Latest trade figures from China – Does it signal a severe slowdown in the economy?

In a Bloomberg Online article dated July 10, 2013, it was reported that the Chinese government released the latest trade figures for June 2013, which indicated a major slowdown in its exports growth, and the general easing of growth seen in many of China’s export partners, including the European Union (EU), South-East Asia, and Latin America. The article did not mention whether investments in the African economies have started to take off, and the potential contribution the region could bring about in trying to maintain the overall economy of China on a positive trajectory. However, such information, even if it is made available, will not make much of the difference to the overall impact in trade growth in the country as the region is still a relatively new market for Chinese investments.

The official trade statistics, according to the data obtained from the General Administration of Customs in Beijing indicated that overseas shipments fell 3.1 percent from a year earlier, compared to a median estimate of 3.7 percent in a Bloomberg News survey. Import growth has dropped to just 0.7 percent versus the median estimate of a 6.0 percent increase. The data also highlighted some of the impacts of the global slowdown it has on most of China’s trading partners including the United States and European Union (EU). The falloff from the less than expected export growth to these countries could be attributed to China’s rising manufacturing costs, the domestic recession happening in many of its EU trading partners, the pullback of US multinationals as a result of rising labour costs in many provinces, the cost competitiveness especially in the area of textile manufacturing benefiting countries such as Vietnam, Sri Lanka, etc. This slowdown in the latest trade figures have also impacted the country’s shipping industry where intense pressures are being inflicted on many shipbuilders in trying to be cost competitive against its major Korean and Japanese rivals. One of such examples is the announcement of one of its home-grown shipyard firms, China Rongsheng Heavy Industries Group Holdings Ltd., which on July 05, 2013, sought the Chinese government support as orders plunged, after it disclosed that some idled contract employees had surrounded the entrance of its main factory in Jiangsu province. This could be a sign of further government bailouts to come for most its major manufacturers, and construction companies if eeconomic growth in China continues to stall for a prolonged period.

In the latest official mid-year global economic assessment by the International Monetary Fund (IMF) on July 05, 2013, China was singled out by the organisation as one of the BRICS (Brazil, Russia, India, China, South Africa) nations to watch out for in terms of slowing growth outlook which is forecasted to come in at approximately 7.8 percent for 2013, down from its previous forecast of 8.0 percent. Although this level of growth forecast is still relatively high when compared to many of its peers, but is still down if one were to compare against the previous average growth of approximately 9.0 percent to 10.0 percent seen in earlier years. The IMF economists have pointed out some of the key issues which are hampering the growth outlook in China including the rising manufacturing costs, potential increase in inflation, environmental costs as a result of the various occurrences of coal burning induced smogs in most major cities during the winter seasons, the one-child only policy which hampers population growth, the so-called ‘hukou’ system where rural households are not able to enjoy the similar privileges that existing city residents are having as these rural folks start to resettle in cities as part of their search for greater quality of the standards of living, and better futures for their offspring.

China is about to release its economic growth report for the second quarter of 2013 on July 15, and the loan growth figures for June on Friday, July 12, which will likely show the extent of the damage inflicted on many businesses, and banking institutions as the government tries to rein in on ‘shadow’ banking, sparking a two-week spike in the interbank rates during that month. The current consensus estimate for economic growth during the second quarter of 2013 calls for an increase of approximately 7.5 percent from a year earlier, and this is down from the 7.7 percent during the first quarter of 2013, and 7.9 percent during the fourth quarter of 2012. The latest trade data, according to many analysts, does point to weak external and domestic demand.

With the release of many economic statistics pointing to slowing pace of economic growth in China, it is expected that the Chinese policy makers, led by Premier Li Keqiang, are not likely to intervene in the economy, as he has mentioned several times since the new transition took place in April, where he has repeatedly indicated the government’s stance that China will not artificially prop up the economy through fiscal measures, and infrastructure spending. Unless, the growth outlook for China comes in below 7.5 percent, or if it is showing continuing signs of instability of the interbank lending rates, the government could step in and revive the economy as seen by the bailout rescue of China Rongsheng. However, such forms of government intervention could set a precedent, which might not be healthy in removing the inefficient businesses from the market place, and instead increase the moral hazard risks of businesses, which could prove costly on tax payers if the bailouts are not successful in turning around these businesses as a result of weak fundamentals.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc