China reduces dependence on imports, but not on exports

Beijing’s policy of “increasing self-sufficiency” of the Chinese economy can be considered successful – the country’s dependence on technological imports is indeed decreasing, as noted by US Federal Reserve economists Francois de Sawyer and Dylan Moore. At the same time, the process is not accompanied by a weakening of the connection between the increase in GDP and the dynamics of supplies abroad – the growth of exports in the last five years has been significantly stronger than the growth of imports. Increasing geopolitical risks, however, have affected the influx of direct investment into the country – it has sharply decreased in the last two years.

The reorientation of the Chinese economy to a growth model more focused on the domestic market is accompanied by a decrease in China’s dependence on technological imports, but not on exports – the severance of global production ties with this country “is not even visible,” according to a review by US Federal Reserve economists Francois de Soyer and Dylan Moore.

Let us recall that the policy of “increasing self-sufficiency” has been implemented by Beijing since 2018 (when the United States introduced the first large-scale restrictions on Chinese imports by increasing duties) and provides for stimulating domestic production in high-tech sectors.

The traditional Chinese growth model assumed an increase in investment in export-oriented industries while limiting domestic consumption (this was facilitated by a high savings rate). Over the past five years, the share of investment in the country’s GDP has remained high, while the share of consumption, on the contrary, has been declining. The trade surplus in 2022 turned out to be the maximum, amounting to almost $900 billion (about 5% of GDP). Import growth over the past five years has been significantly weaker than export growth. At the same time, the connection between imports and GDP growth weakened, which is an indicator of a decrease in dependence on foreign supplies, the authors point out. This dependence is reduced primarily due to the import of mechanical and electrical equipment, as well as high-tech goods. The decline in exports of the latter is likely due to restrictions from the United States.

The Chinese auto industry is considered as the most significant example of changes in the Chinese market: car exports from China began to grow sharply in 2020, as a result, the country turned from a net importer into a net exporter (this is also accompanied by an increase in the export of auto parts). Exports are supported by manufacturers’ access to cheaper components – steel and electronics – as well as subsidies from regional authorities (especially for the production of electric vehicles). But there is another reason: the growing demand for electric vehicles within the country is forcing manufacturers to look for export markets with a more conservative consumption structure to load the production capacity of cars with internal combustion engines.

The decrease in dependence on imports is accompanied by a decrease in the influx of foreign direct investment – this trend has been observed in the last two years, and at the end of the third quarter the indicator turned out to be negative for the first time since the count began in 1998. The volume of outgoing investments, on the contrary, remains comparable to 2017. The main reason for the decline is likely to be increased geopolitical risks and threats of sanctions – last August, the US imposed a ban on investment in high-tech sectors in China. This encourages friendshoring—relocating assembly to more friendly countries. China, however, is also introducing new restrictions for foreign investors.

Tatiana Edovina