Weakening demand, sourcing shifts likely to restrain China’s export growth (content sourced BY Joc)

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Asia’s export growth will bounce off the lows of 2012-13 and still be the envy of the world over the next five years, but it will pale in comparison with the country’s export gains over much of the last two decades, according to a noted Asia analyst.

Outbound shipments from Asia will have a compound annual growth rate of 7 percent from 2015 through 2020, about half the growth rate achieved between 2002 and 2008, said Richard Martin, managing director of IMA Asia, a consulting and research firm with offices in China, Hong Kong, Singapore and Australia. Still, the forecast is a sizable improvement from the 2 percent CAGR in 2012 and 2013.

Growth of Asian manufactured exports has slowed for three major reasons. First, Asia’s share of global exports is so large and has expanded from such a small share that any gains will be modest in comparison with the boom years. Asia’s share of global manufactured exports jumped from 19 percent in 1980 to 40 percent in 2012, Martin said during a June 5 webinar on Asia trade trends hosted by the JOC.

Weaker demand from the U.S. and Europe also is pulling down Asian export growth. U.S. imports from Asia on a CAGR basis will expand 7 percent from now through 2020, compared with an 11 percent increase in 2002-08. For Europe, the gains will be even smaller, with imports from Asia growing by 6 percent on a CAGR basis through 2020. Comparatively, European imports from Asia jumped 17 percent on CAGR basis in the 2002-08 period.

How the U.S. and Europe responded after the 2008 financial crisis largely accounts for the broad differences in forecasts for growth in demand for Asian goods, Martin said. While the U.S. has repaired the balance sheets of households, corporations and banks, and is now trying to do the same for the federal government, Europe’s approach has been “woeful,” he said.   

Martin estimates the U.S. by the end of the decade will recapture three-quarters of the pace of GDP growth it had before 2008. Europe, however, will regain only half the rate of GDP growth by 2020.

The third reason Asia is expected to lose some of its exporting heft is that some production is shifting out of the continent, namely to Mexico and the U.S. Twenty-four percent of the roughly 100 shippers surveyed by Wolfe Research this spring said they plan to shift sourcing to the U.S., while 18 percent plan to move production to Mexico. Interest in sourcing in China fell to the lowest point (7 percent) in the 11 quarters the New York-based research investment
firm has been surveying shippers with a total annual transportation spend of over $13 billion.

Despite the interest in sourcing product for North American consumption closer to customers because of reduced transportation costs and rising Asian labor costs, China has “substantial critical mass,” said Mark Millar, an Asia logistics industry consultant at Hong Kong-based M. Power Associates. Thirty years of aggressive infrastructure investment and a deep and broad supplier base will allow China to sustain its reign as the world’s factory for years to
come, he said.

China’s supply chain stature also is aided by the country’s politicalleadership, which is working hand-in-hand with the country’s central bank, providing a measure of stability that some of its Asian neighbors lack, Martin said. Chinese President Xi Jinping likely will serve a second five-year term, giving the country steady leadership through 2023. He praised Zhou Xiaochuan, governor of the People’s Bank of China, of having the expertise and working relationship with Beijing’s political leadership to bring currency stabilition and lower inflation.

As the pace of China’s exporting growth slows and its total economic growth does the same, import gains will follow suit, Martin said. He expects the country’s import growth rate on a CAGR basis to slide by more than half, from 25 percent in 2002-08 to 11 percent through 2020. Aside from some production moving overseas, China will make more of the goods it consumes, reducing the need for some imports.

But even with the slackening growth, China “by the end of the decade will become the world’s largest importer of manufactured goods.” China’s burgeoning middle class is driving much of those expectations. Having $20,000 or more in household income is generally considered the starting point at which middle class Americans regularly buy branded goods and work to
buy a vehicle or house. In 2012, some 147 million Chinese households had between $20,000 and $50,000 in annual income. By 2020, that group is expected to hit 240.2 million people, suggesting a wave of demand for everything from refrigerators to midsize sedans.

The number of households with more than $50,000 in income also is growing steadily, suggesting upscale brands of white goods and vehicles will succeed in meeting the whims of the upper middle class. In 2012, about 14.4 million Chinese households had incomes exceeding $50,000. That number will quintuple by 2020 to 81.6 million, Martin said.

“China will be the biggest market for premium cars,” he said. 

On the other hand, the market for luxury goods seems to be dropping. A survey by Shanghai-based publishing group Hurun Report showed spending by wealthy Chinese fell 15 percent last year, Bloomberg reports.

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