It was always going to be tough for China’s exporters. I have forgotten the number of times this blog has warned that things will be far worse for China than current pundits predict.
The news that exports fell 25% is no surprise. This will not be the end. The sheer volume of exports from China to the West (the EU and UK specifically) means that any buyers strike will hit China very heavily. The rest of Asia will also suffer as China reduces its inputs from the wider Asia trade network.
It is hard to believe any “analysts” really thought there would be a modest uptick. Who are these people? At least the excellent Pettis is on the ball as usual. That is a man worth listening to although I have previously disagreed with his overly optimistic stock market predictions.
China’s policy of sending delegates to Europe and the US to diffuse the “protectionist” fears is a wise move. Having spoken to a well placed economist in China it is clear that they have a good understanding of the political-economy issues currently in play.
The fact that Chinese exporters are lobbying for a currency depreciation is a further worry on the horizon but I just cannot see it. The Chinese government would not risk such an aggressive move just yet.
China’s exporters succumbed on Wednesday to the full force of the global economic turmoil. Even after the horror show of economic statistics published around the globe in recent months, China’s exports numbers in February painted a grim picture.
Some analysts had been expecting a modest uptick, given that there were fewer working days in February last year because of new-year holidays. Instead, exports slumped by 25.7 per cent as the collapse in global demand caught up with the country’s exporters and overshadowed a sharp rise in domestic investment..
China’s exports have decreased since November, but until last month the rate of decline had been much slower than in other Asian countries with large export sectors.
Economists said the headline figure for last month, which was already much worse than expected, probably masked an even steeper decline given that there was a shorter number of working days in February 2008 due to new-year holidays.
“It was really just a question of time,” said Michael Pettis, finance professor at Beijing University. “Given the figures coming out of other Asian countries, China’s recent export numbers were not sustainable.” Chinese exports have fallen every month since November but until Wednesday they had dropped at a slower pace than elsewhere in Asia.
For Chinese diplomats preparing for the Group of 20 summit, the trade numbers might come as something of a relief. In particular, the trade surplus, which had been hovering around a record $40bn (€31bn, £29bn) a month since October, declined sharply to $4.84bn in February.
With the global recession deepening, China has been afraid that its large trade surpluses will encourage protectionist pressures and that other governments at the G20 will press China to appreciate its currency.
China this week launched its second buying mission to Europe in the past month in an effort to defuse protectionist sentiment. The government has also faced rising trade tensions with some neighbouring countries after China has begun running a trade surplus with the rest of Asia in recent months. India has already placed restrictions on Chinese imports of toys and officials fear further such measures across the region.
The figures released on Wednesday will allow the Chinese government to argue that it is starting to rebalance its economy, with exports slowing sharply and imports falling less rapidly as the government’s fiscal stimulus plan starts to kick into action. The 26 per cent rise in fixed asset investment over January and February, announced on Wednesday, lends some credibility to this story, as do huge recent increases in bank lending.
“This gives us a glimpse of what China could start to look like if fiscal policy really gets going,” said Paul Cavey, an economist at Macquarie Securities.
However, it was not clear if the trend was sustainable given signs of weak underlying demand in much of the economy. “You could find that imports fall again in a few months time and the trade surplus rises,” he said.
A smaller trade surplus would have other international implications, including fewer Chinese purchases of US financial assets. With foreign direct investment into China also slowing and some signs of capital outflows, most economists are predicting that China’s foreign currency reserves will not increase at the same rate as they did last year.
“Private buyers [of US Treasury bonds] will have to take up more of the slack to prevent the expanded supply from pushing up auction rates,” said Stephen Green at Standard Chartered in a research note.
However, while the trade numbers might help to ease some of the international criticism of China, they will also magnify the already huge pressures that the government is facing at home from the export sector. Such a large decline in exports will probably mean more factories on the verge of bankruptcy and a further increase in unemployment, on top of the 20m migrant workers who have already lost their jobs from the export sector.
Chinese exporters are likely to step up calls for a depreciation of the currency. However, the government has rejected such an option. In his speech to the National People’s Congress last week, Wen Jiabao, the premier, said that the exchange rate would remain “basically stable”. Economists point out that a modest weakening of the Chinese currency would do little to help exports in the current market but could prompt a large and potentially destabilising capital outflow, as well as anger trading partners.
Instead, the government has been looking at other measures to try to assist exporters. Chen Deming, the commerce minister, said at the weekend that China would reduce taxes on exports to zero and provide additional financial assistance to exporters. The China Iron and Steel Association has proposed lifting a tax rebate on exports of cold-rolled steel from five per cent to 17 per cent, state media reported on Wednesday.
Xie Rongfang, head of the Wenzhou Shoe Industry Association, said a further increase in tax rebates was being negotiated with the government. “The pressure on us at the moment is huge, both at home and abroad, so any financial support the government can give us will be very welcome,” she said.
However, these policies bring their own dangers, because if the government appears to be doing too much for exporters it could encourage retaliatory measures from trading partners.
“If the European market starts to be flooded again with cheap Chinese steel, then there will be a big fight,” said a European diplomat in Beijing this week.
After dropping 43 per cent in January, imports fell by 24 per cent last month, which some analysts said was a sign that the government’s fiscal stimulus measures were beginning to have an impact.
Figures for fixed asset investment for the first two months of the year were also much higher than expected, rising 26.5 per cent against the same period the year before, compared to 21.9 per cent in December.
Within those figures, transport investment – one of the priorities of the fiscal stimulus plan – rose 210 per cent over the same period the year before, while property investment was up only 1 per cent, a sign of the continued weakness in the housing market.
Originally published at the China Economics blog and reproduced here with the author’s permission.