Over the last several months the economic data from China has not looked all that good but nobody wanted to panic. The analysts always prefaced the report on these setbacks with an assurance that China could reverse this trend if they really wanted to. There was an assumption that much of this reduction in activity was due to conscious decisions on the part of the Chinese leadership as they were more concerned about the threat of inflation than they were about the rate of the country’s growth. It seemed that the Chinese believed that they could reverse course whenever they elected to. That assumption is not quite as sturdy as it once was. The latest export and import data was far weaker than anybody really expected and there is real fear that China is going to be unable to bring itself out of this slump as quickly as many had anticipated. There are still many things the Chinese can do to reverse course and in the last few weeks there has been more talk of stimulus through the Bank of China and directly from the government. The problem is that we all know how unpredictable these moves can be. The US and Europe have been engaged in this activity for some time now and have little to show for it.
Exports were expected to rebound from the miserable readings in February – the forecast was for growth of around 5% but instead the export levels fell by 6.6% year over year. At the same time the value of imports fell 11.3% despite the fact that commodity imports were up and the prices of those imports had fallen. The import decline was mostly industrial goods and consumer goods and that is not what the nation had expected or wanted to see at this juncture. The only good news in all this data was that the trade deficit from last month vanished and was replaced by a surplus of some $7 billion. The improvement in trade data was only due to the reduced levels of import and that is not how nations want to see their trade balance improve. The Chinese consumer is suddenly getting very cautious and that worries the analysts who have been assuming that the growing middle class in China would become their new economic engine – the one to replace the fading export centered world of low cost manufacturing.
The assessment of the Chinese economy is changing as a result of these data releases. The news has been essentially bad all year and now it is affecting the growth estimates for the country. It had been assumed that China would be growing at around 7.7% for the year and now there are estimates of no more than 7.4%. That may sound pretty robust when compared to the anemic rates in the US and Europe but assessing China is something of an “apples and oranges” dilemma. China may be the second largest economy in the world and one of the most rapidly growing over the last decade but it is still a developing nation in many respects and that growth has come from a very low base. The GDP of China places it at number two in the world behind the US but its GDP per capita puts it at number 93 – just ahead of Jamaica. This affects the assessment of their growth rate as compared to the developed nations. A growth rate in China that is under 6% is considered equivalent to recession. The rate of growth in China is therefore more like 1.7% or 1.4% as opposed to the almost 3% growth in the US. The slide in the economic performance of late is not insignificant in China and sets up a whole host of other issues.
Analysis: In a nation of some 1.6 billion people, the job is all important. China has to find ways to keep its population employed and slow growth is not making this ask any easier. There is yet another complication and one that China is just starting to understand. The lack of export activity is partly due to more competition from nations that are challenging China as the low cost alternative. The Chinese have lost their edge as a cheap producer as wages have risen to the point that most of Asia is cheaper and so are many other parts of the world. The wage rate in China now is around $2.30 an hour and that is more than twice what it was just five years ago. The wage rate in Mexico is less than $2.20 and in some of the Asian states like Burma and Vietnam it is less than a fifth of that in China. This is forcing the Chinese manufacturer to become more competitive with the manufacturers in the US, Europe and Japan. This can be done of course but it means Chinese companies need to invest in machines and robots just like their competition. This is not what the government would prefer as they are still far more interested in job creation. The slowdown in trade is very worrying for the Chinese as well as anybody who sells to the Chinese. That is why the global markets are getting very nervous and why many other nations are starting to look at downgrades of their own growth for the year.
Source: Courtesy Dr. Chris Kuehl, Armada Corporate Intelligence