Even an export rebound won't do much to lift China growth
As the mainland has become an economic powerhouse in recent years, foreign demand now plays a much smaller role in driving expansion
The mainland's January trade figures confounded analysts everywhere.
Released yesterday, last month's exports were not only much stronger than anyone expected, they also seemed at odds with recent business surveys indicating a slackening in activity.
Yet although the pick-up in the trade data was welcome news, it was neither as mysterious nor as significant as many of the responses implied.
What really threw the analytical community was the publication of customs figures showing mainland exports were up 10.6 per cent last month compared with January 2013. Most forecasters had expected them to be flat.
What's more, it was difficult to blame Lunar New Year distortions for the unexpectedly strong export performance.
Last year, the new year holiday fell in the middle of February. This year it came at the end of January. With assembly lines shutting down and the pace of shipments abating over the previous week, all the negative effects should have been felt last month.
Instead, exports boomed.
Some commentators attempted to blame the surprise strength on hot money flows. Exporters, they said, were over-invoicing their shipments in order to bring capital into the country in contravention of Beijing's capital controls.
But that explanation didn't stack up. First, if hot money inflows were really a major factor, you would also expect under-invoicing by importers to depress headline import growth. In fact, imports were also strong, rising by a chunky 10 per cent.
Second, if over-invoicing were responsible for exaggerating exports, you would have expected shipments to Hong Kong - hot money's favourite conduit into and out of the mainland - to have shot up.
But according to yesterday's data, exports to Hong Kong slumped 18 per cent compared with last year.
Instead, last month's exports were propelled by a revival of demand from the big developed economies. Shipments to the United States rose 10.7 per cent, to Japan 16 per cent and to Europe 19.2 per cent.
A full-blown economic recovery in the developed world would be a lot to infer from one month's trade data from the mainland. But even if the upturn in demand is genuine, don't expect rapid export growth to power the country's economic expansion to the extent it did in the years before the financial crisis.
The world has changed in the past five years. The developed markets may have put the worst behind them, but with less leverage around and a lot of painful restructuring still to come, the mainland's biggest export customers are not going to grow nearly as quickly as they did in the years running up to 2007.
On top of that, as Goldman Sachs chief Asia economist Andrew Tilton explains, mainland exporters are no longer gaining market share. Much of the export growth in the early 2000s was driven by exporters taking a bigger slice of the developed-markets pie.
Now following heady wage rises and steep currency appreciation, mainland goods are no longer so competitive. As a result, mainland exporters are struggling to retain their market share (see the first chart).
And finally, in the past few years, the mainland economy has become so large relative to the rest of the world that foreign demand now has a far smaller impact on overall output, and far less power to drive growth.
From 36 per cent of gross domestic product in 2006, mainland exports have fallen steeply in relative terms to just 24 per cent of GDP last year.
Similarly, the country's trade surplus, which is what contributes to headline output figures, has declined by more than half from 7.5 per cent of GDP to just 2.8 per cent in 2013.
In short, exports are no longer the economic force they once were, which is why there is no discrepancy between an export recovery and an overall deterioration in business activity. Mystery solved.