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In this report, we will sort out the external and internal environment and structural changes of China's exports in detail, in order to present investors with a full picture of the mainland's export trade, as well as the economic logic behind it, and discuss its impact on the bond market.
From the perspective of the global value chain, in the past 20 years, the mainland's export industry structure has been significantly upgraded, and the export competitiveness of high value-added manufacturing, medium and high-tech industries and other industries has been significantly enhanced, which is reflected in the continuous improvement of the forward participation of the mainland's global value chain in the global value chain. With the upgrading of the mainland's export structure, the relocation and transfer of the mainland's industrial chain is affected by the two main factors of low-cost drive and increased global trade frictions, some Southeast Asian countries such as Cambodia and Vietnam have obviously increased their closeness with the mainland in global trade in recent years, and their backward participation in the bilateral value chain with China has increased significantly, while Mexico has also been affected by Sino-US trade frictions to play a certain role in the transfer of mainland exports. On the whole, we believe that the process of the mainland's trade transfer to the outside is more accompanied by the resonance of the expansion of trade share, rather than the erosion of trade share. We believe that this is actually the result of the inseparable links of the industrial chain, and the final optimization and progress of upstream and downstream countries.
On the one hand, driven by the continuous strengthening of the Belt and Road construction and the rising demand for global trade diversification after the Russia-Ukraine conflict, the growth rate of China's exports to the five Central Asian countries and Mongolia and Russia and the proportion of China's total exports have increased significantly after 2022. Another increase comes from the Middle East and other regions, Saudi Arabia, the United Arab Emirates, Egypt, Iran, Ethiopia 5 countries will officially join the BRICS organization from 2024, we can see that the total amount of exports to Saudi Arabia and the United Arab Emirates in 2023 is significantly higher than the total export amount of the mainland, and the economic development of countries in the Middle East is accelerating. In the context of the acceleration of infrastructure construction, the mainland's export projects to the Middle East have also rebounded significantly year-on-year, mainly contributed by Saudi Arabia, which has also driven the mainland's transportation equipment exports to the Middle East to be in a high-speed year-on-year position. From the perspective of the mainland's trade development trend in recent years, thanks to the "Belt and Road", the implementation of RCEP, the increasing role of multilateral organizations, and the development of transnational infrastructure such as China-Europe trains, we can gradually see the rise in the importance of Southeast Asia, Central Asia, Central and Eastern Europe and other regions, and we expect that this may still be able to contribute to the mainland's foreign trade in the future.
From the perspective of domestic trade transfer: In recent years, the export growth rate of the central and western regions has continued to exceed the national average, and we have observed that the export growth rate of the northeast region has also been higher than the national average after the epidemic. We believe that the change in the distribution of the mainland's foreign trade share and the change in the growth rate of various regions are actually the result of the diversification of the mainland's foreign trade pattern and the gradient transfer of industrial chain and foreign trade in China. In recent years, the total export volume to Central Asia has expanded significantly, while the southwest region has mainly benefited from the natural conditions and the trend of the mainland industrial chain to Southeast Asia, and has undertaken a considerable part of the industries with high energy consumption and that could have been transferred to Southeast Asia. The Northeast region has benefited from the trade cooperation between China and Russia in the Far East, making exports a relatively good part of the Northeast economic indicators. Therefore, in addition to observing the outward transfer of global value chains and industries, the gradient transfer of domestic trade and industrial chains is also an important factor in determining the future export pattern of the mainland.
Economic and bond market implications: On the whole, we believe that in the context of the decline in global external demand, it may be difficult for mainland exports to rebound significantly in 2024, but benefiting from the low export prices of the mainland is conducive to maintaining the share of trade, and the decline in global commodity prices is conducive to depressing the impact of mainland import prices, the mainland trade surplus may still be maintained at a certain height, thereby supporting the RMB exchange rate. In the context of the weakening of the pressure to stabilize the exchange rate, and the high real interest rate and low economic momentum in China, further guiding the interest rate downward is still a more important direction of monetary policy, and the domestic economic momentum has not yet recovered significantly, and the monetary policy still needs to cooperate with the fiscal policy to stimulate the economy, the bond interest rate in 2024 may usher in a further downward trend, and the lower limit is expected to break through the new low in 2023, and the "asset shortage" Under the pattern, it may still be a better investment strategy to lay out in advance and extend the long-term period before the monetary policy is greatly relaxed.
risk
External demand fell more than expected, and global macro uncertainty exceeded expectations.
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- introduction
- Transformation and upgrading of China's export industry from the perspective of global value chain
- Optimization of the mainland's export structure from the perspective of total trade
- GVC (Global Value Chain) 视角下大陆出口产业升级与向外转移
- In the context of industrial transfer, the mainland and emerging markets have formed a benign trade resonance
- Changes in the structure of China's exporting countries in the context of strengthened cross-border regional cooperation
- Details of the strengthening and deepening of transnational regional cooperation: the two main lines of the "Belt and Road" and the "BRICS".
- In the context of slow globalization, deepening Asia-Europe ties has helped China's exports to open up new increments
- Industrial transfer and domestic regional economic development from the perspective of domestic and provincial provinces
- The imbalance between the level of economic development and foreign trade between the mainland regions still exists, but it is gradually alleviating
- Characterization of interregional trade patterns on the mainland
- Future outlook for domestic inter-regional trade transfers
- In the medium term, the gradient transfer of trade and industry may provide new growth momentum for some western and northeastern provinces
- How will China's export trade play out in the short and medium term, and what will be the impact on the bond market?
- Against the backdrop of declining external demand in advanced economies, it is difficult to avoid pressure on exports in the short cycle of the global economy
- The price advantage may still have a certain supporting effect on the mainland's trade share and surplus
- The rebound in trade surplus and foreign exchange settlement demand is conducive to monetary easing and bond yields to continue to fall
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introduction
When the real estate industry in mainland China gradually enters a new pattern of industry development, the driving force of economic growth may decline and stabilize at a low level compared with the previous 15 years, and the importance of other sub-items of the macroeconomy will also usher in a relative increase. Looking back on the past two years, driven by factors such as the resilience of external demand exceeding expectations, the relatively more complete domestic supply chain, and the continuous optimization of the mainland's foreign trade policies, the mainland's export growth rate has fallen lower than expected as a whole, and the year-on-year pull on GDP is also higher than the pre-epidemic trend level. Entering 2024, the global environment trend we are facing may be: overseas economies will go into recession - monetary conditions will be loose - the economy may usher in a recovery in the future, and overseas demand may first fall and then rebound in the medium term; Therefore, exports are particularly important as a link between the internal and external sectors of the economy. Judging from the statements of the 2023 Central Economic Work Conference on opening up to the outside world/foreign trade, we believe that the wording on exports at the policy level is also more optimistic than in 2022, and 2024 may also usher in a more positive and friendly policy environment for opening up and exports.
Therefore, in this report, we will focus on the topic of China's exports, and introduce the global value chain analysis system and regional input-output tables to split the study of mainland exports, so as to better restore the structure of mainland export countries, commodities and provinces, and understand the future development direction and potential of mainland exports from both domestic and foreign perspectives.
Figure 1: Foreign trade-related statements at key economic conferences since the end of 2022
Source: Chinese government website, CICC Research Department
Transformation and upgrading of China's export industry from the perspective of global value chain
Since China's accession to the WTO in 2001, China's exports have experienced 1) strong growth from 2001 to 2008, 2) repair and structural upgrading after the GFC (Global Financial Crisis) from 2010 to 2016, and 3) The total volume of trade brought about by the Sino-US trade friction that began in 2017 has been affected to a certain extent, and the adjustment of the internal and external circulation pattern of the economy has accelerated, and 4) the export share and growth rate brought about by the resilience of the supply chain after the epidemic in 2020 have increased together. From 2020 to 2022, benefiting from the resilience of the mainland's supply chain, the mainland's production side recovered ahead of other countries, while the overseas demand side performed strongly, superimposed on the Regional Comprehensive Economic Partnership (RCEP) agreement has come into force one after another, and the "Belt and Road" initiative has been further promoted.
Chart 2: A historical review of China's export growth and its role in driving GDP growth
Source: Wind, CICC Research
Optimization of the mainland's export structure from the perspective of total trade
In the past 20 years, the growth of the mainland's total foreign trade has been accompanied by a significant optimization of the structure, and it has also witnessed the process of the mainland's participation in the global value chain to the continuous improvement of its position in the global value chain.
From the perspective of total trade, we can observe that the changes in commodity structure and export share in the past 20 years have been driven by industrial upgrading and transfer. From the perspective of trade patterns, the proportion of processing trade in the mainland's export trade has been declining, while the proportion of general trade has continued to rise and accounts for more than 60 percent, and the overall quality of trade has improved. In terms of changes in the proportion of exports by region, the share of mainland exports to the United States has fallen significantly after the GFC in 2008 and the trade friction in 2018, while the proportion of exports to ASEAN has continued to rise, which to a certain extent corroborates with the adjustment of the mainland's trade mode.
Figure 3: Proportion of mainland export trade
Source: Wind, CICC Research
Figure 4: Percentage of exports from mainland China to various countries
Source: Wind, CICC Research
At the industry level, we can examine the explicit comparative advantage (RCA, calculated as the share of a country's exports of a certain commodity in the country's exports/the share of the world's total exports) and the trade specialization index (TSC, calculated as the trade balance/total trade) two indicators, generally speaking, the rise of RCA and TSC means the improvement of the industry's trade competitive advantage, from which we can see two clues:
Under the WTO, after 2002, the mainland's explicit comparative advantage in primary products (agricultural products and fuel and mineral products) declined, which coincided with the reality that the mainland did not have a strong advantage in natural endowments. Chemicals, integrated circuits and electronic components, transportation equipment, automobiles and accessories, and other capital-intensive industries with certain technological added value have shown a relatively obvious improvement in RCA. Labor-intensive products such as clothes continued to decline in RCA. From the perspective of TSC, a similar conclusion can be drawn, and the degree of specialization of trade in man-made commodities such as food, beverages, tobacco and alcohol, shoes and hats has dropped significantly, while electromechanical audio-visual equipment, vehicles, aircraft, We believe that the logic behind this is also the fading of the mainland's low labor cost dividend and the industrial upgrading led by industrial policy, the automobile industry chain is the best representative, we can see that the share of mainland automobile exports in the mainland's total exports and the world's automobile exports has increased significantly, especially since 2020, China's new energy vehicle exports have accelerated, and the share of mainland exports of automobiles in global auto exports has been close to 8%.
For example, the RCA of steel products showed a more obvious overall recovery, especially when the PPI was low, and the overall TSC of non-mineral products also rebounded. We believe that the logic behind this is that in recent years, the mainland has actively exported infrastructure under the "Belt and Road" and other relevant regional cooperation systems, and on the other hand, it is also caused by the strengthening of the willingness of product producers to export when there is relative overcapacity and low prices of industrial products in the mainland.
Chart 5: RCA by industry under WTO caliber
Source: WTO, CICC Research
Exhibit 6: TSC by industry under the HS classification standard
Source: Wind, CICC Research
Figure 7: Rapid export development of the automotive industry in China
Source: WTO, CICC Research
GVC (Global Value Chain) 视角下大陆出口产业升级与向外转移
Considering that there will be some double counting in the traditional international trade calculation method, we believe that it would be more accurate to introduce the concept of trade value added that is more commonly used in the global value chain (GVC) system. In short, the global value chain refers to the decomposition of the production process of commodities by the transnational supply chain system in the context of economic globalization, so that these enterprises located all over the world but on the same production chain form a close transnational network. The degree and status of each country's participation in the global value chain are usually strongly correlated with a country's openness, industry and foreign trade competitiveness, and since the 21st century, value chain trade has also accounted for an increasing share of the global trading system.
Figure 8: Dismantling framework of trade value added in the context of the global value chain system
Source: Global Value Chain Development Report, Global Value Chain Research Institute, University of International Business and Economics (2021), CICC Research Department
In the GVC system, points of interest include the level and location of a country's participation. We can introduce the concept of forward participation and backward participation in GVC, which can explain the relationship between a country's industry and upstream and downstream industries in the production of the global value chain, and can strip the added value of domestic and foreign countries. Forward participation is defined as "the proportion of value added in intermediate goods exported by the country to other countries for re-export in the country's total exports", which can be understood as "country A exports X goods to country B, and country B further processes X goods into Y goods for export to other countries (and can also include country A itself), and in the case of X, the value added from country A accounts for α% of country A's exports", which is our measure of GVC forward participation. The higher the weight, the higher the weight, indicates that country A is at the front end of the value chain, or has a strong advantage in R&D, technology and other high value-added activities, and is located in the upper reaches of the value chain. The proportion of foreign added value included in the import value of intermediate goods in the country's total exports is backward participation, and the higher this proportion can indicate that the country is located at the back end of the relevant industrial chain, has more low-cost labor advantages and other resource endowments, and participates in processing trade export links such as processing and assembly, so this high proportion mostly means that the country's export structure is generally biased towards the middle and low end of the industrial chain and the downstream part. It should be noted that the upstream and downstream of the GVC system are not the same concept as the upstream and downstream of the industrial system as we understand them on a daily basis.
We can see that since 2002, the forward participation of GVC in mainland China has been on the rise as a whole, and the backward participation of GVC has experienced the processing trade boom brought about by the initial participation in GVC from 2002 to 2008, and the upgrading of the export industry chain after 2010. Structural adjustment, the stage of decreasing the proportion of processing trade, on the whole, after the trade friction in 2018, the total participation of the mainland GVC has dropped slightly, and in horizontal comparison, China's current GVC forward participation is higher than that of the EU as a whole compared with developed economies, but compared with Germany, Japan, There is still a certain gap between traditional manufacturing powers such as the United States, higher than Mexico and ASEAN in emerging economies, but slightly lower than India.
Figure 9: China's level of participation in global value chains
Source: OECD TIVA, CICC Research
Figure 10: China's Global Value Chain Status Index
Source: OECD TIVA, CICC Research
The upgrading of industrial structure and commodity structure is often accompanied by the improvement of the position of the industrial chain, and this process is likely to be accompanied by industrial transfer. We can see that the backward participation of mainstream emerging economies and China in the bilateral trade value chain has increased significantly in recent years, especially in major Southeast Asian manufacturing countries such as Cambodia, Vietnam, and Thailand, which also shows that they have undertaken a large number of China's low- and medium-value-added labor-intensive manufacturing industries with labor cost advantages, such as textiles and garments, industrial product assembly manufacturing, etc. Mexico, on the other hand, has seen a faster slope in backward participation after the trade friction in 2018. As for India, another major emerging economy in Asia, from the perspective of value chain relevance, it does not play a too obvious role in undertaking China's industrial transfer, and on the whole, the forward and backward participation of India and China in the bilateral value chain is lower than that of other sample emerging economies, we believe that on the one hand, the industrial structure of China and India is not completely compatible, and on the other hand, it is also related to the fact that India's foreign business environment is not friendly, and the transfer of domestic industrial chains to India (especially greenfield investment, factory establishment, etc.) is more complex.
Figure 11: Backward participation in the bilateral trade value chain between South Asia, Southeast Asia and Mexico and China
Source: OECD, CICC Research
From the perspective of mainland foreign investment, it can also be seen that the proportion of mainland OFDI flows to ASEAN and Mexico in total OFDI flows has continued to rise in recent years, and the proportion of manufacturing in ASEAN OFDI investment has continued to increase in 2021, reaching 44% of the total flow of mainland foreign direct investment in ASEAN. We believe that behind this is not only the result of the "going out" strategy of mainland enterprises, but also the demand of multinational enterprises to reduce costs brought about by the lower production costs in Southeast Asia, and it is also a natural choice to maintain the security and efficiency of global international trade in the context of Sino-US trade frictions.
Figure 12: China's share of OFDI in key emerging economies continues to increase
Source: Wind, CICC Research
Exhibit 13: Proportion of China's FDI flows to ASEAN by sector
Source: Wind, CICC Research
Taking Vietnam and Mexico as examples, we can basically get a glimpse of the logic and details of the transfer of mainland industries to emerging markets. Footwear, followed by basic metals and metal products, actually reflects the process of domestic labor-intensive low value-added industries to emerging countries in Southeast Asia, and on the whole, the proportion of added value in Vietnam's exports from China has rebounded significantly in almost all important industries in the past 20 years. However, the situation is slightly different for Mexico, where the largest increase in the proportion of added value from China in Mexico's exports is in the category of computer, electronic and electrical equipment, and this proportion has increased significantly after 2017-2018, while in contrast, Mexico's other manufacturing industries are far less connected with China than Vietnam.
Exhibit 14: Value-added component of Vietnam's exports from China
Source: OECD, CICC Research
Figure 15: Fraction of Mexico's exports from China
Source: OECD, CICC Research
In the context of industrial transfer, the mainland and emerging markets have formed a benign trade resonance
In the past two to three years, some investors have been concerned about emerging markets taking a share of mainland trade. However, judging from the actual data, the process of the mainland's trade transfer to the outside is more accompanied by the resonance of the expansion of the trade share, rather than the erosion of the trade share. In the past five years, the share of trade in goods between the mainland and major emerging economies in Asia has shown a common upward trend, and the mainland's exports with Vietnam and Malaysia have also had a strong year-on-year correlation. We believe that behind this is the inseparable link of the industrial chain, and finally the upstream and downstream countries form a situation of common optimization and progress.
Generally speaking, we see that in the context of the transformation and upgrading of the mainland's industrial structure, the mainland's foreign trade has also evolved from expanding the total amount to paying equal attention to "quantity" and "quality" in the past 20 years. While the natural economic phenomenon of industrial transfer to overseas occurs, it also contributes to the increase of the added value of the mainland's foreign trade, the upgrading of the internal industrial structure, and the improvement of economic efficiency. At the same time, the transfer of mainland industries to the outside is also accompanied by the expansion of local OFDI, which is conducive to the further "going out" of mainland enterprises and the expansion of international business capabilities, so that the mainland can better benefit from the global economic development.
Exhibit 16: China's share of merchandise trade with emerging Asian economies
Source: WTO, CICC Research
Figure 17: The growth rate of exports from China is highly correlated with Vietnam and Malaysia
Source: Wind, CICC Research
Changes in the structure of China's exporting countries in the context of strengthened cross-border regional cooperation
Details of the strengthening and deepening of transnational regional cooperation: the two main lines of the "Belt and Road" and the "BRICS".
In terms of the details of the changes in the direction of the mainland's export destinations and transnational cooperation regions, we can see that the "Belt and Road" countries in Eurasia and the BRICS countries are the two main lines in the structural transformation of export countries. Since 2023, there have been more than 150 countries cooperating with the Belt and Road Initiative. As well as the growth of emerging markets, we can see that the mainland's Belt and Road trade volume index in 2023 is also on the rise, from a regional point of view, the growth of Mongolia, Russia and Central Asia has been particularly obvious since 2022, on the one hand, since 2022, the multilateral cooperation between the mainland and Central Asia has been continuously strengthened, and the economic and trade relations have become increasingly close, and on the other hand, the economic and trade relations between Russia and emerging Asian economies have become closer due to the impact of the Russia-Ukraine incident. In 2023, after the epidemic subsided, the five Central Asian countries benefited from the enhancement of the transportation capacity of the China-Europe Express and the development and establishment of the free trade zone in Xinjiang and the central and western regions of China, and carried out active economic and trade exchanges with Chinese mainland. Overall, we can see that the growth rate and proportion of China's exports to the five Central Asian countries and Mongolia and Russia have increased significantly after 2022.
Chart 18: The Belt and Road Trade Volume Index has risen overall, with Mongolia, Russia and Central Asia rising significantly
Source: Shanghai Shipping Exchange, iFinD, CICC Research
Figure 19: Exports to the five Central Asian countries + Mongolia and Russia accounted for the proportion and value growth of the mainland's total exports
Source: Wind, CICC Research
The other main line comes from the BRICS, especially the newly joined countries in the Middle East. In 2023, the BRICS organization decided to expand, and Saudi Arabia, Egypt, the United Arab Emirates, Iran, and Ethiopia will officially become BRICS members from January 1, 2024. Since 2023, driven by the economic needs of both sides, China's economic and financial exchanges with Saudi Arabia, the United Arab Emirates and other countries have been continuously strengthened. In the context of the acceleration of infrastructure construction, the mainland's export projects to the Middle East have also rebounded significantly year-on-year, mainly contributed by Saudi Arabia, which has also driven the mainland's transportation equipment exports to the Middle East to be in a high-speed year-on-year position.
Chart 20: China's exports of construction projects to the Middle East rebounded significantly year-on-year
Source: Wind, CICC Research
Exhibit 21: Exports from the Middle East (12MMA, YoY)
Source: Wind, CICC Research
In the context of slow globalization, deepening Asia-Europe ties has helped China's exports to open up new increments
After the GFC, the world has essentially entered the era of so-called "slow" globalization, and the development of this anti-globalization trend has been more significant with the trade friction between China and the United States in 2017-2018 and the disruption of the global supply chain and trade order by the epidemic. Since 2008, the upward trend of global trade as a share of GDP has stalled, and even declined in some cases. On the whole, mainstream developed countries are actively shifting outward through industrial chains to expand the global market and gain more market share, while emerging countries may not be able to reproduce in the short term by actively participating in the division of labor in the global value chain to increase the contribution of trade to the economy and obtain more external assistance from economic growth.
Figure 22: The upward trend in global trade as a share of GDP has stalled since 2008
Source: Wind, CICC Research
In the context of the decline in the growth rate of the aggregate, we can also see by reviewing the trade share and trade competitiveness of the major export countries after World War II that the mainland's current export share of goods trade has surpassed the highest position of Japan and Germany, close to the United States in the 50s of the last century, and from the perspective of trade competitiveness, China's trade competitiveness has surpassed Germany in the past two years, but there is still some space from Japan in the 80s of the last century. From the perspective of the balance of global international relations, a country's export share and the intensity of its trade competitiveness will not grow unlimitedly. At present, after nearly 20 years of development, China's foreign trade has reached a more advanced position in the global horizontal comparison, so we can also see from the 14th Five-Year Plan for foreign trade and other documents that the policy level for the future development direction of international trade is actually more focused on improving quality and enhancing the export capacity of the service industry.
From the perspective of the mainland's trade development trend in recent years, thanks to the "Belt and Road", the implementation of RCEP, the increasing role of multilateral organizations, and the development of transnational infrastructure such as China-Europe trains, we can gradually see the rise in the importance of Southeast Asia, Central Asia, Central and Eastern Europe and other regions, which may still contribute to the incremental part of the mainland's foreign trade in the future. Therefore, we believe that in the context of declining global demand and slowing down in the development process of global trade, further broadening and deepening trade relations with high-growth potential regions may provide a certain buffer and safety cushion for the future development of mainland exports, but it may be difficult to become an important force in supporting the economy alone.
Chart 23: Changes in the share of trade in goods by major exporters
Source: WTO, CICC Research
Exhibit 24: Changes in the trade competitiveness of major exporters
Source: WTO, CICC Research
Industrial transfer and domestic regional economic development from the perspective of domestic and provincial provinces
In the above article, we mainly focused on the impact of international industrial transfer on mainland exports from the perspective of global value chains. However, considering the large size of China's economy and the wide area of its area, and the fact that the development of regions not only has its own characteristics in terms of industrial layout, but also has certain differences in the degree of development. Therefore, when studying the topic of China's exports, industrial upgrading and transfer, the NVC (domestic value chain) perspective is equally important. In addition, from the perspective of mainland trade-related policy directions, support for trade transfer has been mentioned more and more frequently and in importance in recent years. In this part, we will explore the process and potential impact of the redistribution of inter-provincial foreign trade pattern from the perspective of domestic transfer of foreign trade.
The imbalance between the level of economic development and foreign trade between the mainland regions still exists, but it is gradually alleviating
From the perspective of per capita GDP, there is a certain imbalance in the per capita GDP between mainland regions, with the eastern and southeastern coastal areas being relatively higher, followed by North China, while the inland regions such as Central China, Southwest China and Northwest China are relatively low, and Northeast China is showing negative growth under the influence of various factors. From the perspective of growth rate, the growth rate of the eastern and southeastern coasts has declined significantly from 2017 to 2022, while the growth rate of inland areas such as central China, southwest China, and northwest China has remained resilient despite its relatively low absolute level.
Figure 25: Subregion's GDP per capita relative to advanced economies
Source: Wind, CICC Research
Figure 26: Five-year relative growth rate of per capita GDP by region
Source: Wind, CICC Research
From the perspective of foreign trade, it has always benefited from the geographical location, the national reform and opening up policy and the pattern of advantageous industries, from 2000 to 2016, the southeast coastal region of the mainland accounted for about 70% of the mainland's total foreign trade, and in recent years, with the occurrence of trade transfer, the share has begun to decline. Correspondingly, we have seen that in recent years, the export growth rate of the central and western regions has continued to exceed the national average, and we have observed that the export growth rate of the northeast region after the epidemic is also higher than the national average.
The reason for this is that we believe that the change in the distribution of the mainland's foreign trade share and the change in the growth rate of various regions are actually the result of the diversification of the mainland's foreign trade pattern and the gradient transfer of industrial chain and foreign trade in China. In recent years, the total export volume to Central Asia has expanded significantly, while the southwest region has mainly benefited from the natural conditions and the trend of the mainland industrial chain to Southeast Asia, and has undertaken a considerable part of the industries with high energy consumption and that could have been transferred to Southeast Asia. The Northeast region has benefited from the trade cooperation between China and Russia in the Far East, making exports a relatively good part of the Northeast economic indicators. Therefore, in addition to observing the outward transfer of global value chains and industries, the gradient transfer of domestic trade and industrial chains is also an important factor in determining the future export pattern of the mainland.
Figure 27: Proportion of exports by region in mainland China to total exports
Source: Wind, CICC Research
Chart 28: The difference between the growth rate of exports by region and the growth rate of national exports
Source: Wind, CICC Research
Characterization of interregional trade patterns on the mainland
In this part, we will give a basic introduction to the domestic inter-provincial trade flow, considering that the availability of inter-provincial trade data is relatively poor, we can use the latest (2017) version of the inter-regional input-output table to basically depict the general situation of the regional value chain between provinces in the mainland in recent years.
From the perspective of total domestic inter-provincial trade, the six regions with the highest inter-provincial trade dependence include Chongqing, Hainan, Beijing, Jilin, Heilongjiang and Shanghai, while the five provinces with the lowest inter-provincial trade dependence include Shandong, Fujian, Hubei, Sichuan and Qinghai. At the same time, as shown in the table below, we have also split the top five and bottom five industries in terms of net export volume of each province and city, so as to better understand the export structure of each province.
Some interesting information can be extracted from these inter-provincial trade data:
1) The western region and the northeast region are still mainly dependent on the import of goods/services from other parts of the country, and in general, they show a high degree of trade dependence and a high proportion of net imports in the total output, while in terms of categories, the top five industries of net exports in the western region account for a relatively high proportion of energy and mineral products, while the northeast region has a relatively high proportion of agriculture and forestry, food, minerals and other categories, and is relatively low in the regional value chain as a whole.
2) On the whole, the transfer of Beijing and Shanghai to other provinces accounted for the highest proportion of total output, which was much higher than that of other provinces and cities, and the industries of the two cities in the north and Shanghai were mainly exported to other provinces and cities were tertiary industry or high value-added manufacturing.
3) Zhejiang is also a province with a high energy level, but it shows a large proportion of net imports in output and a high dependence on inter-provincial trade, we believe that the logic behind it is that Zhejiang Province is a typical "export-oriented" economy, and its total export scale has long been in the forefront of the domestic region, and its strong foreign trade is actually supported by a wide and deep domestic gradient division of labor industrial network.
Figure 29: Net domestic exports by province as a share of total output
Source: 2017 Regional Input-Output Table, National Bureau of Statistics, CICC Research Department
Figure 30: Inter-provincial trade dependence by province
Note: The calculation method of inter-provincial trade dependence is the total domestic inter-provincial trade/total output
Source: 2017 Regional Input-Output Table, National Bureau of Statistics, CICC Research Department
Chart 31: Net Exports by Sector by Province and Municipality
Source: 2017 Regional Input-Output Table, National Bureau of Statistics, CICC Research Department
Future outlook for domestic inter-regional trade transfers
From the above analysis, we can see that in the context of unbalanced regional development and unbalanced trade development in the mainland, there is actually a lot of room for the gradient transfer of domestic trade under the regional value chain system. We have combed through the last three five-year plans for foreign trade development, and we can find that the expressions of "optimizing the domestic regional layout of foreign trade" and "trade gradient transfer" have gradually become important and clear. In the "14th Five-Year Plan" for the development of foreign trade, the Ministry of Commerce officially excluded the comparative advantages of each region, and from the perspective of regions, the central and western regions focused on the "Belt and Road", while the northeast region focused on the Far East cooperation plan, and proposed to strengthen the design of relevant systems to enhance the overall capacity of the central and western regions and the northeast region.
Figure 32: References to inter-provincial trade transfer in the Five-Year Plan for the Development of Foreign Trade
Source: Ministry of Commerce of the People's Republic of China, CICC Research
From the perspective of actual trade, we can see that since 2017, the total proportion of exports from the western provinces to 6 countries in Southeast Asia has shown an overall upward trend, and we believe that this reflects the characteristics of industrial transfer and the enhancement of the function of Southeast Asia's trade springboard to a certain extent, and since 2021, the proportion of exports from the western provinces to 5 Central Asian countries has increased rapidly. and the result of the continuous expansion and increment of the China-Europe Express.
Exhibit 33: International trade between the West and Belt and Road countries/Southeast Asia
Source: CEIC, CICC Research
Figure 34: International trade between the Northeast and the Far East
Source: CEIC, CICC Research
Looking forward to the medium-term period in the future, with the continuous advancement of the mainland free trade area, the continuous strengthening of trade cooperation between China and the "Belt and Road" countries, and the gradual attention to the transfer of trade gradient in policy, we expect that the foreign trade between the central and western regions and the three northeastern provinces will still have certain development potential and space in the future, and show strong regional characteristics. Southeast Asian countries have deepened trade relations, while Northeast China has focused on international trade and international cooperation with the Far East, and international trade in various regions has developed according to local conditions. In addition, with the continuous enhancement of China-Europe freight capacity, as well as the uncertainty of the global situation has also risen, although the railway freight rate is more expensive than that of sea freight, but it has the characteristics of fast transportation speed and more stability, we expect that the follow-up China-Europe freight train may further release the momentum of cargo transportation in Eurasia, or will further benefit Shaanxi, Sichuan, Chongqing, Henan, Shandong and other provinces and cities with higher shipment volume of China-Europe trains.
Exhibit 35: Regional conflicts have led to rapid increases in shipping prices in the Red Sea
Source: iFinD, CICC Research
Figure 36: China-Europe freight train traffic by province
Source: China-Europe Express Network, CICC Research Department
In the medium term, the gradient transfer of trade and industry may provide new growth momentum for some western and northeastern provinces
As analyzed above, in the context of the evolution of the international environment such as the continued advancement of the Belt and Road Initiative and the continued deepening of industrial transfer, another major advantage of our country is that the inland provinces of the mainland actually have high foreign trade growth potential. Since 2023, the relevant measures of debt resolution have been continuously promoted, and the problem of controlling moral hazard is actually accompanied by debt resolution, so we believe that the new debt of some key provinces with heavy debt burdens may be affected to a certain extent in the future. In terms of provinces, the financial fundamentals of the central and western provinces and the northeast provinces may be relatively weak, and their revenue quality (the proportion of tax revenue in public budget revenue) is also relatively low, and their dependence on central transfer payments is relatively high. On the one hand, the expanded foreign trade provides these provinces with an increase in trade and promotes economic growth, and on the other hand, after the opening of foreign export channels, the industrial gradient transfer will be carried out more smoothly, and the industries that undertake the transfer of the southeast coastal areas can also further empower the economic development of the central and western regions.
Figure 37: The quality of fiscal revenue in the central, western and northeastern provinces is lower than that of the developed provinces in the eastern and southern regions
Source: Wind, CICC Research
Exhibit 38: The amount and growth rate of central transfer payments received by provinces
Source: Ministry of Finance, CICC Research
In the short term, the rebound in trade may still not be able to offset the downward pressure on fiscal revenue caused by the decline in land sales revenue, and local fiscal resources may not be completely improved as a result. However, from a medium- to long-term perspective, the core solution of debt still depends on the enhancement of local economic self-sufficiency, and the evolution of trade gradient transfer and domestic trade pattern has provided at least a new source of economic growth momentum for some provinces. From a medium- and long-term perspective, it will help to enhance the balanced capacity of regional development and improve local fundamentals.
Chart 39: The year-on-year growth of local government fund income in 2023 is still not negative
Source: Wind, CICC Research
How will China's export trade play out in the short and medium term, and what will be the impact on the bond market?
We can see that there are still some positive factors to support mainland exports, including increased trade added value and upgraded export industries, newly opened export trading partners, and the space brought by domestic gradient transfers.
Against the backdrop of declining external demand in advanced economies, it is difficult to avoid pressure on exports in the short cycle of the global economy
Although the increase in the domestic structure and the export capacity and willingness of domestic producers will eventually lead to an increase in export growth, in general, mainland exports are still subject to the global macro framework, and we believe that in the context of falling external demand, it may be difficult for mainland exports to grow significantly in 2024, but due to the potential decline in trade share advantage and import prices, we believe that the mainland trade surplus may remain at a high position.
In 2024, the global macro environment we are facing is that the western developed economies represented by the United States and Europe will most likely begin to fall after the most aggressive interest rate hike path in the past century, and the overall economic expectation will decline during the year, and the interest rate cut cycle may start in 2024, and from the perspective of economic pressure, the first half of the year benefited from the resilience of household consumption, the U.S. economy may still have some support, and the U.S. economic pressure may increase significantly from the second half of the year, while the annual economic growth of the euro area may be relatively sluggish.
Chart 40: The New York Fed expects a significantly higher probability of a U.S. recession in the second half of 2024
Source: Wind, New York Fed, CICC Research
Chart 41: Real GDP growth in the eurozone is likely to remain subdued in 2024
Source: Wind, CICC Research
Since the second quarter of 2021, the weighted M2 weighted year-on-year growth of China, the United States, Japan and Europe has begun to fall, and as of November 2023, it has fallen to a low level of about 2.4%, and correspondingly, we have also seen a significant year-on-year decline in global commodity prices. More intuitively, there is a strong correlation between the global manufacturing PMI and the total global merchandise exports year-on-year, and the current global manufacturing PMI has fallen to a low level, or there is still a downward trend, which will drive the global merchandise exports to see a significant year-on-year rebound.
Chart 42: Global demand for goods correlates strongly with currency placements in major economies
Source: Wind, CICC Research
Exhibit 43: Global manufacturing PMIs correlate strongly with global merchandise exports year-on-year
Source: Wind, WTO, CICC Research
In order to better quantify the changes in export structure and the possible interaction results of the differentiation of different market economies, we calculated the year-on-year pull effect of exports from major countries/regions to mainland exports. On the whole, in fact, the situation of mainland exports by region is also more consistent with the fundamentals of each region, the export pull point of developed economies has dropped significantly, although exports to ASEAN have a certain resilience, but with the decline in demand from developed economies, their export pulling capacity to the mainland is also decreasing, while Central Asia and Middle East countries have shown strong resilience, to a certain extent, it is also the result of the different growth drivers behind these regions analyzed above. But even so, in terms of pulling capacity, Central Asia and the Middle East are actually not on the same order of magnitude as the United States, the European Union, Japan and South Korea, and ASEAN, which are more closely related to them. Taking 2022 (higher export growth rate) as an example, on average, the total exports of the United States, the European Union, Japan, South Korea, and ASEAN to China will increase by 2.2, 3.1, 1.3, and 2.7ppt year-on-year, respectively, while the 5 Central Asian countries and the 2 Middle East countries will pull 0.4 and 0.5ppt respectively.
Chart 44: Manufacturing PMIs in developed and emerging markets diverged
Source: IHS Markit, CICC Research
Exhibit 45: Total exports to the mainland pulled up year-on-year
Source: Wind, WTO, CICC Research
Overall, we believe that in the context of the decline in global external demand, although the impact on Central Asia, The rapid growth of exports in the Middle East can form a certain cushion, but it may be difficult to completely hedge the impact of the decline in external demand in developed economies, and from the current total level of mainland exports in the month, although the current export base index is still above the pre-epidemic (and before 2017) trend level, it has fallen since 2022, with the continuation of the decline in external demand, especially the downward pressure on the US economy in the second half of this year or gradually increase, we expect that exports may be difficult to grow significantly in 2024.
Chart 46: Mainland exports are still above pre-pandemic and pre-2017 trend levels, but have fallen somewhat
Source: Wind, CICC Research
The price advantage may still have a certain supporting effect on the mainland's trade share and surplus
In terms of the trade balance, in general, we expect that the mainland's export trade share advantage may be maintained driven by the domestic price advantage, and under the expectation of global inflation and commodity prices, the mainland's import prices may also usher in a certain decline, thus continuing to support the current account surplus.
China's exports have enjoyed a certain price advantage in the global high inflation environment in the past 2-3 years, and we can see by calculating the terms of trade index (export price/import price) that in the past 1-2 years, due to the low level of domestic inflation and the high level of overseas prices, the mainland terms of trade index has dropped significantly, and the current level is second only to Japan. Theoretically, the deterioration of the terms of trade does not necessarily lead to the conclusion that it is conducive to the expansion of the surplus, but because the decline in the mainland's terms of trade is accompanied by the increase in the volume of export trade, the "volume" has played a greater advantage in the interaction between volume and price, so it is essentially good for the maintenance of the mainland's export and trade balance.
Chart 47: China's terms of trade index retreated rapidly
Source: Wind, CICC Research
Exhibit 48: China's trade surplus and China's terms of trade index
Source: Wind, CICC Research
By referring to the history of the development of trade share of Japan and Germany, two major manufacturing exporters, it can be seen that the decline in export prices is often accompanied by an increase in trade share. For China, this law has become more and more significant since 2013, and we can also see that there is also a certain positive correlation between the year-on-year increase and decrease of the mainland's industrial product prices and the year-on-year increase or decrease of the trade surplus. Therefore, we believe that commodities with high quality but strong price advantages are actually a major competitive advantage of mainland export products, and may continue to support the share of mainland export trade and the resilience of surplus in the future.
Exhibit 49: Japan's export prices and share of goods exports year-on-year
Source: Wind, CICC Research
Exhibit 50: German export prices compared with the share of goods exports
Source: Wind, CICC Research
Chart 51: China's export prices and share of goods exports year-on-year
Source: Wind, CICC Research
Exhibit 52: China's PPI and trade surplus increased or decreased year-on-year
Source: Wind, CICC Research
From the perspective of imports, about 30% of the mainland's imports are minerals and fuel products, and in the context of the accelerated decline of global PPI and the price of non-crude oil and crude oil commodities in 2024 or continue to grow negatively, the mainland's import prices may also usher in a decline. From a short-term perspective, with the fiscal and infrastructure efforts in 2024, the demand for bulk commodities in the mainland may rebound slightly compared with 2023, while under the pattern of volume increase and price reduction, we believe that imports may not erode the trade surplus too much. Overall, we expect the mainland's trade surplus to fluctuate slightly in 2024, but remain elevated.
Figure 53: About 30% of China's imports are minerals and fuels
Source: Wind, CICC Research
Exhibit 54: World Bank forecasts for commodity price changes
Source: Wind, CICC Research
The rebound in trade surplus and foreign exchange settlement demand is conducive to monetary easing and bond yields to continue to fall
Returning to the mainland macroeconomic and bond market, we believe that in the context of the decline in global demand next year, the year-on-year growth rate of mainland exports is difficult to pick up significantly, from the perspective of surplus, in general, we believe that the trade surplus may fluctuate slightly throughout the year, but compared with previous years or still at a high level, so as to provide some support for the RMB exchange rate, thereby further easing the constraints of monetary policy easing.
Exhibit 55: China's trade balance year-on-year to USD/CNY
Source: Wind, CICC Research
And from the recent demand for foreign exchange settlement, whether it is the difference between the settlement and sale of foreign exchange by banks on behalf of customers or the difference between foreign-related receipts and payments by banks on behalf of customers, the difference between receipts and payments has turned into a surplus, although there are seasonal factors such as the end of the year and the approach to the Spring Festival, but the increase in the willingness to settle foreign exchange in the short term will also help to stabilize the level of the RMB exchange rate. Considering that the trade surplus in 2023 is not low, but the foreign exchange settlement items will continue to be in deficit, mainly because the exchange rate is expected to fluctuate greatly in 2023, and under the expectation of the narrowing of the nominal interest rate differential between China and the United States, we believe that the pressure brought by the nominal interest rate differential will be reduced, and the exchange rate market is expected to usher in a certain improvement, and the improvement of exchange rate expectations is also conducive to further releasing the power of the unsettled foreign exchange surplus, thereby forming a virtuous circle for stabilizing the exchange rate。 And if we also consider the real interest rate, we can see that China's real interest rate is higher than that of major overseas economies, which is also conducive to capital inflow under the capital account to a certain extent, further easing exchange rate pressure.
Chart 56: The difference between foreign exchange settlement and sales by banks on behalf of customers and the difference between foreign-related receipts and payments by banks on behalf of customers both rebounded
Source: Wind, CICC Research
Exhibit 57: Accumulated large unsettled foreign exchange surplus in 2023
Source: Wind, CICC Research
Chart 58: China's real interest rates remain elevated
Source: Wind, CICC Research
Therefore, for the bond market, we believe that the important consideration of monetary policy since the fourth quarter of 2023 may be the exchange rate pressure, and in 2024, with the joint support of the surplus and high real interest rates, and the Federal Reserve may enter a cycle of interest rate cuts this year, the overall exchange rate pressure may ease compared with 2023, which will also open up space for further easing of the mainland's monetary policy. In the context of the domestic economic momentum has not yet recovered significantly, and the monetary policy still needs to cooperate with the fiscal policy to stimulate the economy, the bond interest rate may usher in a further decline in 2024, and the lower limit is expected to break through the new low in 2023.
Article source:
This article is excerpted from: "The Impact of the Evolution of China's Export Pattern on the Economy and Bond Market", which was published on January 26, 2024
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