Is China Becoming More Expensive?
by Nicholas Borst | August 17th, 2012 | 11:52 amIt’s a common argument these days that China is becoming too expensive and losing its competitive edge in trade. The press is full of anecdotes from foreign companies complaining that they are being priced out of China and are moving operations elsewhere.
Those that follow China know that these arguments are not new and are often exaggerated. The three data points below should cause you to be skeptical of claims that China is becoming less competitive.
1. China’s Share of Global Trade is Still Growing
Chinese exports increased by 9.3% in 2011, a robust growth number and faster than the average growth rate of global trade. In fact, over the past two years China’s trade grew twice as fast as the global average. The trend of China’s trade growing faster has persisted for over a decade and looks like it will continue this year despite slower export growth. Specific industries in China may be facing declining competitiveness, but the overall trend is clear.
2. Prices of Chinese Goods are not Dramatically Increasing
The U.S. Bureau of Labor Statistics issues a handy index that tracks the prices of Chinese goods coming into the US. Unlike some other sources, the BLS index adjusts for good quality, making it quite useful in tracking changes in import prices. As you can see below, prices for Chinese good have increased only by 5% over the last 7 years, despite a 30% appreciation of the currency. Moreover, during this same period import prices from other emerging markets such as Mexico have increased even faster. China’s exports have not become significantly more expensive, especially compared to its competitors.
3. Wage Growth has not Accelerated
The average wage in China grew 14% in nominal terms last year, which sounds like quite a bit. However, 14% is actually slower than the average wage growth rate of the past decade, 15%. Wages did jump 20% for private sector jobs in 2011, but from a much lower base than the average wage.
Without a change in the three metrics above, market share, product price, and labor costs, it seems unlikely that China’s trade competitiveness has declined dramatically.
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Anastasia L. Thelusma October 16, 2012 | 11:12 pm
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Expensive for whom? CPI figures show aside from oil, food and real estate, most other item have been declining.
Exporters have had their margins shrink because of eurozone and US economic woes, not from currency appreciation.
Arry August 23, 2012 | 4:05 am
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Interesting summary of the metrics. Personally I see more influence on China losing it’s edge based on legislative and cultural factors more so than just economics. The ambiguous bureaucracy of their legal system, poor intellectual property protection and increased complications due to cultural complications and local management seems to be playing a much greater role than I expected. I agree the Lewis Turning Point is on it’s way, but I believe it will be more influenced by these issues more so than just China’s economic statistics.
Rebecca August 22, 2012 | 1:55 am
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Andrew,
You bring up a good point. At some future period China will hit the Lewis Turning Point and be forced to move out of low-end exports. However, I think the data shows that we aren’t there yet. For example, the data series below shows that even in a low-end export-oriented sector like garments, companies still maintain healthy margins.
Textile, Garment, Shoes & Hat: Profit to Cost Ratio (%)
Source NBS
1999 3.46
2000 4.24
2001 4.34
2002 4.25
2003 4.28
2005 4.54
2006 4.90
2007 5.20
2008 5.74
2009 6.46
2010 7.66
2011 6.68
The IMF also has a good discussion in the most recent Article IV on why China still has a ways to go before losing competitiveness in these industries.
Nicholas Borst August 21, 2012 | 11:31 am
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Broadly agree with the analysis, but it’s largely backward looking. All else equal, the fact that prices of imports from China have been increasing at less than the rate of appreciation of the RMB suggests that Chinese exporters have seen their margins shrink. In addition, productivity growth has sagged post-crisis, hence unit labour cost growth is higher, which also squeezes exporters’ margins. This margin shrinkage can’t go on forever. No doubt the consequences will be slow to unfold, but China is losing competitiveness.
Andrew August 20, 2012 | 3:26 am
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