Petro-dollar windfall could help China's rebalancing

A $1 trillion oil-fired trade windfall couldn't be better timed to help Chinese companies climb the value chain and rebalance the economy of the world's biggest exporter.

Fast growing countries producing oil and other commodities, are taking advantage of the windfall from the recent surge in prices and buying roughly half of the $2 trillion worth of goods sold by China overseas.

But, more importantly for the economy, they are buying the value-added products that Beijing wants its export-oriented factories to focus on - construction equipment, heavy infrastructure goods and telecom network equipment, for instance.

"Commodity exporting countries have had a windfall after commodity price rises and they are now recycling this back into the global trade system," Yao Wei, China economist at Societe Generale in Hong Kong, told Reuters.

"The silver lining to China's exports is really the other emerging economies," she said.

China's export-led expansion of the last decade has been largely a function of processing trade - importing materials and components for assembling products that are then shipped overseas.

And now the source of value in Chinese exports is shifting.

New orders are increasingly coming from developing economies buying industrial goods to build out infrastructure, products with a large element of domestic added value, using locally-made components that China once imported.

This shift in the trade focus potentially benefits the domestic economy even more as skills and product lines are upgraded to satisfy demand from a new customer base.

Higher share of value-adds

Analysts at consultancy GK Dragonomics calculate that the share of domestic value added in processed exports is 30-50 percent, but 70-90 percent for what it calls "normal" exports.

Those normal exports, products assembled from locally made components that China previously imported, represented about 48 percent of the total of Chinese goods shipped overseas in 2011, versus 41 percent between 2001 and 2005.

Add together the effect of increasing the amount of domestic value added to exported goods and the new destinations to which China is shipping them, and it could underpin export growth, jobs and wealth creation for another decade.

"The Chinese government's eagerness to encourage these trends is thus quite understandable," a recent GK Dragonomics study said.

Still, Beijing's likely share of the $1 trillion petro-dollar boost to global trade anticipated by analysts at UBS, after Brent crude's 14 percent gain since 2011's trough in August, is unlikely to fuel a surge in economic growth.

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