• Fri
  • Apr 18, 2014
  • Updated: 9:35am
PUBLISHED : Thursday, 09 January, 2014, 11:51pm
UPDATED : Friday, 10 January, 2014, 8:37am

All is not what it seems when it comes to China's trade figures

If double-counting in transshipments and over-invoicing are stripped out of the calculations, US remains a bigger trading power than China

China's trade figures for December are not out yet, but already the local media is trumpeting that the country is the world's greatest trading power, with the United States beaten into second place for the second consecutive year.

Look at the raw numbers, and China's achievement appears truly impressive, especially considering that its economy is only about half the size of America's.

According to customs data, over the 12 months to November, China's gross trade with the rest of the world - exports plus imports - was worth a mighty US$4.1 trillion.

In contrast, the US could only manage a shade less than US$3.9 trillion. Hooray, China is No1.

Unfortunately, however, there are a few problems with China's claim of primacy; so many, in fact, that it is hard to know where to start.

When Beijing releases China’s trade figures, take them with a hefty pinch of salt

First, let's ignore the inconvenient truth that the biggest trading economy in the world is neither China nor the US, but actually the euro zone, whose goods trade with the rest of the world over the 12 months to October - the latest month for which figures are available - came to US$4.8 trillion.

Let's ignore another awkward problem, too. If you look not at the raw numbers for goods trade but instead at balance of payments data combining the trade in both goods and services, a different picture emerges.

According to this measure, in the first half of last year, China's trade with the rest of the world came to US$2.2 trillion. Over the same period, the US notched up a thumping US$2.5 trillion. So if you include services, the US is still on top.

Still, we're ignoring that and looking only at the bald numbers for goods trade.

Alas, things here are not quite what they seem either.

For one thing, many of the shipments that show up in mainland China's customs figures aren't really foreign trade at all. They are cargoes of goods transported from one mainland port to another through Hong Kong.

Over the 12 months to November, these transshipments were worth US$158 billion. Allow for double-counting - on the way out and going back in - and these amount to 7.5 per cent of China's headline trade. Strip them out of the customs data, and China's international goods trade slips to US$3.8 trillion, behind the US figure.

We can't stop there though. China's trade figures are also exaggerated because exporters habitually over-invoice their shipments in order to channel foreign hot money into the country's financial system in contravention of Beijing's controls on capital flows.

According to a report published this week by Washington lobby group Global Financial Integrity, China's exports in the first quarter of last year were over-invoiced by a hefty US$54 billion.

Adjust the headline figures to allow for this chicanery, and China's foreign trade falls further to about US$3.6 trillion.

But even that doesn't give us a representative picture because what really counts is not how much stuff you ship, but the economic benefit you gain from those shipments.

So many of China's exports consist of high-value components manufactured elsewhere that, according to the Organisation for Economic Co-operation and Development, only 67 per cent of its gross exports actually consist of value added in the country itself. The comparable figure for the US is 89 per cent (see the chart).

Try to allow for this, and China's goods trade with the rest of the world drops in value to about US$3 trillion. The value of US trade comes to about US$3.7 trillion.

Those last figures are intended as illustration rather than a serious assertion.

Even so, the point is that where it matters, the US is still a bigger trading economy than China - at least for the time being. So when in the next few days Beijing releases China's trade figures, take them with a hefty pinch of salt.




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Tom has made these comments before, but they are always worth repeating as many people don't seem to get the point. What I'd like to see Tom analyze is this: Is China the next South Korea or the next Brazil/Argentina.
"Washington lobby group Global Financial Integrity" - now there is a contradiction in terms!
Problem is, in China right now, higher borrowing rates (interest rate liberalization) is not enough to suppress the interest-insensitive demand for loans on the part of the local governments and SOEs.
Most of them simply don’t care about the high cost of borrowing --- they just want the loans at all costs.
Some of them don’t intend to repay the debts anyway (or it'll be a problem faced by the politicians in the next term.)
What they care about is the locality’s GDP growth rates and future tax revenues.
Which means 'liberalizing lending rates might merely lead those with government guarantees to outbid smaller and more efficient enterprises, resulting in more misallocation of capital.'
('Europe’s Lessons for China’s Reformers' by Daniel Gros. Project Syndicate.)
To suppress the further rise in wasteful investment, the incentives of those officials have to be changed as well.
One way to help the small and medium sized enterprises (which employ the greatest majority of workers in China) is to imitate Britain's 'Funding for Lending Scheme'.
(To know more, you can read Michael Pettis’s ‘Avoiding the fall’. Some western economists, like those in the Economist, may not agree with his counter-intuitive arguments.)
Unlike what happens in the Western countries, in China higher deposit rates actually lead to lower savings rates, because then Chinese residents don’t have to save as much income as before to prepare for their future medical expense, property downpayment, children schoolfees, pensions, etc.
Perhaps this causes Yukon Huang to conclude wrongly that ‘interest rates would have to fall to generate a decline in savings or an increase in investment until (trade) balance is achieved.’
(Financial Times, ‘China’s interest rates are too high, not too low’ by Yukon Huang)
If Tom’s analysis is correct (I think he is), then so much the better for China.
For it shows that China’s big effort at rebalancing her economy has really been going on recently.
A standard accounting identity found in any economic textbook is that, the current account surplus is equal to the excess of savings over investment.
Due to financial repression in China (also admitted by George Soros), consumption (as a share of GDP) is too low, which means China’s savings is even higher than the already-very-high investment, causing China’s persistent current account surpluses in recent years.
Now demand is composed of either consumption, investment, or current account surplus, nothing else.
A rebalancing of the Chinese economy requires both investment and trade surplus to decline --- China is moving away from her dependence on investment and trade surplus and toward consumption.
(Too high an investment level means overcapacity and unsustainable rise in debt.)
Interest rate liberalization means (hopefully) a drop in investment due to higher borrowing costs, and an even greater drop (not rise!) in savings (and hence greater consumption) due to higher deposit rates.
Hence, by the accounting identity above , a lower current account surplus.
The lower reported exports or trade surplus figure is a blessing in disguise actually.


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