July 14, 2005

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The coming China crunch

Jake van der Kamp in the SCMP explains, after the usual caveat about the reliability of Chinese stats, why China's export boom may be coming to an end (charts below the fold):

In just one year, it [China's trade surplus] has shot up from US$14.2 billion to US$80 billion a year. It looks like a big number, but it is not necessarily really that big. It amounts to 4.5 per cent of gross domestic product, which is sizeable but not huge, and the figure was actually higher in 1998. To put it in further contrast, the United States runs a trade deficit nine times as large. What makes it unusual, however, is how suddenly it has materialised. The superficial reason for it is that the mainland's export growth is still running at more than 30 per cent year on year while its import growth has fallen to much lower levels.

This answers the superficial question, but it still begs the real one, of why import growth should have plummeted so rapidly. It also begs the question of why the mainland's export growth should remain so strong when export growth across the rest of Asia has contracted sharply over the past year.

We shall leave these questions aside for the moment. Let us move to the second chart, which also shows one of those lines that suddenly moves sharply up. This one represents the official figures from Beijing of how much money is lost every year by loss-making enterprises in the mainland.

...they [the numbers in the second chart] say losses rose during the 1997-98 Asian financial crisis. The official word is that China was impervious to that crisis. I have always doubted it and, when I see numbers that say it was not true, I tend to give those numbers more weight. The second reason is that the woeful performance of the Shanghai stock market recently says corporate profit performance must be down severely. Stock markets do not lie about things like that...

I think what may have happened here is a common phenomenon when companies start to experience straitened circumstances. At such times, the profit and loss account is forgotten (it is anyway with many mainland companies) and all the attention focuses on cash flow. What the boss then wants is simply money through the door, preferably real US dollar money, to pay the most pressing creditors and keep the operations going. He may know he is digging a hole for himself but his mind is focused on the immediate future and he probably fools himself that his problems are temporary only.

In this case, the available evidence says he is pinched because the prices his foreign customers pay him are still falling while his costs of raw materials and component goods are still rising. To get around the problem, he is shipping out his inventories as fast as he can in order to get his cash, while delaying restocking. It would certainly have the effect of keeping export growth up while import growth tumbles.

I cannot demonstrate conclusively that this analysis describes the problem but the facts fit, and if I am right, we will soon see the mainland's big export boom crumble and its trade surplus go right back down again.

Not to mention a further drop in the pressure to revalue the yuan...at least for economic reasons. You can take this analysis further. China's economic growth has held up despite the Gvoernment's efforts at engineering a slow down. At the same time there has been a rise in protectionist pressures in major export markets such as the US and EU, especially in textiles. If Chinese manufacturers have ramped up production to beat the quotas and economic pressure, you can expect not just an export slowdown but a far broader one.

China has accounted for 25% of global GDP growth in the past 5 years, a major buyer of US dollars and bonds and a key driver in Japan's nascent economic recovery.

By the way, you'll be please to know China has officially completed the transition to a socialist market economy.


posted by Simon on 07.14.05 at 09:47 AM in the


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If the bottom really drops out of the US housing market and people end up holding mortgages worth more than their properties that might be enough to make China's export market go splang without any further protectionist measures being required. At which point our esteemed congressmen could forget about textile quotas and a the deluge of teddy bears and concentrate their full attention on Chinese buyouts of mediocre American companies.

The mind quakes.

Say, doesn't it help to decrease the trade deficit if we sell off our bum companies to the Chinese? It seems to me we finally found the product we can export back!

posted by: Will on 07.14.05 at 03:32 PM [permalink]

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