Dull exports lead China firms compete in limited local market

Chinese government recently announced to encourage exporting firms to develop domestic sales channel due to slump of processing trade activities.
However, current energy consumption figures in China suggest that the domestic market is not enough active to absorb supply from exporting companies.

Chinese processing trade companies are located in the bonded area. They import parts and materials from overseas without tariff, and their products are basically exported. Those companies have contributed China to earn huge amount of foreign currencies since the reform and open policy.
Processing trade companies should be licensed from the government when they wish to sell their products directly into the domestic market.

Chinese government deregulated the rule of domestic sales license for part of excellent processing trade firms in 2009 following the severe slump of exports due to the Lehman shock. This time, general processing trade companies are also encouraged to develop domestic markets.

China's processing trade amounts were 112.6 billion US dollars in August, according to the General Administration of Customs. It was 2.2% lower than the same month a year ago. Processing trade had already recorded year-on-year decrease in July.

Chinese processing trade had grown by two digits except for the slump period after the Lehman shock, but the growth rate has faded since 3Q 2011 after the Chinese yuan became stronger than the $1=6.4 yuan level.

Japan's exports, that is the typical supply source for the Chinese processing trade, also peaked out in late 2010. Although Japanese exports had strongly correlated with Chinese exports, those two numbers has been deviating especially after the Japan's severe earthquake in March 2011.

While growth of processing trade is fading, China's total exports continue moderate growth due to the relatively firmer general trades. Some people believe that the growth of general trades suggests that Chinese industrial activities are shifting from the subcontract of foreign companies to mature local industry. Those people anticipate consumption of the domestic Chinese people is also growing.

However, the growth of energy consumption apparently shows actual slowdown of industrial activities in China. Growth of exports including the general trades is also under the shrinking tendency.
If Chinese domestic demand is expanding despite the sluggish growth of exports, energy consumption is likely to maintain steady growth. Therefore, it is natural to think the Chinese domestic demand is not strong enough at moment.

If many exporting companies rush into the limited domestic markets, intense competition with local firms might hurt strength of the entire Chinese manufacturers.

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