“China’s exports have to suffer with the western consumer flat on his back. And the problem is that China is so dependent on exports”.

If we had US$1m for every time an investor laments in this way our funds would be at capacity by now.

We reckon that net exports are currently contributing some 10% of the growth in the Chinese economy. Forecasts range between 8% and 16%. So it is a significant part of the economy but it is not the major attraction as many people, who sit, surrounded by products all stamped “Made in China”, seem to think. It has been a higher percentage in the last 3 years and has obviously fallen since the crisis of Q4 last year but it has never been the critical factor in the China story (see the attached chart). Look at 2003 when exports made a negative contribution to the economy or 2001 and 2004 where they contributed less than 1% and yet in both years the economy grew 8%-10%.

The Chinese economic miracle has always been based on the domestic economy – consumption and investment have always been the main drivers since Deng Xiao Ping got the show on the road at the end of the 1970’s. Again this is often forgotten given the obsession the West has for the level of Chinese savings: Chinese savings are high therefore domestic consumption is low and domestic consumption is a critical piece of the domestic economy goes the argument. But take another look at the chart.

China is a domestically driven economy and the domestic sector has just had the biggest shot of adrenalin in history.

Recently a number of economists have argued that due to Asia’s quasi-pegged currencies, easy monetary policies, and high savings rates (which drive investment and thus maintain a wide output gap at the same time as they generate high growth) , the region can see strong asset price appreciation (perhaps even a bubble). Furthermore, nothing can (or will) be done to stop it due to the economic and political importance of the export sector.

In other words, for fear of having to move the currency, monetary policies will not be adjusted enough to compensate for underlying economic strength. Sterilizing the excess liquidity that arises from exchange rate intervention will also be insufficient unless it pushes up interest rates – and this would merely expand the interest differential and cause further hot money inflows. I have also seen similar arguments made for Emerging Markets as a whole and for China specifically.

I also recently had a chance to see a number of global macro/asset allocation type of presentations, and they were all basically saying that » Read more: China is not Brazil but this is still interesting…