There is nothing new here but the concerns are real and mirror my own. Things are not always what they seem in China.
China’s Exports More to do with Manipulation than Recovery [Chin Briefing]
The news that China’s exports increased by 17.7 percent in December year-on year is impressive. So too, the statistic that China has now overtaken Germany as the world’s largest exporter. In turn, this has lead to commentary about the position of the RMB against other globally traded currencies such as the Euro and the U.S. dollar. However, in announcing that China has overtaken Germany, analysts have been jumping the gun – Germany has yet to release its own export figures for December. As in the news that in 2009 China overtook the United States as the world’s largest vehicle market make for interesting headlines, there is the matter of sustainability. Are these positions sustainable? Let’s examine both of these situations.
China’s export boom
Also overlooked in the export equation when it comes to China figures is the matter of manipulation of taxes to encourage exports. Again, this is not a sustainable situation in the longer term. China needs tax revenues to pay for the extraordinary cost of continuing its development. Yet here is where the real truth lies: China’s export boom has come largely as a result of the huge incentives given by China’s export rebate program, speeding up repayments of VAT and widening the quantity of products that could be reclaimed. China has enhanced this by extending claim deadlines widened VAT scope to assist with R&D, extended VAT refunds to overseas contractors, abolished VAT altogether in certain construction situations, and increased refund rates.
The argument, when looking at China’s growth, is how much of this is truly sustainable. Massive fiscal handouts for vehicle and property purchases, a stock market that appears fed by loose cash rather than underlying fundamentals from its companies, and exports driven by massive tax incentives is going to be a tough act for China to keep up.