Chinese Economics Thread


Banned Idiot
Article from Bloomberg that comments about the connections between the US and Chinese economies and potential problems for China if the US had a serious downturn.

China December Trade Surplus Narrows as Exports Cool

By Li Yanping

Jan. 11 (Bloomberg) -- China's trade surplus narrowed for a second month as export growth slowed, signaling that the fastest economic expansion in 13 years may have peaked.

The surplus for December shrank to $22.7 billion from $26.2 billion in November, the Chinese customs bureau said in a statement on its Web site today, lower than the $24.4 billion median estimate of economists surveyed by Bloomberg News.

Export growth cooled to 21.7 percent last month from 22.8 percent, indicating that recent yuan gains, the slowing global expansion and cuts to export-tax rebates on polluting industries are beginning to bite. For 2007, the trade gap surged 48 percent to a record $262.2 billion, giving U.S. and European officials ammunition to keep calling for faster appreciation of the yuan.

``Slower export growth may help China achieve a soft landing,'' said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing. ``China's economic expansion may have peaked last year.''

After the figures were released, the yuan remained near the highest since a dollar peg was scrapped in 2005. The currency was 0.1 percent stronger at 7.2644 per dollar as of 1 p.m. in Shanghai, heading for its fifth weekly gain.

The yuan advanced 7 percent against the U.S. dollar in 2007, twice as fast as in 2006, partly because the central bank boosted interest rates to a nine-year high.

Currency Gains

U.S. Treasury Secretary Henry Paulson and European Central Bank President Jean-Claude Trichet led teams to China over the past two months pressing China to let the yuan rise further and ease trade tensions.

``Pressure on China to let its currency appreciate faster won't stop because the surplus is still getting bigger,'' said Xing Zhiqiang, an economist at China International Capital Corp. in Beijing. Xing expects the yuan to rise 10 percent in 2008.

China's economy expanded 11.5 percent in 2007, the fastest pace in 13 years, according to government forecasts. Wang estimates it will grow between 8 percent and 10 percent over the next three to five years.

``Government measures to curb export growth of energy- consuming and polluting products and to lower import tariffs have effectively curbed further widening of the trade surplus,'' the customs bureau said in a statement on its Web site today. ``Policy adjustments achieved initial results.''

Tax Rebates

China reduced export-tax incentives twice last year on products including pig iron and nickel. New tax rules to slow exports of some other steel products that took effect on Jan. 1 may cool shipment growth further. Steel-product exports fell 14 percent in December from a year earlier.

The tax measures were, in part, a response to pressure from trading partners. The European Union in November threatened to introduce tariffs to shield producers such as ArcelorMittal.

``Exports will decline further this year as higher taxes make Chinese prices less competitive,'' Liu Yuanrui and Shao Wenzhong, analysts at Changjiang Securities Co., wrote in a report today.

Imports climbed 25.7 percent in December to $91.7 billion, maintaining the previous month's 25.3 percent pace of expansion.

Government policy makers last month named inflation and the risk that the economy will overheat as its two main concerns for 2008 and said the People's Bank of China would pursue a ``tight monetary policy.''

Made in China

The policy is designed to slow the rate at which cash has been funneled into building thousands of factories, many of which may become idle should export demand dwindle too fast.

Policy makers are trying to prevent the economy from overheating in the face of risks that global growth will stall and slash demand for Chinese-made goods.

``If exports slow in China, you'll see a lot of overcapacity, you'll see margins collapse, you'll see deflation and you'll see a lot of non-performing loans,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong.

A 1 percentage point slowdown in the U.S. would trim China's export growth by 4 percentage points and reduce gross domestic product by 0.5 percentage point, according to Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.

Morgan Stanley forecast last month that growth in China's shipments abroad may slow to 16 percent in 2008. Imports will increase 18 percent, the investment bank predicted.

``A U.S. slowdown will hit China's other export markets too -- and that we think will likely have a knock-on impact upon China's own investment growth,'' said Stephen Green, an economist at Standard Chartered Plc in Hong Kong.


The Capitalist
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Hi Norfolk

I do find myself inclined to Fu's takes on this situation

Your words are like daggers aimed at my heart:(

Sorry but too tired and intoxicated to give a proper answer to your points this PM, watch this space :D


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Hi Norfolk

Your words are like daggers aimed at my heart:(

Sorry but too tired and intoxicated to give a proper answer to your points this PM, watch this space :D

Sorry SampanViking, I didn't mean to make you unhappy!:eek: And I will indeed be watching. Have a good sleep and a gentle recovery!:D


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Article from Bloomberg that comments about the connections between the US and Chinese economies and potential problems for China if the US had a serious downturn.

Here's a piece that looks a little deeper into this issue of Chinese dependence on exports. A 'best case scenario' for China of a US slowdown may be that it'll help achieve a 'soft-landing' & alleviate some of the inflation problems discussed here.

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An old Chinese myth
Jan 3rd 2008
From The Economist print edition

Contrary to popular wisdom, China's rapid growth is not hugely dependent on exports

MOST people suppose that China's economic success depends on exporting cheap goods to the rich world. If so, its growth would be seriously dented by a stuttering American economy. Headline figures show that China's exports surged from 20% of GDP in 2001 to almost 40% in 2007, which seems to suggest not only that exports are the main driver of growth, but also that China's economy would be hit much harder by an American downturn than it was during the previous recession in 2001. If exports are measured correctly, however, they account for a surprisingly modest share of China's economic growth.

The headline ratio of exports to GDP is very misleading. It compares apples and oranges: exports are measured as gross revenue while GDP is measured in value-added terms. Jonathan Anderson, an economist at UBS, a bank, has tried to estimate exports in value-added terms by stripping out imported components, and then converting the remaining domestic content into value-added terms by subtracting inputs purchased from other domestic sectors. At first glance, that second step seems odd: surely the materials which exporters buy from the rest of the economy should be included in any assessment of the importance of exports? But if purchases of domestic inputs were left in for exporters, the same thing would need to be done for all other sectors. That would make the denominator for the export ratio much bigger than GDP.

Once these adjustments are made, Mr Anderson reckons that the "true" export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore (which on January 2nd reported an unexpected contraction in GDP in the fourth quarter of 2007, thanks in part to weakness in export markets). Indeed, China's economic performance during the global IT slump in 2001 showed that a collapse in exports is not the end of the world. The annual rate of growth in its exports fell by a massive 35 percentage points from peak to trough during 2000-01, yet China's overall GDP growth slowed by less than one percentage point. Employment figures also confirm that exports' share of the economy is relatively small. Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.

Even if the true export share of GDP is smaller than generally believed, surely the dramatic increase in China's exports implies that they are contributing a rising share of GDP growth? Mr Anderson's work again counsels caution. Although the headline exports-to-GDP ratio has almost doubled since 2000, the value-added share of exports in GDP has been surprisingly stable over the same period (see left-hand chart). This is explained by China's shift from exports with a high domestic content, such as toys, to new export sectors that use more imported components. Electronic products accounted for 42% of total manufactured exports in 2006, for example, up from 18% in 1995. But the domestic content of electronics is only a third to a half that of traditional light-manufacturing sectors. So in value-added terms exports have risen by far less than gross export revenues have.

Many of China's foreign critics remain sceptical. They argue that China's massive current-account surplus (estimated at 11% of GDP in 2007) proves that it produces far more than it consumes and relies on foreign demand to buy the excess. In the six years to 2004, net exports (ie, exports minus imports) accounted for only 5% of China's GDP growth; 95% came from domestic demand. But since 2005, net exports have contributed more than 20% of growth (see right-hand chart).

This is due not to faster export growth, however, but to a sharp slowdown in imports. And even if the contribution from net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand. The boost from net exports is in any case unlikely to vanish, even if America does sink into recession, because exports to other emerging economies, where demand is more robust, are bigger than those to America. According to Standard Chartered Bank, Asia and the Middle East accounted for more than 40% of China's export growth in the first ten months of 2007, North America for less than 10%.

Multiplier effects

China's economy is driven not by exports but by investment, which accounts for over 40% of GDP. This raises an additional concern: that weaker exports could lead to a sharp drop in investment because exporters would need to add less capacity. But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production. Adding in the capital spending of local firms that produce inputs sold to exporters, he reckons that a still-modest 14% of investment is dependent on exports. Total investment is unlikely to collapse while investment in infrastructure and residential construction remains firm.

An American downturn will cause China's economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China's growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing's worries about the economy overheating, it would be welcome.

The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America's total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China's growth than it is of America's.

Copyright © 2008 The Economist Newspaper and The Economist Group. All rights reserved.


New Member
I agree with the last poster. The current inflation is Supply side, not Demand side. For example, the increase in fuel cost count as Supply, since it will cost company more money to buy fuel, which lead to increase in price. This have nothing to do with demand, which have no relation with fuel cost (they are not buying fuel after all).

There for, this "inflation" is more of an adjustment. If the price of pork rises by 50% and general inflation is less than 10%, then the farmer are making far more money than before.

In time, the price will settle to an equalibrium point and inflation will lower naturally.


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Germany-China rail freight plan

A new rail freight service between Germany and China, that would be twice as quick as sea travel, has been backed by six countries, Chinese media says.

The China Daily state newspaper says China, Mongolia, Russia, Belarus, Poland and Germany are to work together on the Hamburg to Beijing train route.

The states are to ease customs and border checks to minimise travel time.

China Railway Container Transport said the 20-day-long freight journeys should start in early 2009.

"Barring any complications, a scheduled container train should be shuttling between China and Germany in a year's time," said the firm's chairman Zheng Mingli.

A trial run is under way, with a container train taking a sample of Chinese products to the north German city.

After it arrives the six countries will analyse ways to improve the rail route, including easing customs barriers, and integrating different railway types.

Moving goods by sea between the two cities usually takes 40 days and means passing through the Indian Ocean, which adds an additional 10,000km to the journey.

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The Capitalist
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After all that I come and see that most of what I had to add has been said already by Shumacker and yongke;)

Interesting to hear about the rail route though germark, I am aware that there are a number of others also planned through Central Asia, Iran and Turkey.

The attraction of the Southern routes is that all the countries use the same rail gauge, whilst Russia uses a wider one (to prevent rail based Invasion) This means the trains will need to switch bogeys coming in and leaving Russia.


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Excerpts from
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by Pieter Bottelier, China Brief, Jamestown Foundation, Volume 7, Issue 23,13 December, 2007:

Domestic challenges

(a) Consumer price inflation (CPI)

After a period of mild deflation (1998-2002) followed by years of remarkable CPI stability (2003-early 2007), concern about rising consumer prices has returned. The monthly CPI increased by 6.9% in November (over November 2006), the highest rate increase in 12 years. Unlike the previous episode of high CPI inflation (1992-1995), however, this time consumer prices are rising primarily because of supply factors in the food sector (pork, eggs, vegetable oil, noodles), not because of excess demand—but that could change. The government is understandably concerned that inflationary expectations may set in and begin to drive price increases in the non-food components of the CPI as well. This would be possible because of the large monetary overhang in the form of an unusually high M2/GDP ratio (165 in October).

It is not clear in this article as to the reasons for the apparent constraints on supply. Is it simply that land is being taken out of cultivation by a combination of more farmers moving to seek work in the cities and former farmland being redeveloped for other purposes? Or is it that the Government, in order to alleviate some of the poverty in the rural areas, has permitted food prices to rise in order to better benefit the farmers?

(b) The stock market bubble

The government has been trying to cool the market; for example, the stamp duty on share transactions was tripled in May 2007, the ceiling on QDII outflows was lifted and large domestic IPOs by state banks and state energy companies were promoted to increase the supply of tradable shares. Yet, except for the market correction in November, the risk of bubble conditions has not been eliminated. Furthermore, on August 20, 2007 the State Administration of Foreign Exchange (SAFE) announced that Chinese households would be permitted to invest (unlimited amounts) directly on the Hong Kong stock exchange. This announcement was undoubtedly inspired by the desire to slow the accumulation of foreign exchange reserves and reduce pressure on the domestic stock market. In early November, however, after the Hong Kong market had risen by some 40% following the SAFE announcement, Premier Wen Jiabao indicated that final approval of the scheme would be withheld until a number of conditions had been met, which could take a long time. The episode illustrates the difficulty of managing liquidity in the hands of the public and the embarrassing lack of policy coordination between relevant agencies of the state. A sudden large outflow of private savings from China to Hong Kong could indeed destabilize both domestic and Hong Kong capital markets; total deposits in the banking system at the end of the third quarter of 2007 amounted to some RMB37 million (about US$ 5 trillion equivalent). More than half of that amount was owned by households and increasingly held in liquid form as bank demand deposits.

Although China’s central bank is primarily concerned with the management of liquidity in the banking system (narrow liquidity or the margin of loanable funds, i.e. bank liabilities minus outstanding loans and reserve requirements), it also plays a role in the control of asset price bubbles driven by excess liquidity in the hands of the public. In spite of several rate increases during the past 6 months, bank deposit rates have once again become negative with respect to current CPI inflation. This has not only accelerated to shift from time deposits to more liquid demand deposits and from demand deposits to share purchases, but it has also driven more financial intermediation underground to unregulated informal money and capital markets which reduces the effectiveness of macroeconomic controls. As China knows well from earlier experience, negative real deposit rates can undermine the health of the entire financial system [1].

There are others on this board much better placed to comment on the capacity of the Chinese economy to provide returns on savings and investments.

(c) Economic imbalances

China’s economic and social imbalances—over-reliance for GDP growth on investment and net-exports, growing social inequality, environmental degradation—have become very serious and need to be addressed by all available tools, including further financial sector reform. One of the reasons for over-investment, particularly in manufacturing, is the low ceiling on deposit rates that renders them negative with respect to current CPI inflation. Low deposit rates have tended to increase excess liquidity in the corporate sector and depress the entire interest rate structure. Especially for large corporations with ready access to the official sources of finance, capital tends to be too cheap in China.

Other factors that have contributed to “over-investment” by corporate China in recent years include: (1) a sharp improvement in corporate profitability since the beginning of this century, combined with the virtual absence of dividend payments, (2) the fact that privatization proceeds have typically accrued to the enterprises being privatized (or their holding companies), thus increasing resources available for investment, and (3) easy access (for surplus production) to export markets where prices are reported to be better on average than in China’s hyper-competitive domestic markets [2]. Even in cases where export prices are lower than domestic prices, corporate profitability does not necessarily fall due to scale economies and/or continued high productivity growth. This explains how the combination of low interest rates, high liquidity, high corporate profits and strong productivity growth has created a kind of manufacturing investment “flywheel” effect that is contributing to growing imbalances in China’s economy. Part of the cure for these imbalances therefore lies in an upward adjustment of the entire interest rate structure and other measures that will have the effect of suppressing unregulated financial markets. Faster exchange rate appreciation would also help to redress domestic economic imbalances.

This is in general line with what Fu was saying about needing to raise interest rates overall. SampanViking weighed in pointing out the difficulties that this may raise for farmers, amongst others. Both seem to be right, and this seems to reflect the nature of China's present economic issues:

International challenges

The international dimensions of domestic financial liberalization are very important. The last thing China needs under current circumstances is additional “hot money” inflows in response to higher domestic deposit rates. To reduce that risk, domestic interest rate liberalization should be combined with the “flexibilization” of exchange rate management and further capital account opening. There are, however, good reasons why China may wish to keep at least some capital controls and to continue managing its exchange rate, though with greater flexibly than in the past. The current international financial system has become unstable, because, since the collapse of the Bretton Woods system in 1971, there are no built-in restrictions on international liquidity creation through U.S. current account deficits. In any event, China may wish to protect its economy against unwanted speculative capital inflows (or outflows) and other potentially destabilizing cross-border financial transactions. In light of the very serious international economic imbalances that plague the global economy, the current U.S. dollar-based international financial system looks unsustainable in its present form.

Since the beginning of this century, the world has seen an unprecedented worsening of global trade imbalances, reserve accumulation in surplus economies (such as China) and an accumulation of net external liabilities in the U.S., custodian of the international monetary system since the collapse of Bretton Woods. Most international reserves are invested in U.S. dollar-denominated financial instruments. The U.S. has become the world’s largest debtor nation. The declining international value of the U.S. dollar since 2003 has reduced its attractiveness as reserve currency and increased pressures for the development of alternative ways to invest reserves and store wealth. If the custodian and greatest beneficiary of the international monetary system (i.e. the U.S.), is unable, for whatever reason, to reduce its unsustainable external deficit without forcing major wealth losses on its creditors in the form of a declining dollar, then the system itself is potentially at risk. Since return to a Bretton Woods-type international financial system (which requires much greater domestic policy discipline than the current system) is implausible, the question arises what a large developing country like China can do to protect its economy from the vagaries of the current system without contributing to instability. When its domestic financial system is sufficiently mature some years down the line, China faces a dilemma: join the international system fully and play by its rules, or maintain at least some capital controls and influence over the exchange rate. The first choice risks importing instability, the second risks contributing to instability.

Some have argued that the main source of the current global economic imbalances is the inability or unwillingness of the U.S. to avoid sustained large external deficits through domestic policy adjustments. Others emphasize that a large part of the weakness of the current international financial system is precisely the fact that large surplus economies like China do not play by the same rules, but instead link their currencies to the U.S. dollar and avoid market-based exchange rate adjustments through market intervention. As China’s example demonstrates, such intervention permits global imbalances to grow larger than otherwise would have been the case. In addition, China’s efforts to prevent or slow both nominal and real exchange rate appreciation (through domestic sterilization) present huge challenges of domestic monetary management. Since China’s trade and current account surpluses have become the largest in the world in absolute terms (2006 and 2007) and are now also among the largest in relative terms, it is hard to avoid the conclusion that China has become a contributor to global imbalance. The solution, however, is not simple; China is in a “catch-22” situation. Although China’s exchange rate is undervalued and should be allowed to appreciate faster, the question remains: How can countries like China be expected to fully play by current international rules if those rules may be the source of international financial instability?

While the bulk of China's economic prosperity is certainly acquired through the domestic market, the margins that allow for such an accumulation of capital and foreign reserves, and especially US dollars, are of course earned in foreign markets. With so much surplus capital (at present) with (almost) nowhere else to go, Chinese investors are caught between a rock and a hard place; continue holding onto and even buying more of, US debt, which continues to depreciate in value due to both lower interest rates and the simultaneous devaluation of the US Dollar; or try to wean themselves off of US debt in such a way as to try to limit additional losses occasioned when such debt likely has to be sold at a loss, without precipitating potentially serious consequences in world securities markets in general and the US in particular.

Additionally, there is the factor that deteriorating economic conditions in general and in the US in particular may reduce demand for Chinese manufactures, etc., threatening in turn the exports earnings that provide the margins which afford such large foreign reserves, and subsequently capital for additional investment. Even with China not being fully integrated into the US-based world economic system, Chinese prosperity is nevertheless still tied to an economy with an historical predilection for "boom and bust" economic cycles. While Chinese economic planning may be considerably more prudent in some ways than the dynamics in the US allow, having your margin of prosperity so (almost unavoidably) dependent upon a comparatively volatile economy does not allow for a lot of flexibility in options should economic conditions noticeably deteriorate.

If China were to find itself caught between rising inflation at home and falling exports and investments earnings abroad, the political stresses within China might become considerable. Tensions between China and the U.S .under such circumstances may be exacerbated by such undercurrents as a result.


I am not going to commend on those complicated economic issues of interest rates, liquidity, money supply etc but something more relevant to the price controlled measures that was taken.

Things would be much simpler if inflation can be entirely attributed to cost alone, whether it be cost of raw material, transportation or energy. Ever experience having to pay an extra 10 cents for a cup of coffee just because the price of a kg or so of sugar has increased by 20 cents? (Sugar is a price controlled item here) It may seem ridiculous but I have experienced many similar instances (mostly involving food items) at one time or another. You are left somewhat bewildered how the new price come about, based solely on the calculation of costs alone.

In my opinion, the motivation to maximise profit is one of the more important factors in the complicated process of price inflation. The success of any price control measure would largely depend on correctly identifying instances of artificial inflation (e.g. caused by profiteering, personal greed) from those of genuine inflation (e.g. related to imbalance in supply and demand for which different measures would have to be taken.)


The Capitalist
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Norfolk asks
It is not clear in this article as to the reasons for the apparent constraints on supply. Is it simply that land is being taken out of cultivation by a combination of more farmers moving to seek work in the cities and former farmland being redeveloped for other purposes? Or is it that the Government, in order to alleviate some of the poverty in the rural areas, has permitted food prices to rise in order to better benefit the farmers?

HI Norfolk

No, their is no real shortage of Agricultural land in China, the real problem is highly inefficient subsistence farming methods, which cannot produce anything like the yields of Intensive Farming.

Chinese Farmers do not use Pesticides, Herbicides or have veterinary cover for their livestock, so when attempts are made to increase production, crop blight and livestock disease are the usual consequences.

China is however wary of land clearances in order to create modern farms on a substantial level, due to the numbers of people involved and it wants to avoid recreating the conditions of the UK during the Enclosures Act of the early 19th Century or indeed the US's own Share Croppers in the 1930's.