UBS debunks: China's real exports as % of GDP are more like 10%!

[Guest]

UBS debunks: China's real exports as % of GDP are more like 10%!

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AMERICAN PONZI DEBT PROVIDES THE ESSENTIAL MARKET FOR CHINA GROWTH? NOT ACCORDING TO UBS!

IS CHINA'S ECONOMY EXPORT LED - UBS SAYS - VERY LITTLE.pdf

Here's an article from UBS arguing very substantively why China's exports as a percentage of GDP (and consequently it's vulnerability to a US slowdown) are nowhere near the numbers iTulip is using. This UBS article arrives at a true exports percentage of GDP which is in the range of 10% of China's total economy. Could it be that iTulip's FIRE economy derived domino theory where China growth hinges precariously on US overconsumption may need to be at least partially "re-calibrated" in light of this paper from UBS?

This is why we should be wary of conclusions which are presented as so "self evident" that they have entered the realm of the axiomatic - which can be then deployed with impunity to construct entire global scenarios. "The China story which hinges on "Unbalanced Global Growth" has been leaned on heavily to construct future scenarios here - and the scenarios depicted according to this construct have such an aura of global inevitability that no one has even bothered to question them.

But this article invites us to step back from uncritical acceptance of the "FIRE economy derived China growth story" and see how perilous it is to lean on what appear to be axiomatic truths. Once accepted, the axioms lead to construction of entire global theses based upon a potentially seriously flawed premise.

China, BRIC nation growth paradigms, commodities, energy consumption growth, global economic leadership trends - all of the discussions on why this is a precarious PONZI edifice perched upon the American homeowner - if you read this UBS analysis and find it's of substance, it suggests these "self-evident truths" require a re-think from the ground up.

EXTRACT -

<< Does it matter whether we look at exports on a gross or net basis? The short answer is that it matters enormously, and Chart 9 helps show why. China’s rising trade surplus isn’t due to an acceleration in export growth; exports actually slowed over the past five years.

Rather, the real culprit is the sharp decline in import growth since 2004 – which, as we have argued many times before, is due to excess capacity creation in domestic heavy industrial sectors. In other words, net exports may be contributing an unusually strong amount to overall growth, but this has nothing to do with export demand or growing external dependence.

Instead, it’s all about rising domestic supply displacing import suppliers ... i.e., about reducing exposure to the global economy. >>

EXTRACT -

A simple example should help illustrate the point; imagine a company that makes furniture for export. The company has 100 workers, produces US$500,000 worth of output using only domestic inputs, and generates US$200,000 of wages and profits per year. Using our framework above, we have a 100% domestic content ratio and a 40% domestic value-added ratio, and the company is contributing US$200,000 to domestic GDP.

Now imagine that the company changes its business model; instead of making furniture, it now decides to make DVD players using the same 100 workers. The company now imports US$4,500,000 worth of imported inputs from abroad, processes these inputs with a minimum of additional domestic sourcing and generates US$5,000,000 of export revenue. At the end of the day, the company finds that wages and profits have risen to US$250,000.

What has this done to our calculation? We now have a 10% domestic content ratio, a 50% domestic valueadded ratio, and the company is now contributing US$250,000 to domestic GDP. Three quick points here: First, the actual export contribution to GDP has clearly gone up, by exactly 50% (from US$200,000 to US$250,000). Second, despite the fact that the domestic content ratio of exports has fallen, the company has still clearly moved up the “value-added chain”, as value added per worker has risen from US$2,000 to US$2,500.

And third, the headline export/GDP ratio has gone up by a factor of ten, i.e., the headline ratio wildly overstates the actual change in underlying exposure to external demand and thus the role of exports in the economy. Why? Because the business model has changed from one of producing goods with high domestic content to “churning” goods with a very low domestic content. And this, we hope, should cure investors once and for all from looking at simple export/GDP ratios as an indicator of ... well, anything.

Original PDF here: http://www.allroadsleadtochina.com/reports/prc_270907.pdf

[Verrocchio]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

This is why we should be wary of conclusions which are presented as so "self evident" that they have entered the realm of the axiomatic...

...how perilous it is to lean on what appear to be axiomatic truths. Once accepted, the axioms lead to construction of entire global theses based upon a potentially seriously flawed premise.

Lukester, you've sounded this theme before, and I must agree: A concept of the future is nearly useless if the premises are faulty. Since gaining a clearer picture of our individual and collective futures seems to be one of the major attractants for all of us, this is a salient point.

Let us assume, for the sake of discussion, that the UBS economist who set up the straw man of the mythical export-led Chinese economy is correct. Still, the thought of even a mild downturn in US imports from the PRC would probably cause sleepless nights in Zhongnanhai. Why? The downturn could be a catalyst that interacts with systemic weaknesses such as resentment over endemic corruption, large segments of disaffected workers (countless violent riots occur annually), and a shaky banking system, resulting in political upheaval.

[touchring]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

Exports don't matter. The real estate bubble in china is ripe for pricking.

[c1ue]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

There are some good points in the article, but there are several glaring omissions:

1) The author talks about China vs. Hong Kong/Singapore, specifically that the export/GDP as a measure of export impact on the economy is not accurate.

The author fails to note, however, that incomes in many of the higher export/GDP % countries is far higher than China. Hong Kong, Singapore, Taiwan, Korea, etc all have income that are many multiples that of China; the difference being that exports for these countries may be important, but they don't mean the difference between eating and not eating.

2) The author also fails to correlate the net effect of exports on the internal economy - specifically that every actual export job impacts some number of internal economy jobs. Kind of like dry cleaners in Detroit.

The export/GDP number may be as inaccurate as he says, but it is intended to try and measure this effect.

Or put another way: Where is the income coming from to buy the internal consumption? Especially given the low average incomes?

The good points:

1) The author does point out that China is increasing manufacturing for internal consumption, and cites import statistics as evidence. The former is true; the Chinese leadership clearly recognizes the overall economic benefit of having Chinese buy Chinese made goods as opposed to sending their money overseas - unlike the USA. After all, why pay for software, cars, entertainment, or name brand clothing when you can make your own? by copyright infringement, etc.

However, the latter actually hurts the idea of decoupling; if China imports are flat to even, then a US recession will cause a flood of unwanted goods to go somewhere. If this flood turns around and returns to China, it will hurt the economy there as greater supply = lower prices. If it goes elsewhere in the world, where again does it end up?

2) The author's story of "growth rates slowing" is a pile of BS; I don't see how a range of growth rates (with a 3 month mma) from 5% to 35%+ from 2000 to 2007, with a present rate of around 20% give or take, can be construed as slow growth. You should also note the consumption figures are quite flat and the investment figures continue to be very high - more than consumption.

As I've noted before, China still consumes more capital than it uses. It is still not clear to me that China can continue its present trajectory should this investment trend reverse.

The article is a nice expository on how export/GDP is misused by the MSM, but doesn't provide either a satisfactory replacement nor a compelling different story.

[Mega]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

Luke
I belive Jim Rogers thinks its 16% but Hey what's 6% between friends ;)

But your point is taken as Peter S sez in his book "Crashproof"....China's "War time" production will be like the War time production of America in WW2. You could say that without War America would collaspe because there was no market for her goods.

But America simply swaped War production for peace time production.....China will swap America production for self production.
Mike

[Guest]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

Miker -

You wrote: << China will swap America production for self production.>> I'm definitely on the same page with you and Peter S. on this.

All we have to do is check back on this topic in 12-18 months. If the US is floundering, consumers and hapless home owners are going bankrupt in droves, or in a general funk, and China's GDP is still chootling along at 9%++, then most people at that point would have to grant they need the US consumer a lot less than we still believe. We'll have a good idea in the next eighteen months.

I'm betting the 'linkage' is a lot less than meets the eye. We'll see soon enough.

[Mega]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

What i suspect will happen Luke is that Oil prices will fall, then they see demand don't!

Peter S sez that he sees oil getting ready to rocket, factor in that Zatpata Geroge sez that no meaning for Oil fields have been found in the last 40 years...........and we can see which way thing will go.

After Gold peeks in 4 years i like to swap out into "GREEN" power......Next Bubble sez EJ.
Mike

[touchring]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

All we have to do is check back on this topic in 12-18 months. If the US is floundering, consumers and hapless home owners are going bankrupt in droves, or in a general funk, and China's GDP is still chootling along at 9%++, then most people at that point would have to grant they need the US consumer a lot less than we still believe. We'll have a good idea in the next eighteen months.

I'm betting the 'linkage' is a lot less than meets the eye. We'll see soon enough.

If the US goes floundering, Japan, South Korea, Taiwan and the EU will be hit before China does. China makes lower end and cheap goods, the kind Walmart and Ikea sells, these stuff generally do not do too badly in a recession.

Nonetheless, China itself has a stock and real estate bubble implosion to deal with after the Olympics, and the fallout will be extremely serious.

[The Outback Oracle]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

First I must state I am no expert on anything and I cannot give detailed stats for my opinions.
However...
First, I believe China is a whole series of bubbles, export, share, real estate, all of which may well burst about the same time. Devastation in that case would be considerable. The infrastructure development will surely continue apace but it looks very doubtful to me that it can possibly make up the slack.
Second, profit margins in China are extremely tight. So dislocation of the markets will cause damage out of proportion to the market price change
Third, Gerard Minack of Morgan Stanley Australia, in a very coherent paper "Global Strategy, The Big Pic Pac" that economies are not so much "coupled" (as in a locomotive) as "synchronised". The same forces that cause "recession" in the US will cause problems in, say, China. These include, tightening monetary policy, high currency, the global credit crunch, and a general turn in earnings.

I think the idea of the US and China being "synchronised" rather than "coupled" is an important notion.

All this heavy observation from a small wholesaler in AUS

[Jim Nickerson]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

First I must state I am no expert on anything and I cannot give detailed stats for my opinions.
However...
First, I believe China is a whole series of bubbles, export, share, real estate, all of which may well burst about the same time. Devastation in that case would be considerable. The infrastructure development will surely continue apace but it looks very doubtful to me that it can possibly make up the slack.
Second, profit margins in China are extremely tight. So dislocation of the markets will cause damage out of proportion to the market price change
Third, Gerard Minack of Morgan Stanley Australia, in a very coherent paper "Global Strategy, The Big Pic Pac" that economies are not so much "coupled" (as in a locomotive) as "synchronised". The same forces that cause "recession" in the US will cause problems in, say, China. These include, tightening monetary policy, high currency, the global credit crunch, and a general turn in earnings.

I think the idea of the US and China being "synchronised" rather than "coupled" is an important notion.

All this heavy observation from a small wholesaler in AUS

There is nothing wrong with opinions, and it is nice and thoughtful when writers take the few words necessary to clarify what follows.

I appreciate your opinions, Outback.

[Spartacus]

Re: UBS debunks: China's real exports as % of GDP are more like 10%!

is he just introducing a new word to explain the same phenomena or does he write why synchronization is different from coupling, and give real data as proof of the difference?

IOW, is this a distinction without a difference? In the real world, what difference does it make?

First I must state I am no expert on anything and I cannot give detailed stats for my opinions.
However...
First, I believe China is a whole series of bubbles, export, share, real estate, all of which may well burst about the same time. Devastation in that case would be considerable. The infrastructure development will surely continue apace but it looks very doubtful to me that it can possibly make up the slack.
Second, profit margins in China are extremely tight. So dislocation of the markets will cause damage out of proportion to the market price change
Third, Gerard Minack of Morgan Stanley Australia, in a very coherent paper "Global Strategy, The Big Pic Pac" that economies are not so much "coupled" (as in a locomotive) as "synchronised". The same forces that cause "recession" in the US will cause problems in, say, China. These include, tightening monetary policy, high currency, the global credit crunch, and a general turn in earnings.

I think the idea of the US and China being "synchronised" rather than "coupled" is an important notion.

All this heavy observation from a small wholesaler in AUS