Echo

China can and will fight for its exports

Tuesday, August 5, 2008

The New York Times article, Booming China Suddenly Worries That a Slowdown Is Taking Hold, reports that policy makers in China are worried about the global slowdown. As growth in the U.S., Eurozone, United Kingdom, Japan, Canada, and across the globe slows, Chinese exports are suffering.

Amid surging inflation, Chinese officials are taking measures to insure the health of export growth, including recent currency intervention (keeping the Yuan low relative to currencies of key trading partners), raising export subsidies in the garment industry, and easing bank lending standards that were earlier tightened. The Chinese economy has thrived on exports to the developed world (U.S., Western Europe) and attained growth rates over three times those in the United States.

However, China is not the only country that stands to lose from a slowing global economy.

Source: Global Insight; Nontruths Research

In May 2008, Germany was the largest exporter of goods, followed by China and the United States. On an annual growth basis, export growth is largest for Brazil, followed by Australia and China. Export growth spurs economic growth across the globe, and reduced export growth will slow economic growth across the globe. Many historically strong exporters, not just China, will suffer the effects of a global slowdown.

China's growth objective

Is it time for Chinese officials to throw in the towel, slow saving for the future, and start spending on goods for today?

The chart below illustrates the current account (CA) as a share of GDP. The CA is a measure of international saving; the following are included in the CA: exports (+), imports (-), and income payments from the rest of the world (+). China, Japan, Eurozone, and Canada are savers, while the United States, United Kingdom, and Australia are debtors.

China still has a long way until it will be considered a developed economy. For now, Chinese policy makers will target continued saving and export growth. They can, and the will.

Annual growth has exceeded 10% since 2004 based on a policy of strong saving and exports. China sold its goods to the U.S. (and other key developed economies) at below-market prices by holding the US dollar strong relative to the Chinese Yuan. China saved the inflow of US dollars and amassed a fortune in foreign currency reserves; in June, the People’s Bank of China (PBoC) held roughly $1.8 trillion in foreign currency reserves. Using these reserves, the PBoC will maintain it strong currency on foreign exchange marketsl; specifically, it will fight to prevent the Yuan from appreciating.

Here, we come full circle. Exports are slowing, foreign exchange accumulation is slowing, and the PBoC will do everything in its power to maintain its hold on saving-driven economic growth. It certainly has the reserve capacity to intervene in the foreign exchange markets.

Eventually, and this may not happen for years to come, the Chinese current account will fall as it spends more on the domestic economy (new roads, new cars, better technologies, education, etc). That is the natural progression of growth: countries grow very quickly for several decades by saving for the future, but eventually, they start to spend more today.

China will be no different, but it is certainly not there yet. Expect continued cheap Chinese goods for a while to come.

Please leave comments. Best, Nontruths

4 comments:

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Interesting topics could give you more visitors to your site. So Keep up the good work.

Janie August 6, 2008 at 10:15 AM  

It will be interesting to see what happens as the world economy slows. Heard a report yesterday stating the US housing market will fall another 1/3 before the bottom so it "ain't over 'til its over". That has got to be a drag in the near future. China still seems to have the third world view of building infrastructure so, as that crumbles in the near future, they will have to rebuild more substantially. You have to love all the corruption!

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