There is consensus among western economists and policymakers that exports are critical to economic growth. The Chinese government clearly agrees. A souring Chinese domestic economy and improving western economies, particularly in the United States, appear to be combining to trigger a surge in Chinese exports.
In recent years, growth in the Chinese economy has been fueled by booming domestic construction and other factors, such as significant government subsidies, but the Chinese real estate sector now appears to be in trouble. For example, a recent banking stress test involving HSBC concluded that China could suffer from a 50 percent reduction in property prices, thus confirming a widely-held concern. This development is significant for U.S manufacturers, because the Chinese construction industry accounts for nearly a fifth of China's GDP, and a declining real estate sector translates into a declining construction sector and, therefore, a declining domestic economy. The resulting excess production capacity in many sectors likely will lead to an increase in exports.
Chinese exports to the United States already are rising. Although most of China's January 2014 economic indicators declined, China's exports rose 10.6 percent compared to January 2013. Observing this trend, Leo Gerard, the President of the United Steelworkers Union, commented, "as [the Chinese] economy slows, they are going to flood the U.S. with more and more of their excess capacity." The declining Chinese construction industry cannot possibly absorb the output of a steel sector that has grown tenfold in 12 years to the point of consuming half of the world's iron ore. Moreover, China's increasing exports include more than steel products. During the winter of 2013-14, many categories of U.S. imports of Chinese goods have been rising, including apparel, kitchen cabinets, and toys. Meanwhile, the Chinese trade deficit is shifting in ways that affect not only established U.S. industries but also industries based on new technology. The U.S. trade deficit with China increasingly involves higher-value technology products, such as consumer electronics, while it has started to shrink for certain lower-value categories, such as shoes.
U.S. policymakers have focused on diplomacy in their attempt to correct the undervalued Chinese currency, the renminbi, as a way to address the burgeoning trade deficit with China, but that effort also may be facing resistance as Chinese growth rates decelerate. When addressing the trade deficit with China in January 2014, U.S. Treasury officials reportedly cited the valuation issue, saying the renminbi remained significantly undervalued and that rebalancing remained incomplete. It now appears that rebalancing has stalled. By late February 2014, the U.S. appreciation strategy was undermined by China's central bank, the People's Bank of China, which reportedly began quietly helping exporters by intervening heavily in currency markets, pushing the renminbi down steadily. Although U.S. policy may have contributed marginally to the renminbi's 3.1 percent appreciation against the dollar in 2013, in less than two months of 2014 the Chinese currency has given back 1 percent of its value against the dollar.
Another commonly-espoused view is that the rising trade deficit would be forced down by increasing Chinese labor rates, and wages in China have indeed increased. For example, the New York Times recently wrote that in only ten years entry-level wages in China grew from about $75 a month, with virtually no benefits, to $670 per month, including $100 in government mandated benefits. However, in recent years the state-owned banking system has been pumping credit into the Chinese economy, which has allowed manufacturers to invest heavily in automation, production capacity, and other factors leading to increased productivity. Consequently, labor costs are not increasing nearly as fast as wages. In fact, despite higher wages and the appreciating renminbi versus the U.S. dollar during 2013, rising productivity and manufacturing overcapacity resulting from government subsidies combined to push down the prices Americans pay for Chinese goods. Consequently, in 2013 the average price of Chinese imports dropped nearly 1 percent. That trend is likely to continue.