International | Feb 13 2009
By Andrew Nelson
Those hoping for a resurgent China to help pull us out of our economic difficulties have been dealt another blow this week after the nation booked its biggest exports percentage drop since October 1998. However, some economists are starting to believe there are finally some rays of hope emerging from the underlying trends.
Exports in January took a dramatic turn for the worse, to put it lightly. The headline read fell 17.5% in value from a year ago, as shipments of electronics, cellphones, steel products and other goods made in China plunged. Economists were expecting a fall of only 14.5%.
The news not only signals there are further economic troubles ahead for China’s once-powerful industrial sector, but also for the government as it tries to deal with millions of migrant workers who rely on factory jobs for their livelihoods.
Import growth was hit even harder, dropping 43.1% after falling 21.3% in December, suggesting all is not well regarding China’s domestic demand.
The massive slump in imports saw China’s already high level of trade surplus remain close to record levels at US$39.1bn. Chinese imports are dominated by raw materials such as crude oil, and as we all know, metals and iron ore, much of it from Australia, and equipment and machinery for manufacturing. Some are blaming the trade imbalance on China’s undervalued currency, saying it is making Chinese goods unfairly cheaper in overseas markets.
However, points out Danske Bank Senior analyst Flemming J. Nielsen, the trade figures are not as bad as they might first appear. “The January data are heavily distorted by the Chinese Lunar Year holiday falling in January this year compared with February last year. For that reason there are five fewer working days less in January this year compared with January last year and potentially this could have subtracted as much as 20pp [year on year] from export and import growth in January.”
Stephen Green, Standard Chartered’s head of research for China agrees on this point, saying that working out the exact meaning of the decline is “tricky”, as while the number of official holidays is a known quantity, what we don’t know is what happened on the ground. To get a more accurate picture, we should be looking at January and February data together, he says.
This ambiguity leads Nielsen to think that the decline in Chinese exports may have actually slowed and adjusting for seasonal distortions, it is actually possible the decline in exports has already stopped. He notes his view that exports are stabilising is supported by the recent turnaround in the new export orders in manufacturing PMI. That said, imports continue to look weak, even adjusting for lower crude oil and commodity prices, on his numbers.
Seasonally adjusted, Danske estimates import growth declined 18.1% month on month after dropping 10.9% month on month in the previous months. However, warns Nielsen, one should be careful not to read too much into the January numbers because of the seasonal distortions. Still, he is of the opinion there are increasing signs that domestic demand in China is starting to recover, with the government’s aggressive fiscal and monetary easing measures looking like they are finally starting to gain some traction.
Green only agrees partly with this view, making a key differentiation in the export outlook, breaking down his view to the two parts of the trade sector, processing and non-processing. He notes processing exports are in a sharp contraction and this view is supported by data up until December. The fact that imports are falling even faster than exports strongly suggests that processing exports will fall further in the coming months, he predicts.
In fact, he sees no bottom in sight, as these goods are primarily sent to G3 and we know how they’re doing (not well). This view is echoed by economists at Citi, who say data out of G3 and broad leading indicators are showing no signs of a turnaround.
And it is this decline in processing exports what is making Guangdong factories miserable, workers miserable and causing all kinds of difficulties for the Chinese government. It also helps to explain why China’s imports from Korea and Taiwan have collapsed in recent months, given that most of that trade is in component parts, notes Green.
Where he begins to agree with Nielsen is in his assessment of the non-processing sector, which he notes is “holding up very nicely” from an export stance and while imports are down sharply in nominal terms, that is partly the effect of softening commodity prices.
His short-term outlook is still less than optimistic, however, as he sees little help coming from the economies of the G3 and much of the emerging world, as recession continues to bite. He notes the export orders component of the January PMI was 33.7%, up mildly from 29.3% in November and 30.5% in December. While it is on the rise, Green explains the numbers still indicate a serious contraction, as a number below 50% indicates that the majority of companies saw fewer orders in January than in December.
“This augurs badly for the non-processing exporters and suggests that China’s exports have another cliff to fall off sometime in Q1-Q2,” says Green.
Economists at Citi also see signs of life emerging from these numbers, but much like Standard Chartered, think the sustainability of any rebound is incredibly uncertain, especially given the January trade data out of Korea and Taiwan have continued to show steep contraction. All up, Citi says it doesn’t buy into the recovery story just yet, given the ongoing lack of foreign demand to drive re-stocking and the seasonal nature of the recent retail sales pick.
The broker also takes issue with what has been taken as a major sign of moderating declines, recent explosive loan saying the numbers are distorted by a disproportionate amount of short-term bill financing and heavy policy-directed lending, which is likely to create future problems. In short, Citi thinks we need to see some signs of global recovery before we can hope China will be pulled out of this slump.
The last view we’ll take in is that of UBS economist Tao Wang, who is cautiously optimistic, but not enough so to keep him from trimming his GDP expectations for China for 2009. Unlike Citi and Standard Chartered and more in-line with Danske, Wang expects a mild stimulus policy-induced rebound in economic activity in Q1, and a stronger one in Q2 following the large scale de-stocking and production cuts in recent months.
However, he has clipped his 2009 GDP forecast to 6.5%, not because he thinks sequential growth is going to fall further, but rather to reflect the continuation of the sharper-than-expected slowdown in Q4 08, as evidenced by this most recent data. This leads him to predict that year on year GDP growth will be below 6% in the first half, reflecting the generally weaker activity in the economy. Further out, Tao Wang expects the quarterly year on year growth to rise to 7% in H2.
“With additional policy measures on the way, growth for 2009 could surprise on the upside,” concludes Wang.