An agent-based analysis of cheap Chinese exports

Edward Tsang 2013.03.06

One plausible explanation to the cheap Chinese exports is that the objective of the sellers is to maximize cash (in foreign currency) on hand, not to maximize profit.

An intellectual exercise

Some of the goods produced in China are cheaper to buy in the UK than they are in China. The question is: why? Following is just an intellectual exercise. It offers a plausible explanation. But of course it is one of many possibilities.

A substantial number of Chinese enterprises are state-owned (premise, note 1).
The state gives substantial loans to state-owned enterprises (premise).
So some state-owned enterprises have excess capital (due to (2)). In other words, cash flow within China is not a problem for some enterprises.
With excessive capital, they have no problem buying goods for export (premise).
Profitability is not an issue, because losses are absorbed by the state-owned enterprises (due to (1) and common sense assumption).
- Of course a manager would like to sell goods for as much as possible (common sense assumption).
- But selling goods below cost is not an issue (just another way of stating the above point).
Cash in foreign countries are controlled by the managers there (premise).
The more cash a manager has, the more power he has (common sense assumption).
- Foreign currency are safe -- they are out of reach by Chinese financial policies (common sense assumption).
There is incentive by managers to maximize cash in foreign currency (due to (6) and (7)) without considering profitability of the sales (due to (5)).

In other words, one plausible explanation to the cheap exports from China is that the objective of the sellers is to maximize cash (in foreign currency) on hand, not to maximize profit.

Note 1: According to Wikipedia, assessed today, the state-owned sector accounts for about 40% of GDP in China. No source was given though.

[End]