Is China too dependent on exports?

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China’s exports, which helped drive the fastest economic growth in more than a decade in the latest quarter, are poised to slow, two surveys of purchasing managers show.
Weakening U.S. demand may damp China’s exports, which account for about 35 percent of gross domestic product, just as higher interest rates and government lending curbs begin to slow the economy. The value of China’s overseas sales more than doubled between 2002 and 2005.

“A sharp slowdown in China’s exports could have a significant impact on the economy, which has become very dependent on exports in recent years,” said Robert Subbaraman, an economist at Lehman Brothers Inc. in Hong Kong. CLSA’s index of export orders fell to 54 last month from 55 in July.
Exports rose 22.6 percent in July from a year earlier, the least in three months, as rising gasoline prices and a slowing housing market crimped demand in the U.S. The U.S. economy grew 2.9 percent in the second quarter from a year earlier, about half the pace of the previous three months.

China’s central bank raised interest rates twice this year and also twice ordered lenders to set aside more money as reserves, seeking to curb a surge in investment that it says threatens to fan inflation and leave the nation with too many factories.

The combination of higher rates and slowing exports means the outlook for China’s economy is “clearly deteriorating,” said CLSA chief economist Jim Walker in the statement. “We expect to see much more weakness in export orders over the coming year as the U.S. economy slows sharply,” Walker, who’s based in Hong Kong, said. “Tightening monetary policy could not be coming at a worse time.”

Via The Eagle Tribune

China’s economy is so export dominated that even a minor weakening in export demand could be devastating for the country. China would do well to heed the advice of economists who have argued for a more diversified economy for years. While they are making efforts to do so they are not there yet. The rise of the middle class in China, as well as gradually rising incomes, should help China further develop its domestic market as well as offer further opportunities for foreign imports.

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