China’s export-oriented path will not change fundamentally
In the coming years, numerous regions are busy drafting medium- and long-term development strategies. One of the pressing questions being asked is whether China's export-driven development model will shift in the post-crisis era. Recently, we’ve looked into an eastern county-level city, where the local government is equally puzzled. If the region continues its current pace of growth, it could reach a population of one million in the next few years. But where will all those people come from? This ties back to the broader issue of China's future regional economic structure, which in turn impacts whether the country's export-oriented approach will persist.
Our assessment is that China's export-focused economic trajectory won’t drastically change in the medium to long term. Part of this prediction stems from China's demographic makeup, as well as the rigid nature of domestic consumption patterns. While domestic demand might grow, it’s unlikely to become the primary driver of economic expansion anytime soon. High levels of investment are also unsustainable, making exports crucial for post-crisis growth. Urban development in China often lags behind industrialization, meaning labor migration will remain a prolonged process. This ensures that China's low-cost, high-quality workforce will continue to be a significant competitive edge.
As the financial crisis worsens, insufficient demand has become a major obstacle to China's economic progress. Export growth has been instrumental in boosting demand. From November 2008 through June this year, China’s exports contracted for eight consecutive months. With external demand faltering and investment proving unsustainable, calls for boosting domestic consumption have grown louder. However, many exporting firms now find themselves in a tricky spot. When shifting their focus from overseas markets to the domestic one, they quickly realize that the domestic market is nowhere near as robust as the global one. Domestic demand policies appear to be short-term solutions. Upon reflection, we see that the Chinese economy isn't easily adaptable. The tension between domestic and external demand has intensified alongside rapid growth. Improving domestic demand is a long-term endeavor. Consequently, China will continue to look beyond domestic demand for growth. This growth must come from exports.
Firstly, China still holds a comparative advantage in labor-intensive industries. Urbanization in China is significantly behind industrialization. Currently, approximately 130-150 million migrant workers operate outside their hometowns. Besides these individuals needing formal urban residency, there are roughly 160 million laborers engaged in agricultural work in rural areas. About 100 million people work in township enterprises, private businesses, or individual industries. These workers will eventually transition into urban sectors, enhancing productivity. Thus, for the foreseeable future, manufacturing labor costs in China are unlikely to spike significantly. Meanwhile, ongoing investments continue to raise labor productivity, maintaining the cost advantage of Chinese manufacturing. Even if labor costs do rise, it will only gradually narrow the gap between productivity and wages, preserving the low-cost, high-quality advantage of Chinese-made products.
Secondly, economic theory suggests that long-term disposable income, which influences consumption, doesn't change rapidly in the short term. China’s social security system remains underdeveloped, with limited government spending on pensions and healthcare. Individuals must rely on savings to guard against unforeseen risks. Hence, domestic demand is unlikely to surge in the short term. Traditional Confucian values promote frugality, further limiting consumption growth. These factors collectively highlight a common challenge: China's GDP has a disproportionately small share of consumption, which is just one component of GDP alongside investment, government expenditure, and net exports. Consumption itself grows slowly, meaning China's economy will continue to depend heavily on exports for some time.
Thirdly, China's income disparity is vast, severely constraining consumption growth. Another sign of this disparity is the declining proportion of labor income in national income, referred to as the "labor income share." Since the mid-1990s, this share has plummeted, particularly since 2003. Presently, labor income accounts for merely 40% of the economy. Compared internationally, this places China among nations with relatively low labor income shares. Including self-employed earnings as capital gains would further reduce China's actual labor income share. The wealth gap means that substantial wealth is concentrated in the hands of the affluent, who tend to save more. Meanwhile, the poorer segments of society have higher consumption tendencies but lack funds, leading to lower overall consumption.
This economic crisis has profoundly impacted China's foreign trade. Yet, in the first half of 2009, China's import-export performance showed that labor-intensive goods retained their competitive edge. Enterprise competitiveness and international market share remained stable. According to customs data, exports of traditional labor-intensive items like apparel and footwear did not drop significantly, whereas exports of electromechanical and electronic goods, with lower labor intensity, fell sharply.
Every industrial powerhouse, especially East Asian emerging economies, undergoes an export-oriented phase. In 2007, China's foreign trade dependency reached 66.3%, far surpassing that of economic powerhouses like the U.S. and Japan. While this level should decrease, it merely implies that exports' share of GDP should fall—not vanish entirely. China must actively boost domestic demand, particularly by narrowing income gaps, improving public services, and strengthening social security to encourage greater consumption. Workers must also benefit more from productivity gains to facilitate industrial upgrading. However, these shifts take time. Optimism alone cannot override economic laws; ignoring them could lead to setbacks. Fundamentally, China's demographic structure dictates its reliance on export-oriented manufacturing. So long as this trajectory persists, economic activity and population will gravitate toward coastal cities. The eastern cities' agglomeration trends will endure. Therefore, understanding these dynamics should guide China's industrial planning and regional economic layout.
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