|China Sets Sights on 8% Trade Growth|
With consumers in the US and European countries tightening their belts after the Christmas holidays, Chinese exporters thousands of miles away are beginning to feel the pinch.
China’s export growth slowed sharply to 2.9% in last November, compared with the previous month’s 11.6% rise, according to data from the General Administration of Customs.
November’s growth rate was below analysts’ expectations. Some say the dramatic softening of external demand can be explained by the Christmas shipment season for smartphones from China, the world’s biggest exporter of mobile phones, coming to an end in November, 2012.
“The export data for November from Taiwan, the Chinese mainland and South Korea have all been disappointing, mainly due to the smartphone impact,” Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong, wrote in a research paper.
About 70% of Apple Inc.’s latest gadget the iPhone 5, are assembled at Fox Conn’s factory in China’s Henan Province. The factory exported more than 90 million iPhone 5 devices in 2012, data from Henan Entry and Exit Inspection and Quarantine Bureau show.
But with Christmas demand easing off, shipments of Apple’s iPhone 5 will come in at around 35 to 37 million units in the first quarter of 2013, lower than the consensus estimate of around 47 million units during the period, according to research firm OTR Global.
The iPhone 5 is just one example of how foreign customers’ sentiments affect China’s export market.
Missing the annual target
China’s foreign trade grew by 6.2% year on year, to US$3.86 trillion in 2012, according to the General Administration of Customs. The figure is far lower the annual growth of 22.5% in 2011.
In the first 11 months of 2012, China’s exports and imports grew by 5.8% from a year earlier, according to data from Chinese customs.
Foreign trade growth will be slower than the annual target of 10% set by the Chinese government, due mainly to weakening international demand, rising domestic production costs, falling commodity prices and growing trade protectionism, Chen said.
According to Bai Ming, a researcher at the Chinese Academy of International Trade and Economic Cooperation (CAITEC) under the Ministry of Commerce (MOFCOM), “Political factors such as the dispute between China and Japan over the Diaoyu Islands after the latter’s illegal purchase of the islands in early September, together with the Chinese currency’s rapid appreciation against the US dollar from September, have all weighed on China’s foreign trade.”
Nevertheless, not all the indications for foreign trade are gloomy.
Although China missed its growth target for foreign trade, Chen noted that the country’s exports still accounted for 11.1% of total global trade during the first three quarters of 2012, a 0.6% increase from the same period in 2011.
“Despite the global economic uncertainties, China’s exports still grew faster than those of other major economies during the first nine months,” Bai says.
Meanwhile, China’s foreign trade structure has also shown signs of improvement, with the share of the processing trade declining. The rewards for Chinese companies from the processing trade are scant, as all they do is import the raw materials and export the finished products.
The processing trade accounted for 34.9% of total imports and exports during the first 11 months of 2012, down from 45.4% a year earlier, according to Chinese customs.
Outlook for 2013
MOFCOM has opted for greater prudence in its trade forecast, setting a growth target of 8% for 2013.
“The international trade environment will remain challenging in 2013, but will be better than in 2012. Foreign trade will pick up in the second half of 2013,” Minster Chen told the meeting.
The global uncertainties include doubts over the success of measures in the US to avoid the fiscal cliff, how the euro-zone deals with the sovereign debt crisis, and fluctuations in international commodity prices, Chen said.
The fiscal cliff threatened to drag down China’s GDP growth by 1.2% in 2013, according to an estimation by the International Monetary Fund.
US President Barack Obama signed fiscal cliff legislation into law on January 3, after the Republican-led House of Representative approved it. The law sets out to raise taxes on the wealthiest Americans while avoiding a tax increase for most American households, and postpones automatic spending cuts for two months.
“The fiscal cliff deal is good news for China’s economy. China’s exports to the US will increase slightly in 2013, as the US economy is on the track to recovery, and may realize 2% growth year on year in 2013,” says He Weiwen, co-director of the China-US-EU Study Centre under the China Association of International Trade.
CAITEC’s Bai points out, however, that rising protectionism, pressure from the US on the yuan’s exchange rate, and the political situation in the Middle East are major concerns for China’s foreign trade in 2013.
According to a report published in December by export credit insurer China Export & Credit Insurance Corp., Chinese exporters are facing growing risks in 17 countries, including the UK and Sweden, due to the instability in the financial position of importers in Europe and the growing risk of bankruptcy among small- and medium-sized buyers.
China’s average annual foreign trade growth rate between 2003 and 2011 stood at 21.7%, according to MOFCOM. A consensus is that such a high rate cannot be sustained in the future.
“Since we expect weak demand from the developed markets, in particular the EU and Japan, to persist in 2013, we are forecasting 9% year-on-year growth for China’s exports in 2013,” Daiwa Capital Markets said in a research paper published on December 10, 2012.
The Chinese Academy of Social Sciences, a top government think-tank, estimated in its annual Blue Book on China’s Economy published on December 5, that the country’s export growth would stay at 10% year on year in 2013, and the total value of foreign trade would amount to US$4.32 trillion in 2013.
China’s industrial goods have gradually lost their export advantage on the global market due to rising domestic labor costs, the Ministry of Industry and Information Technology said in a report published in December.
In China, the average salary of workers in the manufacturing industry doubled in the 2006~2011 period, rising at an annual rate of 15%. Now that labor costs in China are generally higher than in the Southeast Asian economies, there is a tendency for labor-intensive industries to move out of China and into Southeast Asia, the report said.
“The 8% target for foreign trade growth can be achieved, but it will be hard work, as China is already the world’s biggest exporter and is losing its cheap labor advantage,” says Li Xunlei, chief economist with Haitong Securities in Shanghai.
While the prospects for exports will continue to look shaky in 2013, a gradual recovery by the Chinese economy is expected to boost imports.
“With the rising need for restocking, robust investment demand and rebounding commodity prices, we expect import growth to quicken in the coming months,”says Lu Ting, an economist with Bank of America Merrill Lynch in Hong Kong.
Diversifying from traditional markets
Meanwhile, many exporters are cautiously optimistic about the outlook. They foresee a tough business environment in 2013, but remain hopeful about growth in overseas orders.
“On the one hand, foreign clients keep lowering prices. On the other, our production costs continue to rise. So, we only accept orders with higher profit margins, ”says Lu Xiwei, an executive with Zhongshan Xinbao Shoes Co., which mainly exports to Europe.
According to a survey of 1,546 Chinese exporters in sectors such as electronics, telecoms and computer products conducted in last November by business-to-business e-commerce company Global Sources, more than 51% of respondents said they expect revenues from overseas shipments to be higher in 2013.
Among these companies, 47% estimated 10%~20% growth. Roughly one-fifth anticipated an increase of up to 10%, while 22% expected gains to be more substantial at 21%~30%.
However, 36% of the companies surveyed were more conservative in their estimates, pegging 2013 export revenues at 2012 levels, as they contended with several issues hindering growth.
“Many Chinese suppliers are still dealing with higher production costs that have forced them to raise prices. This adds pressure to the already difficult export environment, with business from the traditional markets of the EU and US slowing,”says Craig Pepples, Global Sources’ President of Corporate Affairs.
“Strategies such as market diversification and upgrading product design are helping reduce the downside. Thanks to this, the decrease in export earnings for most manufacturers is less than some expected,”Pepples says.
The indications are that Chinese exporters plan to continue targeting the EU and US in 2013, although orders remain slow. They also intend to explore emerging markets such as South America, the Asia-Pacific region and Africa.
Fuzhou-based Reeyah Lighting Co. has in recent years focused on South America, which it sees as holding greater growth promise than the EU and US. The company, which supplies CFLs, LED lamps and ballasts, is projecting 10% to 20% higher revenue in the year ahead.
Chinese exporters are also gaining an increasing market share in Africa. South Africa’s Standard Bank Group estimates that 18% of Africa’s imports were sourced from China in 2012, up from 16.8% in 2011.
The growth of China’s exports to Africa was 5 percentage points higher than to any other region in 2012, which is an indication of the African market’s increasing importance to China, Jeremy Stevens, a Beijing-based economist at Standard Bank, wrote in a research report.
“Chinese firms, confronting subdued activity in mature markets and tasked with shifting up the value chain, have recognized the importance of selling goods to the large emerging economies, especially the highly populated and increasingly wealthy ones in Africa,” Stevens wrote.
“Demand from African countries, especially the largest ones such as Kenya, Egypt, Angola, Nigeria and South Africa, has become increasingly important to Chinese firms,” he added.
Trade between China and Africa reached US$163.9 billion in the first 10 months of 2012, up 20% year on year, according to MOFCOM.
Wei Jianguo, former Vice Minister of Commerce and secretary-general of the China Centre for International Economic Exchange, estimates that China’s trade with Africa hit US$220 billion in 2012, and that Africa is likely to surpass the EU and US to become China’s biggest trade partner in three to five years.
Boom in regional trade
Wei also highlights the importance of developing regional trade, particularly as the Obama administration is pushing for progress on a US-led free trade agreement known as the Trans-Pacific Partnership (TPP), which aims at eliminating tariffs and boosting trade. The partnership includes major economies such as Australia and Canada, but doesn’t include China.
“There is a tendency for the US to prefer to bypass the WTO and launch FTA or TPP talks with major economies such as the EU and Japan, which means China will not benefit from the fruits of such FTA talks,” Wei says.
To combat rising trade protectionism, China has made considerable efforts to facilitate regional trade through negotiations.
China, South Korea and Japan are mulling the establishment of a free trade area. The first round of the trilateral free trade agreement (FTA) negotiations will be held in early 2013, trade ministers from the three countries announced in a joint statement in last November.
The three countries are not only near each other geographically but also important partners in trade and investment. The total GDP of the three countries in 2011 amounted to US$14 trillion, accounting for 20% of global GDP.
But the FTA talks among the three economies also face hurdles, chiefly the territorial dispute between China and Japan.
Bark Tae Ho, the Republic of Korea’s Trade Minister, expects bilateral discussions and agreements between China and South Korea to be conducted and concluded first; trilateral consensus can be reached subsequently.
Trade between China and South Korea, which stood at US$220.6 billion in 2011, will meet the goal of US$300 billion by 2015, Chinese Premier Wen Jiabao said during a meeting with South Korean President Lee Myung-bak in Phnom Penh, capital of Cambodia, in November.
Also in November 2012, leaders from the ASEAN and their six regional free-trade partners, including China, officially launched negotiations on the Regional Comprehensive Economic Partnership (RCEP), which will be the largest regional trading arrangement in the world.
The RCEP is expected to go into effect by the end of 2015. It will allow the greater flow of goods and services across a market of more than three billion people, officials say.
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Published on our website on March 6, 2013