International | Dec 11 2008
By Andrew Nelson
China’s exports in November fell for the first time in almost seven years demonstrating once and for all that the nation’s economy will not be immune from the crushing impact of the global financial crisis on external demand. Overall, exports are down 2.2% year on year, the first time that number has declined since 2001, when US demand slumped after the tech bubble burst. Imports also contracted last month, falling 17.9% year on year.
October saw China’s exports rise by 19.1% and, according to a report from Reuters, analysts had been expecting further growth of at least 13% in November. However, exports booked a one month decline of 10.4%, while imports were down a massive19.5% on the previous month.
TD Securities global strategist Stephen Koukoulas rightly points out that news like this is “extremely disconcerting for the global economy as the risk of a recession in China has intensified to the point where deflation risks are now also increasingly acute”. He notes the world is no longer buying Chinese goods at the pace it was a year ago, so China no longer requires the level of imported raw materials it did back then. In fact, current raw material inventories in China suggest future demand and prices will be extremely low.
The news is expected to increase current labour unrest in the country, accelerating the pace of factory closures and mass layoffs that have been triggered by the global financial crisis. Thousands of factories have already closed, forcing millions of migrant workers to return to the countryside. As overseas orders continue to shrink, the number of closures and bankruptcies will keep rising.
Chinese minister of human resources and social security, Yin Weimin, last month described China’s job outlook as “grim” and said the situation would likely worsen until the economic stimulus package kicked in next year.
But according to the report from Reuters, Chines analysts and economists are increasingly of the opinion that current fiscal stimulus plans will have little impact. So much for the US$586bn that the county has started to pour into housing, infrastructure and post-earthquake reconstruction over the next two years. Citing a broker at Southwest Securities in Beijing, the report indicates that exports and imports will continue to fall in the coming months, probably until next June, with no sign of recovery expected until there are signs of a global recovery.
Economists at Danske Bank are of a similar view, confirming that industrial activity is slowing sharply on a global scale and this is currently hitting China very hard. The Danish bank also agrees there are no signs that the Chinese government has been able to turn domestic demand around. Where they differ from Reuters’ broker is that the Danish bank expects fiscal and monetary policy will support a recovery in 1H09.
UBS reports that exports to all major trade partners saw particularly sharp drops in growth rate, while export volumes dropped across all major trade commodities, with steel and semi-finished steel products leading the decline. The broker notes traditional major export goods, such as electrical machinery, electronics, and light manufacturing all experienced similar sharp declines in export volume, demonstrating that global demand is simply disappearing.
The news also casts doubt on current GDP forecasts for China, with current estimates predicting growth of about 9% this year. However, the World Bank has now cut its China growth forecast for 2009 from 9.2% to 7.5%, the lowest since 1990. Danske also sees risk to its Chinese GDP forecast and thinks the current slow-down might end up deeper than its is currently forecasting.
Some experts are reportedly penciling in Chinese GDP growth of no more than 5.5% for 2009.
Koukoulas highlights the news from China is extremely disconcerting for Australia. He notes RBA Governor Glenn Stevens confirmed this week that China was slowing more than is commonly acknowledged and that for Australia, such weakness is imposing a massive downside challenge for the growth outlook.
On Koukoulas’ reckoning, every bit of bad news that comes out of China makes him more confident the RBA will cut interest rates towards 2.5% and perhaps even lower. This means the AUD is extremely vulnerable to a massive fall, certainly below US$0.60 and perhaps even more.
“With Australia already in recession, a year of weakness from China would spell almost certain disaster,” predicts Koukoulas. The news isn’t great then, as UBS is also predicting more negative Chinese export growth in the coming months and ultimately sees zero export growth for the country for the whole of 2009.
