And What ABout China's Drop In Export Numbers?

On The Financial Times on 11 March 2008.

China hit by massive drop in exports

• By Geoff Dyer in Beijing
  
  Published: March 11 2009 03:30 Last updated: March 11 2009 14:27
  
  Chinese exports slumped 25.7 per cent in February 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.

There some optimistic comments included in that article.

• Andy Rothman, economist at CLSA in Shanghai, said that government spending on infrastructure was likely to accelerate further over the next few months. “We expect this program to gain economic traction in March or April when project offices will have been established,” he said. “By late March, it is warm enough to dig holes and pour concrete across most of the country.”
  
  As well as dramatic increases in bank lending in recent months, the government said cement output increased 17 per cent in January and February and car sales rose 11 per cent in February according to JD Power, encouraging some observers to predict that domestic demand was already recovering.
  
  “China will still have one of the highest, if not the highest growth rate of any major country in 2009,” said Richard Yorke, chief executive of HSBC in China. Although a lot of the fiscal stimulus measures announced by the government were already in the budget for the next two years, “that is one reason why the Chinese economy will be able to implement the stimulus package so rapidly, because many cities and provinces had already planned for infrastructure projects over the next few years”, he said.

In John Mauldin's Outside The Box article posted on InvestorsInsight.Com

China: Exports Drop

• China's exports in February fell by 25.7 percent from a year earlier, dashing expectations that the country's crucial export sector would hold up better after January's 17.5 percent slowdown in export value, according to China's customs bureau on March 11. The sudden and sharp drop reveals that China's most critical source of business and government revenues are far from recovery and are running dry due to depressed global demand.
  
  In the past few weeks, the Chinese government and state press have drawn attention to signs that the domestic economy is improving. Bank lending increased substantially in January and February in support of struggling businesses and consumers, as well as government-prompted development projects. The purchasing managers index (PMI), a rough measure of overall manufacturing activity, climbed for the last 3 months to a reading of 49 in February, and the government is predicting positive growth of 54 percent in March. (A reading above 50 indicates growth, while one below 50 indicates contraction.) Even in the February export news released March 11, the losses are allegedly offset by a 26.5 percent increase in January's and February's fixed asset investment, slightly over the 2008 growth rate of 26.1 percent, possibly indicating that fiscal stimulus policies are having an effect.
  
  Nevertheless, exports are vital for the Chinese economy, comprising about 40 percent of gross domestic product (GDP). By means of robust trade surpluses, China manages its day-to-day expenditures and puts away foreign currency reserves in case things get worse. February's trade surplus, however, fell to a mere $4.84 billion, down from $39.1 billion in January. China still retains its nearly $2 trillion in reserves to resist the economic downturn, but it is reluctant to tap this last resort and prefers to rely on trade surpluses — which are now dwindling.
  
  February's export numbers do not bode well for China's recovery — the similarly drastic 24.1 percent drop in imports also indicates how badly domestic demand has been struck, especially given the vast amount of effort Beijing has devoted to trying to increase that demand. China's latest trade data, while not complete, reveal the increasingly high toll that the global recession is taking on the Chinese economy. Ultimately, the pain in China's export sector will contribute to social problems that are already bubbling up from unemployment. This in turn will increase the heat on the Communist Party as it steps up security efforts and tries to maintain order.

Professor Michael Pettis commented the following on his write-up, Trade, CPI and other numbers came in this week

• I have always believed that the fact exports were dropping much more rapidly in the rest of Asia than in China was clearly not sustainable, and that it was just a question of (very little) time before we began to see Chinese exports hit much more sharply. I do not believe the process is over.
• It’s probably not a good idea to announce a drive to increase China’s share of the global export market, especially since for the last several months, while the world has suffered a collapse in demand, China’s share of exports has risen dramatically, but this may have been said primarily for domestic consumption.

On China Economy Watch

• Certainly some sectors of the economy are suffering badly and China’s trade surplus plunged in February on the back of a record drop in exports. The trade gap narrowed to $4.8 billion - roughly one eighth of the amount registered in January, according to data from the customs bureau. China's trade surplus hit a record $40 billion in November. Exports dropped sharply in February - down 25.7 percent from a year earlier (following a 17.5% fall in January), while the collapse in imports slowed, falling by "only" 24.1 percent following January's record 43.1 percent decline.

Comments: Exports dropped 25.7% - imports dropped by 24.1% and this is followed by a drop in cpi.

• Meanwhile China announced earlier this week that its consumer inflation fell for the first time in more than six years in February, suggesting we might now be entering a period of price deflation - the consumer price index fell 1.6 per cent from a year earlier in February.

Comments: And the issue of loan 'expansion' is clearly spelt out. Only 'quadrupling' in Feb 2009!

• Huge Loan Expansion
  
  So the big question is to just what extent will the government investment programme help restructure the economy? Certainly it won't kickstart it, since the export sector is dependent on demand elsewhere, and that is unlikely to move in the near tyerm. However the emphasis in Chinese economic activity might be able to switch towards domestic consumption, and that is the big question we now face. Certainly bank lending has increased, with China’s new loans more than quadrupling in February (from a year earlier) as the government pressed banks to support a 4 trillion yuan $585 billion). The problem is, just how much of this lending can turn bad?
  
  Banks extended 1.07 trillion yuan of local-currency loans in February and M2 climbed 20.5 percent from a year earlier, the fastest pace in more than five years, after growing 18.8 percent in January. The lending, which is in addition to a record 1.62 trillion yuan in new loans in January has given rise to concerns that the pace of new lending may be unsustainable and endanger the overall health of the financial system. Lax credit assessment now may lead to an upward surge in delinquencies in the months and years to come.”
  
  Central bank Governor Zhou Xiaochuan said earlier this month that loans and money supply may have grown too quickly, since Premier Wen Jiabao announced a whole year target for lending of 5 trillion yuan, so that the banks are already halfway through their target with 10 months still to go. The surge in credit has also triggered concern that some of the money is being pumped into the stock market. The Shanghai Composite Index which tracks China’s largest stock exchanges is now up by 17 percent since the start of the year.
  
  The worries about bad debts are being taken seriously, and China’s banking regulator have told banks to boost provisions to 150 percent of their outstanding non-performing loans, according to an article in the 21st Century Business Herald. The bad loan ratios of the country's five biggest banks -- Industrial & Commercial Bank of China Ltd., Agricultural Bank of China, China Construction Bank Corp., Bank of China Ltd., and Bank of Communications Ltd., is to be raised to 150 percent from 130 percent at the end of 2008, while the requirement for smaller national banks remains unchanged at 150 percent.
  
  Liu Mingkang, chairman of the China Banking Regulatory Commission, has described such moves as "prudent", and in line with the regulatory decision to carry out spot checks on bank loan books to “ensure quality of growth”.