Did you just say, “Export to China”?

And if this makes critics question its potential as an importer, China’s merchandise imports worth $1.9 trillion (in CY2013) is enough to hold their tongues. All you, as an exporter, need to do is just focus on the Dragon’s growing needs!

Dr. A.K. Sengupta | @TheDollarBiz

The history of China can be traced back to one of the very ancient civilizations ?that flourished in the fertile basin of the Yellow River. The nation’s ?political system was based on hereditary monarchies that existed as a dynasty. The last dynasty was overthrown ?in 1911 and the Republic of China ?was constituted, which ruled the Chinese mainland until 1949. After the defeat of the Japanese Empire in World War II, ?the Communist Party of China overthrew the existing ?nationalist Kuomintang regime and established the present ?People’s Republic of C?hina (PRC), with its capital at Beijing. Until the late 1970s the PRC followed a ?Soviet-style? planned ?economic model. However, following the death of its leader Mao Zedong, also transliterated as Mao Tse-tung, the new incumbent Deng Xiaoping and the rest of the Chinese leadership began to reform the economy by first dismantling agricultural collectivisation and privatising farmlands. A major thrust was given to foreign trade, and several special economic zones (SEZs) were setup. Inefficient state-owned enterprises (SOEs) too were restructured and the unprofitable ones were shut down. Since the liberalisation process began in 1978, China has constantly been among the world’s fastest growing economies, relying heavily on investment and export-led growth. Today, it is the world’s second largest economy, both in terms of ?nominal GDP and purchasing power parity (PPP). It is also the world’s largest exporter of merchandise goods. And not just that. It’s also an important member of the United Nations, with a permanent seat in the Security Council. In fact, the country today? is an important  ?member of numerous formal and informal multilateral organisations, including WTO, AEPC, BRICS, Shanghai Cooperation Organisation, BCIM and G20.

Waking to markets

Being a one-party country China’s move towards a market-oriented liberal economy was quick. Any dissent was dealt in the communist way. Reforms began with the phasing out of collectivised agriculture, and expanded to include the gradual liberalisation of prices, fiscal decentralisation, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening up of trade relations. In fact, China’s private sector has expanded enormously since then. Today, there are over 30 million private business units in the country. The restructuring of the economy and the resulting efficiency has contributed to a more than ten-fold rise in the GDP since 1978. ?Other salient features of the expanding economy also deserve a mention. For instance, the average annual GDP per capita growth from 2000 to 2011 was 9.5%; the average annual GDP growth from 2000 to 2011 was 10.2% (however, since then the Chinese economy seems to be losing steam with growth rate falling to 7.7% in 2013). Interestingly, between 2007 and 2011, China’s growth rate equalled that of the G-7 bloc. So, what is the secret behind China’s rise to economic superpower?

World’s workshop... ?

It is manufacturing that has made China what it is today. China accounted for 19.8% of world manufacturing output in 2012. This means every fifth product (in terms of value) in the world is manufactured in China. Major industries in China include: mining & ?ore processing,? iron &?  steel, aluminium, coal, machinery, armaments, textiles &? apparels, petroleum,? cement, chemical fertilisers, food processing, automobiles and other transportation equipment including rail cars and locomotives, ships &? aircraft,? consumer products including  footwear, toys, electronic & electrical equipment, telecommunication & allied equipment. In short – almost everything! ?China is also the most preferred destination for the relocation of manufacturing facilities. Among the various industrial branches, machine building and metallurgical industries have received the highest priority. These two areas alone now account for 20-30% of the total gross value of industrial output.

...?and the top trader

During the past few decades China has gradually opened up its market to the outside world, and in due course been able to attract increased foreign investment. This has helped the country introduce advance technology and in turn transform and upgrade domestic industries. In 1978, the total value of China’s trade was only $20.6 billion, putting it at the 32nd place in the world. By 2013, this figure had surged to a whopping $4.15 trillion – $1.95 trillion of imports and $2.20 trillion of exports – placing it at the top. ?In fact, China has been the world’s largest exporter for the last five years, with US and Germany constantly fighting for the second spot. Last year, China had a trade surplus of over $260 billion, second only to Germany.

Hindi-Chini Bhai Bhai  

Chinese farmers working at a paddy field. One of the first steps the Chinese government took, when it embraced free-market forces, was dismantle agricultural collectivisation

  India and China have always had a love-hate relationship. While India feels proud for having exported Buddhism to China, it feels betrayed due to the invasion in 1962. This, despite being one of the first countries to recognise the new People’s Republic in China in 1950. Border disputes pertaining to Arunachal Pradesh and the status of Tibet have also threatened to spiral out of control on more than a few occasions. However, none of these have ever affected trade relations between the two most populous countries in the world.     Until about a decade back, bilateral trade between India and China was not as skewed in favour of China as it is today. In fact, if one goes by International Trade Centre data, India actually had minor trade surpluses in CY2003, CY2004 and CY2005. But a decade of Chinese manufacturing dominance and Indian conspicuous consumerism has meant that this surplus has now turned into a massive deficit of well over $30 billion. This has led to alarm bells ringing in the corridors of power, something that can be judged from The Economic Survey of India – 2014. As per it, India needs to step up?? exports to China, especially in sectors where identified potential has not been adequately realised. These include items like machinery, mechanical appliances, pharmaceuticals and chemical based products.

Low-hanging fruits    Although it’s a known fact that China is mostly an importer of raw materials and exporter of finished goods, a detailed The Dollar Business Intelligence Unit analysis reveals that there are 28 multi-billion dollar export opportunities for the taking. To arrive at this list, we analysed all products (broken down to 4-digit HS codes), where Chinese imports were worth at least $1 billion, Indian exports were worth at least $1 billion and still there existed an opportunity of at least $1 billion in CY2013. One of the most startling commodities in this list is iron ores and concentrates (HS Code 2601). In CY2013, being the manufacturing powerhouse that it is, China imported over $105 billion worth of iron ores and concentrates from all over the world. But rampant corruption and mining bans in India coupled with a very high export duty on iron ore exports ensured that India exported just $1.63 billion worth of it in CY2013. However, over 90% of it was shipped to China. This makes it clear that if the new government can get the house in order, tens of billions of dollars are waiting to be pocketed. Similarly, when it comes to petroleum oils, China’s imports in CY2013 were worth over $31 billion and India’s exports were worth $67 billion. But India’s exports to China were a dismal $96.68 million – less than 0.5% of China’s total imports of petroleum oils. Another area where India should definitely try and tap the Chinese market is pharmaceutical products (HS Code 3004). In CY2013, while China imported $10.82 billion worth of medicaments, India exported roughly an equal amount of it. But India’s exports to China were a shockingly low $8.57 million – less than 0.1% of what China imported. Even when it comes to cars, China is one of the biggest importers in the world and India’s exports were worth over $5.5 billion in CY2013. But what was the value of India’s car exports to China? Less than half-a-million. Interestingly, if you add the potential export opportunities for Indian exporters in just these 28 categories, you arrive at a number which is over $399 billion – nearly 119% of India’s total exports to the world in CY2014. Need we say more?

Learn from history

Over the last couple of years, several top economists and organisations have warned China that if it doesn’t start working on strengthening domestic consumption and keeps betting on exports, its economy will implode sooner rather than later. At the same time, due to pressure from across the world, China is slowly but surely letting its currency appreciate against its peers – CNY/INR has appreciated over 40% since 2009 – from about 7 in August 2009 to the current levels of 10. And if the above mentioned reasons and low-hanging fruits aren’t enough, all an exporter needs to do is take inspiration from India’s most popular export to China – Buddhism!  

Dr. A. K. Sengupta Chief Consulting Editor, The Dollar Business; Former Dean of The Indian Institute of Foreign Trade (IIFT), New Delhi