Saturday, 9 January 2010

China's dramatic surge in domestic demand

China has achieved a dramatic expansion of its domestic demand in 2009. It is likely that GDP figures will show that China's domestic demand rose by around 11% last year while China's trade surplus fell by over thirty percent. These estimates are made using conservative assumptions and it is probable the eventual out turns will be even higher - although they will not alter the essential picture, This article looks at this remaking of the pattern of China's demand.

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The full data for China's trade in 2009 will be published next week. Data for GDP will be published later. These will give a more fine grained picture of China's economic development in 2009. However data for the first 11 months of China's trade this year have already been issued and there is no doubt that the official 8.0% target for GDP growth will be met and exceeded. These already published figures therefore allow a clear picture to be formed.

To take first the ballpark numbers, and using conservative assumptions, China's trade surplus, that is its net exports, will have declined in 2009 by around or slightly over $100 billion - over thirty percent. China's GDP will have increased by over $350 billion if growth in 2009 was 8.0% and by approaching $400 billion on the assumption that growth was 8.5%. Detailed figures are given in Table 1. Assumptions used to calculate these are given in Note 1.

Taking first trade, in 2008 China's exports were $1.431 trillion and imports $1.333 trillion. China's trade surplus was $298 billion. In the first 11 months of 2009 China's exports were $1.071 trillion - a fall of $248 billion, or 18.8% compared to the same period in 2008. China's imports in the same period were $0.891 trillion - a fall of $167 billion, or 15.8%. China's trade surplus dropped from $261 billion in the first 11 months of 2008 to $180 billion in the same period of 2009 - a decline of 31%.

To give a projection for 2009 as a whole, if the 31% fall in the trade surplus was maintained for the entire year then China's trade surplus in 2009 would be $206 billion - a decline of $92 billion. In reality the drop is likely to be greater as China's trade surplus in December 2008 was an exceptionally high $39 billion. The actual decline in China's trade surplus for 2009 is therefore likely to be at least $100 billion - another way of stating that China in 2009 added a net $100 billion to international demand. The excellent export figures in the rest of Asia at the end of 2009 in significant part reflect this boost in demand from China.

In order to estimate the effect of the decline in the trade surplus on the structure of China's demand it is useful to translate trade figures into GDP percentages. This involves taking into account service sector trade, and various relatively small statistical adjustments, which lead to China's total surplus of exports over imports in 2008 being $353 billion in national accounting terms. As China's net export situation is dominated by trade in goods it is assume for simplicity below that the national account trade position also falls by 31%.

China's GDP in 2008 was recently revised upwards to 31.405 trillion yuan or $4.6 trillion at the official exchange rate. No change in the figure for net exports has however been published. As the trade position is easier to measure than GDP, where the upward shift was accounted for primarily by a previous underestimate of output in the small service sector, the figure for China's net exports is unlikely to change greatly. This upward GDP revision changes downwards slightly China's export surplus in 2008 as a percentage of GDP - from the previously publishes 7.9% of GDP to 7.7%. This figure is used in Table 1.

Turning to 2009, the official GDP growth projection for the year was 8.0%. However it is clear from the first three quarters results that the eventual figure for growth will not only be achieved but almost certainly exceeded. As the aim in this article is to use conservative assumptions, and therefore take figures which are least favourable for the position presented, it will be assumed for calculation that GDP growth in 2009 was 8.0%. A higher GDP growth rate, given that trade figures are unlikely to change greatly, would imply a higher growth of domestic demand than that indicated in Table 1 below.

Assuming an 8.0% growth rate, the increase in China's GDP in 2009 would imply an increase in GDP of approximately $368 billion - the exact figure depending primarily on the assumption made on the inflation rate to translate an 8.0% increase in constant price terms into current prices.

Taking the assumption of a $109 billion decline in the export surplus, that is 31%, and a $368 billion increase in GDP implies that China's domestic demand in 2009 rose by $477 billion, or 11.2%. This would be one of the highest increases in domestic demand in a single year ever achieved by any country in history.

On this data China's export surplus will have fallen from 7.7% of GDP in 2008 to 4.9% of GDP in 2009, or by 2.8% of GDP. China's domestic demand, conversely, will have risen from 92.3% of GDP to 95.1%. Detailed revision of these figures will be given as final trade and GDP data for 2009 is published. They will, however, not alter the fundamental picture.

Table 1

10 01 08 China GDP 2008-2009

The implications of such data are clear. China did not require a surge in its trade surplus for its economy to undergo rapid growth in 2009 - as some argued. China successfully shifted demand into its domestic economy. An approximately $100 billion decline in net external demand was more than cancelled by a more than $450 billion increase in domestic demand. This must be counted, in light of the extremely negative external economic situation, as one of history's most successful and skilful pieces of macro-economic management. Simultaneously with rapid domestic economic China's trade surplus declined - easing global imbalances and particularly boosting exports from other Asian economies.

Given this dramatic increase in China's domestic demand why did a number of commentators fail to foresee this and therefore greatly underestimate the potential for China's economic performance in 2009? In a number of cases it was because they committed an elementary economic error. They reduced the potential for China's growth in domestic demand to its increase in domestic consumption. However domestic demand is composed not simply of domestic consumption but also of domestic investment. China's domestic investment rose rapidly in 2009 as well as its domestic consumption - the combination of the two producing the rapid increase in domestic demand.(2)

In conclusion the fundamental trend is clear. China succeeded in 2009 in achieving an extremely high rate of increase of both domestic investment and domestic consumption - enabling it to overcome, in terms of GDP growth, the negative shock of the fall in exports and the decline in the trade surplus. Sceptics on the ability of China to raise domestic demand were shown to be wrong. China's stimulus package, which produced the results, was shown to be an extremely impressive piece of macro-economic management.

Addition 10 January

The publication of China's trade data for 2009 confirms the points made above. The new data shows China's trade surplus in 2009, on a foreign trade and not a national accounts basis, was $196 billion compared to $298 billion in 2008 - a fall of $102 billion or 34%. An equivalent percentage decline in China's net exports on a national accounts basis would mean a decline in its surplus of $120 billion compared to the $109 billion projected in this article for calculating the increase in China's domestic demand. This reaffirms that the trade assumptions made for calculations in the article above were conservative.

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This article originally appeared on the blog Key Trends in Globalisation.

Notes

1. All data, unless otherwise stated, is taken from China Statistical Yearbook 2009. The assumption made for China's export surplus in 2009 is set out in the body of the article. To calculate the changes in GDP in current prices it is necessary to make an assumption on inflation/deflation rates. In 2009 these will be relatively minor, therefore for simplicity they have been assumed to be zero. There is likely to be net deflation in 2009, which would revise the figure for the current price increase in GDP given in Table 1 downwards, however it is also likely that GDP growth will exceed 8.0% which would revise the figure upwards.Therefore Table 1 is given as a qualitative initial projection. Revisions will be given as detailed figures are published.

2. Kieran Latty has a clear numerical explanation of this in a comment on Key Trends in the World Economy.

2 comments:

Michael Burke said...

Other commentators have noted two other, less important but significant developments. One is that China's share of world trade has increased so that it is on course to be the world's largest exporter, surpassing Germany. The other is China's surpassing of the US to bcome the world's biggest producer of autos.

But another key milestone may soon be reached. At the end of 1989 the CIA estimated that the Soviet Union's GNP was $2.6 trn. Given a policy aim was to create a closed economy, GDP is unlikely to have been significantly different (and hard to measure). On one inflation measure that would now be equivalent to approximately $4.5trn, slightly less than China's 2009 GDP. Continued growth in China (and Vietnam) could soon mean that the absolute weight of all the non-capitalist economies will reach a new peak, although a new peak of their relative weight in the world economy is still some way off.

Bemused Economist said...

Proving once again the superiority of socialism as a way of organising an economy.