What does the Canton Fair tell about Chinese economy?

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Last week I attended the first session of the 114^th Canton fair. For a long time, the Fair held twice a year in spring and fall in Guangzhou is recognized as one of the most important trade fairs in the world. It is still the largest trade fair in China and China is still the world’s largest exporter with 13% of global exports, despite the increasing difficulties of selling goods abroad.

When talking to Chinese exporters, there are three things that they complain all the time: rising wages, rising Renminbi exchange rate and weaker demand.

Wage is growing quite fast and on average it has increased 10-15% from previous year. In Guangdong, wage level for a junior worker is 2500 yuan (400 USD) per month. For senior and skilled workers, it reaches 5000 to 6000 yuan (800-1000 USD) per month. In Jiangsu and Zhejiang (both are neighbours of Shanghai), monthly salary for a junior worker has reached 3000-3500 yuan (500-600 USD). In inland China, wage level is still low. A Chongqing-based motor manufacturer says monthly wage is about 1800 yuan (300 USD) for a junior worker.  Besides rising wages, exporters also express concerns that compared with the elder generation 15-20 years ago, fewer young people want to work in factories now.  

It is nature that no exporter likes currency appreciation and the profitability of the exporters has been hurt, especially when the currencies of other emerging economies have depreciated again the US dollar.  but it seems that everyone has become accommodated to a moderate 3-5% appreciation every year.  

Despite the rising trend of RMB Cross-Border Trade Settlement, only one out of two dozen exporters  I interviewed has used it and it is probably because most of his customers are based in Southeast Asia and Renminbi is better recognized in that region. For those who trade with Europe, Middle-East or Africa, RMB settlement is still not an option. What’s more, RMB settled imports are 30% more than exports according to the PBOC’s monetary policy report, as RMB appreciation expectation makes foreign companies prefer to hold RMB than sell it and the RMB pool outside China is also very small so that foreign companies do not have access to the Chinese currency even if they want to purchase Chinese goods in RMB. Sometimes exporters can avoid exchange rate risk by selling products to trading companies first and this transaction is settled in RMB.

Despite the concerns on rising wages and RMB appreciation,  in the conversations I had last week most people, especially those who trade with Europe, Russia and the Middle East, say the biggest problem now is weaker demand as they receive fewer business cards this year compared with previous Fairs.  

The New York Times has noticed that the Canton Fair has become less attractive.

For the first time in recent record-keeping, the number of companies with exhibits has declined in both the spring and autumn sessions of the 56-year-old Canton Fair compared with a year earlier. Even during the global financial crisis in 2009, the number of exhibitors dropped in the spring but rebounded in the autumn.

Buyers from all over the world still milled through the cavernous exhibition halls on Tuesday, but they appeared less numerous than during previous fairs.

We can also find evidences from the number of visitors. 92,149 visitors attended the 114^thCanton Fair in the past week and the exhibition hall looks extremely crowded, especially during lunch time. However, 92,149 is 8% less than the number in spring and 1.5% less than the number last autumn.As visitors in the first week account for half of total visitors, it is likely that total number of visitors would drop this autumn and it would be the second time in Canton Fair’s history after 1978 that number of visitors in the autumn fair declines for two consecutive years. The first time was autumn 2007 and 2008.

Here is the key question: Does it mean China’s export is having another hard time, or the Fair is no longer a good indicator?

In history, the Canton Fair tracked China’s export quite well. The number of visitors first started to drop in October 2007 and had two negative growths in both spring and autumn 2008, before China’s export actually started to fall in November 2008. In October 2009 the number of visitors to the Fair rebounded before export started to recover in December 2009. Thus, the current situation suggests that we should not be surprised to see very weak export growth next year.

Canton Fair visitor number growth and China’s export growth

While the number of visitors is falling, some exhibitors also told me that few of their businesses are made during the Fair and their long-term customers also rely less on the Fair to purchase products. Only new customers would make orders at the Fair. A company selling ladders to Europe told me that they spent 300,000 yuan (50,000 USD) for the exhibition in order to keep good relationship with their customers, as they would feel odd if someone does not present at the Fair. Although the importance of the Fair is declining, it would still be extremely difficult to get the space back if they give it up. A buyer from Lain America told me that the main purpose he came to Guangzhou is not to buy goods. Instead, he came here to visit his suppliers and their factories in person.

What’s more, the breakdown of visitors by country shows that the proportion of visitors from advanced economies to the Fair is much lower than the proportion of Chinese export to advanced economies. For instance, the United States and Japan account for 17% and 7.4% of China’s total export in 2012 respectively, but American and Japanese visiting the Fair only account for 4% and 2% of total visitors respectively. Thus the Fair perhaps does a good job tracking China’s export to Europe and emerging economies, but it may not represent the overall picture.

Number of visitors in the first week

In addition, for those who sell products mainly to the Middle East, they have a specific reason for fewer visitors. The Eid al-Adha 2-day holiday starts on October 14 this year, which is the day that the Canton Fair opens.

It is extremely difficult to answer the question I raised above and the both explanations are possible. It does not necessarily mean that export growth would be low next year, but at least it tells us that the trade environment is not very encouraging. 

Shadow PBOC seminar

Chen Long