FX International Payments
By Frances Coppola
The International Monetary Fund’s (IMF’s) 2016 Article IV report published last month assesses China’s economy, saying that imports, in particular, have fallen significantly over the past two years in real terms. It describes two principal reasons:
The IMF says that China’s fast growth in the last decade or so was principally driven by domestic investment and exports. Domestic consumption has been much weaker and the savings rate has been very high. But as mature economies tend to rebalance and transition away from investment and goods exports towards consumption and services. The fall in investment is partly due to the strategic desire of the Chinese government to rebalance the economy.
As investment falls, so do imports of the raw materials and industrial equipment needed to construct housing, factories, roads, bridges, power stations, etc. Machinery and transport, which the IMF says make up about 40 percent of total imports, have been particularly hard hit, although this is partly due to weakening demand for re-exports from China’s smaller Asian neighbors (for which China acts as kind of international trade hub). Commodities, which make up 30 percent of total imports, have also fallen as real estate and infrastructure investment declines.
The sharp fall in Chinese imports has knock-on effects in other Asian countries. A working paper by IMF researchers from May 2016 shows that because China is deeply integrated into Asian value chains, changes in China’s import-export trade patterns are felt in other Asian countries as shocks through the trade channel. When China cuts imports of goods for investment, trade with countries supplying those goods, such as Korea and Taiwan, drops sharply.3
The decline in investment is a deliberate structural change in the Chinese economy. The investment boom is over, and with it the imports of goods for investment, upon which some Asian countries had relied. In addition, as part of its economic rebalancing China is reducing its reliance on imports of goods for investment in favor of domestically produced substitutes. These are long-term changes. Countries that mainly export goods for investment or intermediate goods to China will need to find alternative export markets, which will not be easy in the current time of weak global demand.
However, as Chinese households and corporations learn to spend more and save less, imports for consumption purposes (anything that doesn’t provide a return over time, such as food, healthcare, going to the movies) will rise. The IMF researchers say that countries such as New Zealand, which export consumption goods to China, will fare better in this trade slowdown than countries such as Taiwan, which export mainly goods for investment.
The IMF researchers estimate that about half the fall in Chinese import and export trade is due to rebalancing. The rest is due to weak global demand. This takes two forms. Firstly, many countries around the world are trying to reduce their imports and encourage exports, which in aggregate reduces global trade volumes: the EU, one of China’s biggest export markets, is now running a trade surplus (imports are less than exports).4 Secondly, China is facing increasing barriers to trade: both the US5 and the EU6 recently imposed tariffs on Chinese steel exports, and there are calls for tariffs on other exports too.7 Chinese exports are simply not as welcome as they once were, and countries are becoming less tolerant of China’s tendency to cut prices in order to maintain exports.
China’s trade figures are also affected by the value of its currency. The renminbi is supposedly soft-pegged to a basket of currencies, but in practice it is still closely tied to the US dollar. So despite two devaluations this year, the renminbi has strengthened along with the rising dollar.8 The IMF estimates that about a quarter of the decline in exports is due to the strong renminbi. There is also a negative effect on imports of goods for re-export, since the strong renminbi reduces the attractiveness of re-exports, especially when global demand is weak anyway.9
Part of China’s import-export trade slowdown is due to weak global demand for its exports, which in turn reduces China’s demand for imports as inputs to production. As the global economy recovers from the storms that have battered it since the financial crisis of 2008, China’s export demand may pick up, along with its imports, partly restoring the export performance of its principal suppliers.
However, as China’s economy rebalances away from fast investment and export-led growth towards slower growth led by domestic consumption, its imports of goods for investment and production will naturally decline, replaced by imports of consumption goods and services. Those countries that have come to rely on China’s demand for goods for investment and production may need in turn to diversify and rebalance their own economies.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
9. IMF Article IV report, August 2016.