The meteoric rise in Chinese exports now appears to be losing steam with world export market share falling by 1%-point over the last two years and potentially mirroring Japan’s long-term retrenchment. While the sluggish pace of world trade growth since 2008 has stymied China’s ascendancy, a doubling of wages (in USD terms) and a near 40% real effective appreciation over the last decade have undermined the low-cost export model.
We have previously identified Vietnam and Thailand as having a high export similarity to China. Although Vietnam has also experienced a sharp REER appreciation, wages remain low. Rough estimates suggest that Chinese wages are now double the level in Thailand and four times the Vietnam level. In addition to higher wages pinching exports at the low end, China has yet to make the transition to high-value, high-tech exports, where price competition is less intense. Despite a reasonably high weighting of high-tech exports (56%), the composition has not substantially changed over the last decade and remains comfortably below the likes of Korea and Taiwan, which have managed to escape the middle-income trap. Moreover, this comes at a time when Poland, Vietnam and India have made great strides.
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Source: Bloomberg, Macrobond and Variant Perception