Chinese Export Margins
China is expecting to keep growing at 7.5% plus per year. One of their biggest drivers of growth over the last few decades has been exports. There is only one problem. This is becoming far less profitable and is unlikely to provide the boost it has in the past.
Many industries are aware that China dumps excess capacity on sectors such as solar and steel (just look at Aussie steel producers and German solar companies). A significant proportion of these sales by Chinese manufactures are below costs. How long can this continue?
Recent reports are suggesting that export margins are at very low single digits. This report describes margins for exporters at 1.4%.
If the economy is to continue growing, wages need to keep rising. Wages are rising in China at low to mid teen growth. Can wages keep rising at low to mid teen growth and exporters remain globally competitive? There is a point where wages rise too far and “the worlds factory” becomes uncompetitive. Are we close to that point? The lower margins are suggesting that we are closer this point than many would care to believe. This effectively puts a cap on the Yuan appreciation. Hence China will continue to buy more US treasuries regardless of debt ceilings or political issues.
The bullish case for China is for wages to continue rising at mid teens for another few decades. Unless China finds new industries for their workers, then this is going to be difficult. Building empty buildings with rising wages also poses difficulties. The inability to earn economic returns on the capital expenditure becomes even more marginal and with credit growing at rates around 4 times GDP growth it is quite easy to understand that these trends are not permanent.