May 8, 2012 / 2:07 AM / 7 years ago

Analysis: Petro-dollar windfall could help China's rebalancing

BEIJING (Reuters) - A $1 trillion oil-fired trade windfall couldn’t be better timed to help Chinese companies climb the value chain and rebalance the economy of the world’s biggest exporter.

Employees unload containers from a cargo ship as frontier inspection soldiers (C) stand guard at Qingdao port during a rainy day in Qingdao, Shandong province April 10, 2012. REUTERS/China Daily

Fast growing countries producing oil and other commodities, are taking advantage of the windfall from the recent surge in prices and buying roughly half of the $2 trillion worth of goods sold by China overseas.

But, more importantly for the economy, they are buying the value-added products that Beijing wants its export-oriented factories to focus on - construction equipment, heavy infrastructure goods and telecom network equipment, for instance.

“Commodity exporting countries have had a windfall after commodity price rises and they are now recycling this back into the global trade system,” Yao Wei, China economist at Societe Generale in Hong Kong, told Reuters.

“The silver lining to China’s exports is really the other emerging economies,” she said.

China’s export-led expansion of the last decade has been largely a function of processing trade - importing materials and components for assembling products that are then shipped overseas.

And now the source of value in Chinese exports is shifting.

New orders are increasingly coming from developing economies buying industrial goods to build out infrastructure, products with a large element of domestic added value, using locally-made components that China once imported.

This shift in the trade focus potentially benefits the domestic economy even more as skills and product lines are upgraded to satisfy demand from a new customer base.


Analysts at consultancy GK Dragonomics calculate that the share of domestic value added in processed exports is 30-50 percent, but 70-90 percent for what it calls “normal” exports.

Those normal exports, products assembled from locally made components that China previously imported, represented about 48 percent of the total of Chinese goods shipped overseas in 2011, versus 41 percent between 2001 and 2005.

Add together the effect of increasing the amount of domestic value added to exported goods and the new destinations to which China is shipping them, and it could underpin export growth, jobs and wealth creation for another decade.

“The Chinese government’s eagerness to encourage these trends is thus quite understandable,” a recent GK Dragonomics study said.

Still, Beijing’s likely share of the $1 trillion petro-dollar boost to global trade anticipated by analysts at UBS, after Brent crude’s 14 percent gain since 2011’s trough in August, is unlikely to fuel a surge in economic growth.

Even if China rakes in $100 billion, in line with the roughly 10 percent share it has in the global export market, Asia’s biggest economy remains on course for its slowest full year of expansion in a decade, with economists polled by Reuters forecasting a consensus 8.4 percent growth in 2012.

But more emerging market demand is exactly what will help Beijing rebalance its export-oriented economic model - albeit not necessarily in the import-led way that leaders of stuttering developed economies hope to see.

In fact, building up the customer base in oil exporting countries ensures that China gets back a huge amount of the money it spends every year on fuel - buying in around 5 million of the 9 million barrels per day it consumed in 2011, China’s oil bill last year was about $200 billion.

A study by the International Energy Agency into rising oil revenues on import demand from members of the Organisation of the Petroleum Exporting Countries (OPEC) shows that, compared to the period 1970-2000, every additional dollar spent by China on fuel imports generates 64 cents of demand for its exports.

Analysts at Societe Generale reckon it is this oil-related import growth, driven by the still relatively elevated price of crude, that has helped global trade volumes manage a stealthy sequential gain in momentum in recent months.

“Despite a weak outlook for global GDP growth, there are several factors that suggest the period of stagnating global trade may well be behind us,” they wrote in a report last week.

“Specifically we expect oil prices to remain elevated, suggesting that strong import demand from the Middle East should persist for some time.”


One reason why Beijing is encouraging this diversification of its customer base to the Middle East and other emerging economies is the unreliability of demand from the European union, where recession fears have reared up once again.

It is growth elsewhere that makes the case for rebalancing higher up the value chain and across geographies all the more compelling.

Research by HSBC’s trade and receivables finance department forecasts an acceleration in global trade growth in the Asia Pacific driven by emerging economies inside and outside the region, with demand flat in Europe and North America.

The bank forecasts 86 percent expansion in the volume of total trade in the next 15 years, but the infrastructure trade component of that will grow by 110 percent in the same period.

Plug into that and China should see its share of global trade jump by a quarter to 12.3 percent from 9.8 percent in 2011 and become the world’s single biggest trading nation by 2016.

It could certainly help counteract the lingering risks to growth from the EU, where Asian aggregate exports fell 5.2 percent year-on-year in March, while still managing a 4.6 percent expansion globally, according to an analysis by Nomura.

“Our assessment is that the economies in Asia ex-Japan are generally experiencing green shoots of recovery, but we are cognizant that they could quickly wilt if the recession in the euro area deepens,” said the bank’s chief Asia economist, Rob Subbaraman, in a note to clients.

Editing by Ramya Venugopal

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