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Here's How Trade Drives China's Economy

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Trade is a vital part of China’s gross domestic product (GDP) development. According to this World Bank data, China exported $2.34 trillion worth of goods and services in 2014, while importing roughly $1.96 trillion worth. China is the largest exporter and second-largest importer on the planet, behind only the United States. The export of goods makes up 22.6%, or over one-fifth, of China’s GDP.

Trade Impact

China became the 143rd member of the World Trade Organization (WTO) back in 2001. This served as a major catalyst for the country’s increased foreign involvement, in both investments as well as trade. Membership in the WTO carries an array of benefits, like fair means through which to resolve trade disputes, lower trade barriers (including lower tariffs), and increased access to developed markets.

According to data from the Observatory of Economic Complexity (OEC) at MIT, machines made up a whopping $576.1 billion of China’s overall exports in 2015. This included computers, broadcasting equipment, telephones, and integrated circuits, along with other technology. Textiles were the next biggest export, making up a sizable $256 billion piece of the pie.

For the same year, the top five export destinations for China were the United States ($457 billion), Hong Kong ($273 billion), Japan ($152 billion), Germany ($97.4 billion), and South Korea ($90.1 billion). The top five import origins are South Korea ($131 billion), the U.S. ($128 billion), Japan ($116 billion), Germany ($78.6 billion), and Other Asia ($73.4 billion).

Times are Changing

In 2013, China became the largest trading nation in the world, even eclipsing the U.S., when it surpassed $4 trillion in trade for the first time. However, it appears that China’s trade, particularly with the U.S., could be facing trouble. Last year saw China’s exports slump more than expected, dropping 7.7% on-year and marking the worst fall since 2009.

But as the Chinese government tries to maintain the levels of production that characterized the nation’s past economic boom, decreasing demand and a shifting commodity market isn’t making it easy. Trade with other countries may continue to decrease as China looks inward to meet its need for resources.

This could affect the economies of Singapore, Taiwan, Vietnam, South Korea, and Vietnam, all of whom have high exposure to China. For instance, Taiwan’s economy has become deeply linked to that of its neighbor over the past 15 years, and China is Taiwan’s largest trade partner, absorbing almost 30% of the country’s exports by value. And as China’s economy slows down, it certainly won’t helping Taiwan’s overall economic unease.

Investors should be cautious of the iShares MSCI Taiwan Index EWT and the iShares MSCI South Korea Index Fund EWY, in addition to two China-focused funds, Deutsche X-Trackers Harvest CSI 200 China A-Shares ETF ASHR and the iShares FTSE China 25 Index Fund (FXI - Free Report) .

In contrast, regions like Indonesia, India, and the Philippines are more protected from China’s economic slowdown, based on factors such as trade, tourism, and investments, notes Bloomberg. China will surely remain active in the geopolitical sphere, but it is unlikely that it will continue to serve as the main catalyst behind the growth of major exporting nations moving forward.

One Belt, One Road

The “One Belt, One Road” initiative that was unveiled in 2013 has massive implications for China’s trade activity moving forward. As explained by McKinsey’s Asia branch chairman Kevin Sneader, the “belt” is the physical road, which will run from Xi’an in China all the way through Europe, to as far as Madrid, Spain, while also hitting Moscow in the process. The “road” refers to the shipping lane that will run from China to Venice, Italy.

All in all, the initiative aims to cover about 65% of the global population, a third of the world’s GDP, and a quarter of all global trade. It will take years to complete, but has explosive potential.

China has pushed towards implementing more free trade agreements, with countries such as South Korea and Australia. This will reduce tariffs and overall costs, while helping China maintain a competitive edge. Further development in the “One Belt, One Road” initiative could raise eyebrows, although the ambitious project likely has quite some time left until completion.

For a look at more investment opportunities in China, check out this special edition of the Zacks Friday Finish Line, where hosts Ryan McQueeney and Maddy Johnson are joined by Brendan Ahern, the Chief Investment Officer of KraneShares. KraneShares is a leading provider of China-focused ETFs and Chinese investment education.

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