China: Lower Export Growth May Lead to Policy Mistakes

by: Michael Pettis posted on: July 11, 2008 | about stocks: FXI / PGJ    
  • Font Size:
  • Print

The stock market rally finally stopped Thursday.  After trading up most of the day, by over 1%, the SSE Composite lost its legs in the last hour of the day to close at 2876, down 1.54% for the day.  I guess the main reason for the fall was the release of trade numbers, which suggest that export growth is slowing sharply.  The trade surplus for the month of June was $21.3 billion, compared with $20.2 billion in May and $26.9 billion in June 2007.  I suspect the real trade surplus would be even lower if there were some way to strip out speculative inflows hidden in the invoicing of trade transactions.  Here is what today’s Bloomberg says:

 

Overseas shipments grew 17.6 percent from a year earlier, the slowest pace in four months, after gaining 28.1 percent in May, the customs bureau said on its Web site today. That was less than the lowest estimate of 23 economists surveyed by Bloomberg News.

 

Predictably, this has caused renewed calls for a slowing down of RMB appreciation and a loosening of (what they still call) “tight” monetary conditions.  I won’t do the broken record routine and explain why I think this is a mistaken interpretation of the causes of the export slowdown (which has far more to do with a slowing global economy and rising wages in China, neither of which will be positively affected by looser monetary conditions) and is a potentially costly mistake, but I will say that it is going to be harder than ever for the monetary alarmists to maintain their already-weakening grip on policy.  My favorite source on the politics of Chinese finance is Victor Shih, a professor at Northwestern, and he has this to say on his blog:

 

What we see today is nothing new, and as my book points out, has occurred repeatedly in the past 20 years.  Even Li Yining's call for "acceptable inflation" is not new.  He made exactly the same argument in 1988 when inflation was nearly 30%.  The problem is that Hu Jintao now has many followers serving as provincial party secretaries, and they are lobbying Hu not to squeeze money supply so hard.  Thus, unlike a few years ago, when Hu supported Wen's inflation fighting effort, Wen now fights inflation alone.  I think this is a very dangerous situation for future inflation trends in China.

 

This article has 3 comments! Add yours below...

Michael Pettis

About this author:
Become a Contributor Submit an Article

This article has 3 comments:

  •  
    Ames
    Tiedeman
    Jul 11 04:25 PM
    My Website
    China is an export king. This is not likely to change any time soon.
  •  
    pldragon
    Jul 13 10:32 AM
    My Website
    To reply to the comment above: China WAS the export leader, until not long time ago...
    It depends which industry you are looking for: for all labor-intensive industries, the trend is already reversed for few years now: most taiwanese shoes manufacturers have left for Vietnam and Indonesia...More alarming, Hon Hai (the biggest computer parts maker in the world) , but also Compal, Asustek..etc..are all planning to split at least 50% of their operations from south China to Vietnam...
    It is a headache too that the vietnamese economy is showing high inflation rate, but the wages start to grow from the level they were in china 10 years ago...
    I should say that most Taiwanese huge investors have always been at the forefront to spot the right combination of cheap labor, export growth potential and land availability....and right now, these 3 ingredients are disappearing at lightspeed from china business environment.
    Honestly speaking, without cheap labor, nobody would have ever invested so much in China: the productivity level is abysmally low, the quality of products is often dubious, the tax incentives for foreign companies are gone since early this year,and now the authorities have added a rigid labor law (good for the sake of the employees) but which is scaring the employers.
    The chinese government has long hoped that their Plan B i.e develop the domestic market , would offset the decrease of growth brought by the export boom of the years 1995~2006, but considering the strain of the inflation on the everyday lives of average people, I dont think it is going to happen at all...
    I still believe we are entering a very dangerous timefor China as a whole , not just for financial markets...
  •  
    pldragon
    Jul 14 07:13 AM
    My Website
    Hi Michael...
    To support what I was saying yesterday...
    Have a look at this article today in Taipei times
    www.taipeitimes.com/Ne...


    Taiwanese firms face tough China
    IMMEDIATE CONCERN: An expert in Chinese affairs predicted that 20 percent of Taiwanese companies in China could close down by the end of next month

    By Elizabeth Tchii
    STAFF REPORTER, WITH CNA
    Monday, Jul 14, 2008, Page 12

    Despite a common perception that Taiwan is well positioned to capitalize on China’s success because of a degree of shared Chinese heritage and culture, one-fifth of the Taiwanese companies operating in China could close down by the end of next month because of the harsher investment climate there, an expert in China affairs predicted yesterday.

    Wei Ai (魏艾), an associate professor at National Chengchi University’s Institute of Southeast Asia studies, said that many Taiwanese companies operating in China, particularly those involved in labor-intensive manufacturing, were unlikely to sustain their operations after next month because of newly implemented labor contract laws, higher corporate income taxes and a soaring Chinese yuan.

    Since last year, the corporate income tax for businesses located in China’s coastal cities has risen to 25 percent from the 15 percent preferential tax that was previously in place for foreign-invested companies.

    In addition, Wei said, the yuan has appreciated 18 percent since July 2005, when the Chinese authorities reformed statutes governing currency exchanges.

    “These factors have increasingly pushed Taiwanese companies to cut corners as their operating costs in China have continuously increased,” Wei said.
Loading...
Symbols:
Authors:
Quick Links:

ETFs In Focus

  • Long Ideas

  • Short Ideas

  • Cramer's Picks