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China Now A Magnet In Asia-Pacific Trade

Alex Frew McMillan,|Special to CNBC.com
Monday, 24 Jan 2011 | 11:41 AM ET

The knock on China is that it’s the sweatshop to the world. But after last year, the Middle Kingdom may be on its way to becoming the world’s mall.

Trade
Trade

For the first time in years, China’s imports rose faster than its exports. The nation even posted a trade deficit in March.

The situation is likely to persist this year, too. Imports for 2010 rose 39 percent to $1.4 trillion, while exports gained 31 percent to $1.6 trillion. Though China gets the most attention as an exporter, its imports have risen almost as fast in the past decade, and are now making up for lost ground.

The country’s rising importance as a destination for goods as well as an originator of them is cementing its role as Asia’s key trading partner. Could it soon threaten the United States and the Eurozone?

The list of individual nations depending on China grows each year. In 2009, it became the biggest trading partner for Japan, Brazil and South Africa. In 2008, it was Australia.

“Those economies are relying more and more on China’s demand,” says Wei Yao, China economist with Société Générale. She expects China’s imports to outpace exports for the next five years. “The trend is there, that China is going to lead in many ways in Asia, there’s no doubt.”

One of the keys is rising consumer demand within China itself. The country is no longer merely importing components from other Asian nations, performing some low-end assembly, and then sending finished goods to the Western world.

China’s Ministry of Commerce said on January 18 that it expects retail sales to have grown more than 18 percent in 2010, to more than 15 trillion yuan ($227.85 billion), up from a 15,5-percent increase the year before.

That’s impressive after extraordinary stimulus-driven growth the year before. It also means domestic consumption is running at about twice the rate of economic growth, with China’s GDP expected to post growth of 9-10 percent this year.

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The leap in retail sales is no accident. China’s central government has shifted its stance and is making domestic demand the top priority of the country’s 12th five-year plan, which begins this year.

Double-digit gains in wages and an appreciating currency—the yuan is expected by many economists to gain 5 percent in value this year—are also boosting the buying power of the Chinese consumer, and fast.

As a result, China’s influence as a consumer is being felt throughout the Asia Pacific region.

For instance, China is the top source of both imports and exports for Australia, with almost $83 billion in two-way trade for the 2009-10 year, surpassing Japan (No.2) and the United States (No.3).

Much of that trade focuses on natural resources, thanks to Australia’s huge mining sector— coal, iron ore and gold are three of its four biggest exports. But the relationship is deepening, with Chinese companies investing almost $16 billion in Australia in 2009, almost triple the amount of money invested in the other direction.

Beyond major, multi-decade mining deals, those closer ties are seeing Chinese institutional investors start to buy up Australian office property.

“That growth ends up filling the offices of Sydney and Melbourne with lawyers and investment bankers,” says Steve Day, the managing director at property investment manager Echo Capital. “It is not just an isolated impact on the mining towns.”

The trade ties lead to investment in other sectors. China Investment Corp., the country’s sovereign wealth fund, for instance, has invested about $500 million in the Goodman Group, one of Australia’s largest property managers.

Day says his company has been in discussions with several Chinese institutional investors about putting more money to work in Australia. That’s a new source of capital that could prove as significant as the Japanese institutions that bought up Aussie land in droves in the 1980s.

“They have started to emerge,” Day said. The closer relationship with China “is providing that lift to the whole economy, which does affect the property markets in general, in an occupancy and activity sense.”

The United States is still China’s top trading partner overall, accounting for 18.4% of exports in 2009 with some $298 billion in bilateral trade. Japan, Hong Kong and South Korea follow. A number of European countries—Germany, the Netherlands and the United Kingdom—are next, followed by Asia Pacific partners Singapore, India and Australia.

Davos 2011 - See Complete Coverage
Davos 2011 - See Complete Coverage

So China is far from being able to do without the West. But it is coming into its own as a vital pillar of support for Asian economies, particularly at a time Western demand is lagging.

“It is not true that China can replace the demand from the developed world,” says Yao. “It provides some hedge, or some cushion. But it’s not that we don’t need the U.S. anymore.”

China’s strong domestic demand, though, is shifting the focus, something that’s clearer when you look at where China turns for its imports. Its top suppliers are Japan, South Korea and Taiwan, followed by the United States—much as you might expect for a nation known for low-value added assembly, re-exporting finished goods.

But look further down the list of its ten-largest importers, and China’s importance to emerging markets is clear: Malaysia, Brazil, Thailand and Saudi Arabia are all top suppliers to China, after the developed economies of Germany and Australia. China has also invested heavily in Africa, for so long a no-go zone for Western capital. (See quiz.)

Not everyone, however, agrees that China’s role as a trade destination represents a major shift.

Deutsche Bank still argues that any decoupling of Asian economies from the West thanks to China is still a long way off. In its outlook for 2011, the firm cites data from the Asian Development Bank demonstrating final demand in Asia accounted for only 29 percent of Asian exports in 2008, whereas the United States and Europe make up virtually half, 46 percent, of demand for Asian goods.

Deutsche’s analysis suggests China, India and Indonesia are big enough to stand on their own, thanks to strong consumer demand, but smaller economies like Singapore, Hong Kong, Taiwan, Malaysia, Thailand, South Korea, the Philippines—and even a heavyweight like Japan—still have a high dependence on Western growth.

“While demand in China is becoming more important over time as a driver in its neighbors’ economies, it is not yet important enough to significantly decouple these small open economies from the U.S./E.U. business cycle,” the German investment bank concludes.

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