Is the Chinese export surge really good news?

June 14th, 2010

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Last week, the mainstream financial news media was cheering on the news that China’s exports surged on a year-on-year basis. This led to the belief that China’s economic recovery is on track, which implies that the recovery in commodity demand will be sustained, which will then flow on to the Australian economy. As a result, according to media narrative, the stock market rose on that ‘good’ news.

But before we get carried away with this bout of optimism, let us put on our thinking caps and consider the bigger picture. Firstly, is the surge in Chinese exports and imports really a good news for Australian mining companies? To answer this question, consider this news article,

But rising textiles and electronics exports will do little to offset the slump in Chinese demand for Australian commodities that will come with an expected construction slowdown.

Construction starts for government infrastructure projects have slowed sharply and private sector transactions have been bludgeoned by government measures.

Private sector measures show real estate transactions fell by as much as 70 per cent from April to May in Beijing, Shanghai and Shenzhen, where policy restrictions have been most severe.

To put it simply, China’s demand for Australian commodities post-GFC is mainly influenced by China’s construction ‘boom’ in 2009. It is open knowledge that there’s overcapacity in China’s steel and cement industries. As we wrote in Marc Faber: Beware of investing in Australia (as it follows the Chinese business cycle),

It had been reported that China?s excess capacity for steel and cement production is around the current capacity of United States, Japan and India combined.

A rise in Chinese exports will not be likely to offset the slump in construction.

Next, when you look at the big picture in mind, an export surge is the last thing the world needs. In the this post-GFC world, where growth is anaemic and unemployment is stubbornly high, countries are covertly engaging in competitive currency devaluation in order to prop up their exports in order to prop their economies. The Americans wants to re-balance their? economy with more exports, which implies other countries have to import more from America. Yet, on the other side of the Atlantic ocean, as Niall Ferguson said in this recent interview, the Germans are shedding crocodile tears over the falling Euro because that would boost their exports, which in turn is good boost for their economy. As Marc Faber said in this interview, a falling Euro (i.e. rising US dollar) will give the Americans the excuse to print money to give their economy another adrenaline boost.

Unfortunately, growth-via-exports is a zero-sum game because a for every export, there is an import on the counter-party. If every country wants to increase their exports to boost economic growth, who’s the one doing the importing? Thus, China’s export surge is one step in the wrong direction. The world needs a rebalancing of exports and imports, not more of the same unsustainable imbalance.

Already, the Americans are murmuring about this ‘good’ news. As? China export surge stirs U.S. anger reported,

A surge in Chinese exports and rising anger in the US Congress will put renewed pressure on China to allow its currency to rise against the US dollar.Chinese trade figures showed exports leaping by 48.5 per cent in May over the year before, way ahead of analysts’ forecasts. Data released in the US showed America’s trade deficit widening slightly in April, with some economists arguing that the improvement in net trade and its contribution to US growth appeared to have stalled.

The data gave more ammunition to China’s critics in the US Congress, who have said they will proceed with legislation to restrict Chinese imports to correct the perceived misalignment of the country’s currency. The US Treasury has been pursuing quiet diplomacy with Beijing to allow the renminbi to rise, but lawmakers said they were losing patience.

In the bigger picture, rising trade tensions between the US and China is moving them towards trade war. This can hardly be good news.

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  • Pete

    Great article CIJ.

    I often think the US has a lot of nerve telling China to stop devaluing/pegging their currency.

    What scares me most is that the US will print a lot of money (and get away with it due to the high USD) and that will translate into exported inflation somehow, or something even more nasty that we haven't foreseen.

    It also seems ironic that a country would be in a position like the US is:

    – owing lots of money but being able to print it to pay it off
    – having their currency rise in value, rather than fall
    – be able to import things cheaply as they have done as net consumers for a long time

    Yes, their jobs and exports will suffer. But consider the inverse situation, whereby they would have:

    – a low value currency which gets devalued even more if they print money
    – owing a lot of money, but unable to print to repay it
    – high cost of living due to high import costs and a sharp contrast to the cushy lives they have been used to living

    But they would have exports and more jobs (to a certain extent)…assuming that anyone would want to buy anything American as it would still cost more than the Chinese version.

    They act like spoiled brats.

  • The big deal for Chinese raw materials consumption is tied to their real estate market. The great building binge is likely done for the time being, at least until their economy can realign a bit and absorb significant excess capacity.

    At this point in time I don't put much faith into their official statistics.

  • Pete,
    Speaking on behalf of the nation of spoiled brats, I have to agree with your general sentiment, but iterate that this historical aberration will be short lived.

    Old habits die hard, this being the case for global use of USD as reserve currency.

    There's a new global (dis)order on the horizon…

  • Pete

    To clarify, I mean the politics (and financial sector) of your nation act like spoiled brats.

    Like any nation, there are good and not-so-good citizens, but the citizens are hardly getting a say in all of this.

  • Pete

    Agree.

    Funny thing is that I don't think a year or so ago anyone really noticed that so much of the raw materials consumption was tied to real estate.

    Hindsight is 20/20 of course, but I do feel as if I was completely blind to something so obvious. There were rumours of mineral stockpiling, increased exports and any number of fuzzy theories (which could all have been true), but without reliable data (except anecdotal), we were all pretty much in the dark making assumptions.

    The question will be whether China will stop devaluing their currency on the demands on the US, and whether there will be any problems for China and its supposed capital 'surplus' or savings (especially if they are being printed by the US).

  • I agree…somehow my nation has been hijacked by Keynesian thugs. Or rather, by thugs who spout Keynesian policies as cover for taking what they want.