4 - The Global Financial Crisis and China's Trade Prospects

Summary

Trade Expansion is Important for China's Growth

Trade expansion has been important, if not essential, for China's economic growth in recent decades. With an annual growth rate of 17 per cent since reforms started in 1978, trade has consistently outstripped the already staggering growth of the overall economy in which Gross Domestic Product (GDP) on average grew by 10 per cent a year. Consequently, China has become a leading trader in the world, ranking number two in export and number three in import in 2008, and accounting for 12 per cent and 9 per cent of the world total respectively. In 1978, China's trade to GDP ratio was about 10 per cent. It has since increased significantly, especially since the early 1990s, nearly doubling the 30 per cent in 1990 to reach 58 per cent in 2008.

More importantly, external demand has been an important engine for China's economic growth in recent years. Between 2005 and 2008, net export directly contributed about 20 per cent of China's annual economic growth (see Figure 4.1). Moreover, exports are crucial for developing China's industries and generating employment. In 2007, exports constituted about 25 per cent of China's total industrial output. According to the Ministry of Commerce, export related activities supported more than 100 million of those employed in 2008.

In addition to providing market opportunities and generating employment, trade is an important source of productivity improvement, through economies of scale, competition, technology transfer, and the inflow of export-related foreign investment.

The importance of trade is also reflected by the negative drag over the past year on overall growth by a sharp decline in trade activities. Since late 2008, China's trade has suffered a sudden decline as a result of rapidly deteriorating external economic conditions generated by the global financial crisis. As export demand disappears, industrial output growth declines and overall GDP growth slows down.