The 26% slump in Chinese exports in February will send a shudder through Australia’s resource industries, currently busy negotiating 2009 contract prices, as well as through the Federal Treasury.
It confirms that Australia is in for a nasty recession this year as a result of a big fall in the terms of trade (net export prices), as well as the huge increase in domestic saving revealed by the December national accounts.
It is not great news for China either, of course. According to Bloomberg, the Nanfang Daily newspaper reports that falling exports have forced 20,000 firms in Guandong province to close since October, with two million people losing their jobs – just in that province. It rather puts the Pacific Brands controversy in Australia into perspective.
The actual fall in exports contrasted starkly with a consensus economist forecast of a fall of just 1%. China’s trade surplus collapsed from $US39.1 billion in January to $US4.8 billion in February.
The question of whether China’s fiscal stimulus can insulate it from the worst of the “great recession”, as IMF chief Dominique Strauss-Kahn calls it, remains moot.
Government spending is credited with increasing fixed asset investment by 26.5% in the first two months of this year, and imports fell less in February than January.
But the impact of the Government’s efforts will be slow. Annual GDP growth in the current half year is expected to have a 3 in front of it.
And even if the Chinese policy response to the slowdown is effective in the second half, it remains to be seen how much impact that will have elsewhere in the world.
The surge in Chinese exports from 2003 that underpinned its commodities demand, as well as Australia’s economic growth and budget surpluses, now looks to have been just another bubble that has burst – like US house prices.
We are now expecting too much from China – that it will replace the US as the engine of global growth, continue buying US Treasuries to keep the US dollar and interest rates down, hold its own currency up and shrink its trade surpluses, support commodity prices, while preventing mass unemployment and unrest at home.
Switching China seamlessly from an export-based economy to one whose growth is based on domestic consumption might sound easy in theory for a centrally planned command economy, but in practice it will be very difficult.
It’s true that China is already a larger market than the United States for cars, beer, mobile phones, TVs, newspapers and radio, but the notion that it will simply offset America’s decline in consumption with Government-sponsored investment spending is a fantasy.
And if China spends too much of its reserves at home, what happens to the US Treasury bond market? Every month, China is easily the biggest buyer of US Government debt; last year it lent the US more than $US400 billion – 10% of its own GDP.
Brad Setser of the US Council for Foreign Relations in New York calculates that China owns $US1.7 trillion worth of US bonds. Meanwhile China’s State Administration for Foreign Exchange said recently it was actively expanding ways to use foreign exchange reserves. “In particular we will examine how the reserves can better serve domestic economic development,” it said.
No doubt US Treasury Secretary Tim Geithner will explain at the G20 meeting this weekend that one way to do this will be to ensure that the US economy does not entirely collapse due to a lack of buyers for $US1 trillion to $US2 trillion in bonds he must issue to finance his boss’s own stimulus package.
This article first appeared on Business Spectator