his girlfriend’s number and called her up. That year he achieved a 100 percent offer acceptance rate. Nevertheless, it remains to be seen whether Lee can retain his ability to attract and inspire the best young people now that he is no longer at Google. He needs a lot of them to make his dream come true.
– Wei Gu is a Reuters columnist. The opinions expressed are her own — Just as Chinese stocks often rise without fundamental support, they are now tanking even though companies just had a better-than-expected earnings season.Fears about a policy shift towards tighter liquidity are blamed for the 22 percent decline in the Shanghai market from its August peak. But those fears are largely overblown. Beijing might be talking about boosting domestic consumption, but structural reforms take time and there is little the authorities can do other than continuing to reinflate the economy in the short run.There are encouraging signs that corporate profits — the fundamental basis for share prices — are on the turn.Chinese companies’ earnings for the past quarter rose 36 percent compared with the previous three months, helped by strong results from banks and property firms. Companies also offered a more optimistic outlook, propelling a string of earnings upgrades.The purchasing managers’ index, released on Tuesday, confirms that China’s manufacturing sector is keeping up its steady recovery.Stocks are now trading at about 20 times forecast profits for next year. This is higher than the rest of the region, but Chinese companies enjoy higher growth rates: earnings are projected to grow by 20 per cent this year.And compared with historical valuations, which range from the low teens to as much as 50 times earnings, current prices do not look excessive.Premier Wen Jiabao this week tried to ease concerns when he said China’s economy was at a crucial juncture in its recovery and the government would not change its policy direction. But investors are taking their cue from the rising chorus of alarm sent by lower-level government officials, academics, and law-makers.China’s parliament, usually a rubber-stamp organization, was unusually vocal in its late August session about the need to balance short-term relief with long-term development and structural reforms.Meanwhile, the banking supervision commission has been cracking down on bank loans that make their way into stocks and property. In an effort to rein in excessive lending, it has also made it harder for banks to pass capital adequacy tests.But even if Chinese banks stop lending in the second half — China’s largest bank ICBC even reduced its loan book in August — the swath of loans made in the first half will continue to work their way through the system during the rest of the year.New lending in the first half amounted to an eye-popping 50 percent of gross domestic product on an annualized basis. Even if the ratio slumps to 10 percent in the second half, on average new loans as a percentage of GDP this year will still be double the 15 percent annual growth rate of the past three years.In addition, as the flood of short-term bills — which banks accepted from companies to boost their lending volumes — start to mature, banks are diverting the cash into long-term loans tied to real projects that should help the economy in the coming months.China’s monetary fine-tuning still looks marginal, even with July’s abrupt credit slowdown and a similarly subdued number expected for August. That’s because rising foreign capital inflows will offset some of the drop in bank credit.Technical indicators also suggest the stock market has fallen too far. Chinese stocks had more than doubled between October and August and were ripe for a correction. Trading volumes have fallen substantially since the recent peak.It is hard to call the bottom. But one thing that looks certain is that China’s companies and economy have proven to be stronger than many expected.Lou Jiwei, chairman of China’s sovereign fund, said over the weekend that both China and America are dealing with past bubbles by creating new ones. Given how growth-minded Chinese policymakers are, it would be a mistake to bet on Beijing undermining the economy and the stock market by tightening too early.– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. —
If you want to gauge the current state of China’s construction boom, look no further than Hong Kong’s dynamic neighbour, Shenzhen. Defying the searing heat of the Chinese summer, construction workers are busily building a state-of-the-art stadium for the 2011 World University Games.I was there last week on a five-day tour organized by Guangdong Province, and the stadium was the first stop, indicating how intensely proud officials are about the “Lotus Flower” stadium.The 60,000-seat venue looks strikingly similar to the Bird’s Nest national stadium, the world’s largest steel structure and the centerpiece at the 2008 Beijing Olympics. Now, local media boast that the Shenzhen stadium, designed by a German architectural firm, aims to outshine the Bird’s Nest because the engineering is said to be even more challenging.
The whole games village project is a powerful symbol of municipal pride. It is set to cost a whopping 4.1 billion yuan ($600 million), all of which will be financed by the city government of Shenzhen.It’s true that Shenzhen, one of China’s richest cities with a municipal budget of 902 billion yuan ($132 billion), should have no problem finding the cash. And you can argue that all this construction isn’t a bad thing to have going on during an economic downturn. But looked at another way, it still seems a waste.China is no better than other countries in finding uses for prestige sporting venues. It is just a year since the Beijing Olympics, but the Bird’s Nest already looks deserted. When I visited it last month, paying 40 yuan ($5.82) to enter, it seemed folorn. There were few visitors. Two giant TV screens showing the opening ceremony from the Olympics did their best to remind people of its glory days. If that is what has happened to the iconic Bird’s Nest, how promising could the long-term plans be for Shenzhen’s “Lotus Flower”? China has seen those sporting events as the best opportunity to showcase its economic muscle to the world, but China is still a very poor country and this money could be put to other, perhaps better, uses. In Shenzhen itself, tens of thousands of migrant workers have recently lost their jobs and are in need of retraining. Even though the market seems to have come back, many migrant workers have struggled to find new jobs because they do not have the right skills. What else can you do with 4.1 billion yuan? Well, you could establish as many as 10,000 schools to train migrant workers and their children. That might be a better “trophy” for Shenzhen than another deserted mega stadium showing its past glories on a video loop.Photo caption: The National Stadium in Beijing, also known as the Bird’s Nest stadium, shown here on July 3, 2009, nearly a year after it was the centerpiece of the 2008 Beijing Olympics. REUTERS/David Gray
China has talked about plans to allow foreign companies to float on its domestic stock markets for at least a decade, but that’s all there has been: talk.
Now would be a good time to convert some of that talk into action. Beijing has been struggling with its own investment strategies: the state gets feeble returns on the U.S. Treasury bonds it owns, and its equity stakes in foreign financial firms are well under water.