Chinese trade Falling apart

Dec 11th 2008
From Economist.com

China produces dreadful trade figures, in a blow to the world economy

JUST how worrying are the figures, published on Wednesday December 10th, showing that China’s exports and imports plunged in November? Exports fell by 2.2% last month from a year ago; imports plummeted by an astonishing 17.9%. One analyst sums up the news as “a shock figure”.

The gloom is spread all over the place. Exports dropped across all big traded goods and all parts of the world. Exports to America fell by 6.1%; those to the ASEAN countries, which had grown by 21.5% in October, fell by 2.4%. The faster decline in imports meant that China’s monthly trade surplus reached a record $40.1 billion. Exports last fell in 2001.

Such numbers would be nasty enough for any big economy, but they are particularly shocking because China’s racing trade has been an engine of world trade, and thus global growth. During the 1990s China’s exports grew at an annual average of 12.9%; from 2000 to 2006 that growth nearly doubled to 21.1% each year, according to the World Bank. China's rapidly rising imports have also driven growth elsewhere. The chief economist of a Chinese bank calls the latest figures “horrifying”.

The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceeding months; exports grew by more than 19% from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.

The consequences for the Chinese economy, which has seen dizzying rates of growth since economic reforms began in 1978 (growth in the 1990s averaged 10.5%), could now be dire. Its growth is unusually driven by its exports, which have made it the world’s factory. According to the World Bank, 27% of world GDP in 2006 came from exports (up from 21% in 1990). The corresponding figures for China that year show it to be particularly dependent on exports: 40% of its GDP came from exports in 2006, compared with 11% for highly open America and 29% for Britain. Thus the potential for a drop in exports to drag down China’s growth is correspondingly greater.

The World Bank’s latest growth predictions were released on Tuesday. These predict that the Chinese economy will expand by 7.5% in 2009, well under its own calculation of 9.5% growth that it reckons China needs to keep unemployment stable. But even these calculations may prove to be overly optimistic. The Bank’s prediction rests in part on the expectation that China’s exports will rise by 4.2% next year. In fact many analysts expect the slump in trade to continue and possibly worsen; UBS, a Swiss bank, predicts that Chinese exports will not grow at all in 2009.

Chinese workers, who are already restive, may find the new year increasingly difficult. Labour disputes almost doubled in the first ten months of 2008 and sacked workers from closed toy factories rioted. If export growth ceases entirely, and jobs are threatened, social responses could be more severe. An estimated 130m people have moved from the countryside to the cities, many for jobs in factories that make goods for export. Zhang Ping, the country’s top planner, has given warning of the risk of social instability arising from massive unemployment.

The latest trade figures also worsen the already gloomy outlook for the rest of the world. Some were counting on China to prop up the global economy, as much of the rich world falls into recession. Merrill Lynch had expected China to contribute 60% of global growth in 2009. But the dramatic fall in imports suggest that the Chinese can not be relied on to be the consumer of last resort.

Analysts at Goldman Sachs expect several more months of shrinking exports. Speculation that China will devalue its currency is rife, but this would have little effect if world demand is simply collapsing. The experience of South Korea is instructive: its currency has fallen by a third against the dollar this year, but this did not prevent its exports from dropping by 18.3% in November, compared with a year ago. Unfortunately, this may not be enough to deter the Chinese government from trying to push down the yuan, which has appreciated significantly on a trade-weighted basis.

Fiscal stimulus is much more important; efforts to boost domestic demand would help both China and the world. Most analysts expect announcements about new measures on top of the $586 billion package already announced. Interest rates and taxes are likely to be cut further.

Wen Jiabao at Davos Forum

Sunday, February 1, 2009
The China Post news staff

Chinese Prime Minister Wen Jiabao made a rare appearance this week at the World Economic Forum in Davos, Switzerland and gave the United States a polite lecture on economics.It may sound strange for a new proselyte of capitalism to tell the world's largest capitalist country how to manage its economy, but most in the audience listened and many even agreed.

What Wen said to the world's top business CEOs and government leaders was just common sense which was thrown out of the window by greedy American bankers and laissez-faire officials. "The global financial crisis was attributable to inappropriate macroeconomic policies of some economies and their unsustainable development model characterized by prolonged low savings and high consumption, and blind pursuit of profit," he said.

Although Wen did not blame the U.S. explicitly for the crisis, his reference was unmistakable. Like others in the audience China is a victim of the crisis; its gross domestic product growth shrank by 3% last year to 10% from 13% in 2007. China's fourth quarter GDP growth dropped to 6.5%, a new low in more than a decade, due to slumping exports. Despite the crisis, Wen was confident China's GDP would grow by the target 8% in 2009. The country will spend US$586 billion in 2009 and 2010 on infrastructure and social programs to create jobs and to play a constructive role in helping to revive the global economy, he said.

Wen's mild criticism of the U.S. could be taken as Beijing's response to Washington's recent accusation that it is manipulating its currency. Take note, President Obama. It's a shot across the bow.

Copyright © 1999 – 2009 The China Post.
Back to Story