China: To Take the Lead and Keep It!

For China, nothing is impossible. With its head for business, calculated risk-taking and strategic alliance,it has now broken away from the the bulk of the runners running the global trade race;except for competitive India and the aggressive Asia-pacific economies; pacing on steadily behind. The old warrior economies such as the US,Europe and Japan are sadly just not able to play catch-up at the moment.

The New York Times today circa 14 October has this to report. The Report has been paraphrased in parts for brevity.

"SHANGHAI, Oct 14 — With the global recession making consumers and businesses more price-conscious, China is grabbing market share from its export competitors, solidifying a dominance in world trade that many economists say could last long after any economic recovery.

China’s exports this year have already vaulted it past Germany to become the world’s biggest exporter.

Now, those market share gains are threatening to increase trade frictions with the United States and Europe. Case in point: The European Commission proposed yesterday to extend anti-dumping duties on Chinese and Vietnamese shoe imports.

China is winning a larger piece of a shrinking pie. Although world trade declined this year because of the recession, price-sensitive consumers are demanding lower-priced goods and Beijing, determined to keep its export machine humming, is finding its own way to deliver.

The country’s factories are aggressively reducing prices — allowing China to gain ground in old markets while making inroads in new ones.

The most striking gains have come in the United States, where China has displaced Canada this year as the largest supplier of imports.

In the first seven months of 2008, just under 15 per cent of American imports came from China. Over the same period this year, 19 per cent did.

Meanwhile, Canada’s share of American imports fell to 14.5 per cent, from nearly 17 per cent.

Besides increasing its share of many American markets, China is increasing the value of exports in absolute terms in some categories.

In knit apparel, for instance, American imports from China jumped 10 per cent through July of this year — while America’s imports from Mexico, Honduras, Guatemala and El Salvador plunged 19 to 24 per cent in each country, according to Global Trade Information Services.

A similar tale is told around the world, from Japan to Italy.

One reason is the ability of Chinese manufacturers to quickly slash prices by reducing wages and other costs in production zones that often rely on migrant workers.

Factory managers here say American buyers are demanding they do just that.

“The buyers are getting tough in bargaining for lower prices, especially American buyers,” says the Head of international trade at the Changrun Garment Company, based in southern China which exports jeans to Europe and the United States.

“They offer US$2.85 (RM9.65) per pair of jeans for a package of a dozen, when the reasonable price is US$7.”

Because China produces a diversified portfolio of low-priced and essential items, analysts say the country’s exports can hold up relatively well in a recession. Few other countries can match what has come to be called the “China Price.”

“China has a huge advantage,” says Nicholas R. Lardy, an economist at the Peterson Institute for International Economics in Washington. “They can adjust to market changes very rapidly. They have flexibility in their labor markets. And as consumers trade down the quality ladder, China thus benefit.”

Additionally, the expiration of textile quotas in large parts of the world this year has allowed China to increase its market penetration.

But equally important are government policies that support this country’s export sector — from Beijing keeping its currency weak against the dollar to its determination to subsidize exporters through tax credits and billions of dollars in low-interest loans from state-run banks.

The results have been impressive. All told, in the first half of 2009, China exported US$521 billion worth of clothes, toys, electronics, grains and other commodities to the rest of the world.

Though that represented a 22 per cent decrease from the first half of 2008, it compares favorably to other major exporters. German exports, for example, have fallen 34 per cent over the same period. Japanese exports were down 37 per cent and American exports 24 per cent, according to Global Trade Information Services.

Trading powerhouses like Germany are suffering from weaker demand for heavy equipment, automobiles and luxury goods. But the value of exports from oil-producing countries, like Russia and Saudi Arabia, has fallen even more.

One reason is that the price of oil has plummeted from last year’s record highs. But since oil is priced in dollars and the value of the dollar has fallen markedly, so have the value of American imports from these countries — over 45 per cent in the case of Russia’s exports to the world.

Meanwhile, American imports from Saudi Arabia have fallen 65 per cent.

China’s market share gains are mostly at the expense of countries like Japan, Italy, Canada, Mexico and Central America — in industries that China has long sought to dominate.

China’s share of furniture imports in the United States has grown from 50 to 54 per cent over the last year, while furniture exports to the United States from Canada and Italy have plunged 40 per cent from a year ago.

In Europe, Chinese textiles and apparel have gained market share in every major country, after the quota expiration in January.

Not long ago, Italy’s shoe imports were dominated by Romania; now China has a commanding share.

Japan once relied on electronics shipments to the United States, but every year for the past decade Japan has lost market share to China. This year is no different.

In 1999, electronics goods from Japan made up 18 per cent of America’s electronics imports. Today, that figure is down to 7 per cent.

China’s market share has climbed 10 to 20 percent from a year ago. Together, the gains are helping China increase is immense trade surplus with the rest of the world, reviving worries about global trade imbalances — and once again putting the spotlight on China’s currency, the renminbi.

After letting its currency rise against the dollar, beginning in July 2005, China is once again pegging it closely to the dollar.

As the dollar has fallen against other major currencies like the euro — about 15 per cent since a year ago — Chinese imports have become more and more competitive.

Now, European officials are clamoring for China to reduce its flood of exports and even pressing for anti-dumping investigations.

The International Monetary Fund is calling on China to rebalance its economy and allow its currency to appreciate against other major currencies.

The United States — which for years complained about China’s weak currency and soaring trade imbalances — has largely been silent in recent months, analysts say, partly because Washington is trying to improve relations with Beijing at a time when it desperately needs China to purchase American debt.

“Obama’s interest is not to push China to appreciate the currency, but to get them to pay the bills,” Dong Tao, an economist at Credit Suisse says, referring to China’s purchases of American debt.

For its part, Beijing worries that raising the value of its currency could be catastrophic, disrupting the stimulus that hundreds of billions of dollars has brought to the Chinese economy.

But the country’s leaders are well aware of the need to shift the economy away from heavy dependence on exports and toward stronger domestic consumption. Indeed, China is eager to move up the value chain, by selling higher-priced goods like computer chips, aircraft and pharmaceuticals — all of which would bring better-paying jobs and healthier economic growth.

Moreover, many economists say that as Chinese consumers become richer, they will buy more of their own goods. And as the dollar falls, it will make American exports more competitive globally, including in China.

Those trends together could eventually help rebalance global trade — which became overly reliant on Americans buying cheap Chinese goods and China buying American debt.

Right now, Beijing worries about growing trade frictions with its biggest trading partners, the European Union and the United States, and the possibility of some countries initiating protectionist measures.

Chinese exporters, meanwhile, fear that even as they gain market share, the pressure to produce at low prices will hurt them and the quality of their products in the long run. Liao at the Changrun factory says many producers are essentially scavenging to source raw material.

“Some even go to old factories to collect abandoned fabrics from old stock, so they can save two-thirds of the cost on raw material,” she says. “These fabrics are in very bad shape. They won’t wash, and easily wear out.”

But the discounting period may be here for a while with many economists forecasting a lengthy period of slow growth in Europe and the United States.

“China is going to get stronger,” Tao at Credit Suisse says. “Its competitors are getting weaker in the downturn. And the Chinese state has helped bail out some industries, like the auto industry; so in the future some new industries may emerge as exporters.”

So, it looks like China is on the roll.

Perhaps the world would like to study the China economic model up close? Perhaps, just, perhaps, it will help to pull themselves quickly out the sluggish world economy? The earlier, the better.