By John Richardson
CHINA’S 15.3 percent increase in exports in May, far greater than most analysts had expected, is being interpreted as a sign of the country’s enduring economic strength.
This is certainly good news for China amidst all the other negative news. But to what extent is it good news for the US, the main destination for most of the increase in China’s exports? China’s exports to the US surged by 23 percent in May, compared with just a 3.2 percent increase to the European Union.
“Underpinning China’s export success is a combination of long-term investments in automation and short-term depreciation of the currency,” wrote the New York Times, in this article.
Increased automation is the reason why imports in the US are becoming less expensive. Data from the Bureau of Labor Statistics in the US show that average prices of goods imported from China fell in April for the first time in two years.
Automation has been forced on China’s manufacturers by rapidly rising labour costs. Moving up the value chain to more sophisticated forms of manufacturing is also a key part of Beijing’s 12th Five-Year-Plan.
It seems likely that investments in automation have been funded by soft loans, via the state-owned banks, as this is such an important part of central government strategy.
China’s export trade has been further boosted by the government allowing the Yuan to depreciate in value against the dollar by 1 percent in May, its largest drop since the Chinese currency was unpegged from the dollar in 2005.
And so? Yes, this is an election year in the US and both Mitt Romney and Barack Obama will be under a lot of pressure to do something about the “unfair advantages” enjoyed by China’s manufacturers.
The focus could well be on all those soft loans from the state-owned banks, with more noise about the Yuan being undervalued.
We might therefore be in for more trade disputes between China and the US, if the May export figures really do point to a major shift in the composition of China’s exports.
Longer term, China still has a long way to go to catch up with the US in terms of investment robotics, research and development and intellectual property-right protection, according to the consultancy, Accenture.
But with ample state funding available, how long will it be before China catches up, assuming it can avoid the middle income trap?