BCA: Is China Losing Competitiveness

There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.

The mainstream media has been filled with reports about Chinese companies closing production facilities due to rising costs. Some analysts have concluded that China is quickly losing its competitive edge, and international producers are moving to other countries. In reality, there has been no meaningful decline of China's export market share, particularly when exports of oil-producing countries are excluded. Indeed, China's slowing export growth in recent months is a reflection of changing global market conditions rather than a deterioration in Chinese producers' competitiveness. Rising input costs due to higher commodities prices are not unique to China: manufacturers around the world are suffering similar cost pressures and margin squeezes. In addition, the RMB's appreciation has not been excessive, rising at a 3.5% annual rate in trade-weighted terms since its 2005 de-peg from the U.S. dollar. The trade-weighted yuan is still below its 2002 levels, when the economy was struggling with a deflationary shock. Finally, recent weakness in the export sector can be partially attributed to the Chinese government's voluntary export restraints, which have been part of the country's broader growth-rebalancing strategy. These policies could be removed any time if excessive weakness develops. Already, the government has increased VAT rebates for textile and garment exporters since the beginning of the month.


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