Chinese exports took a nosedive in February as exports fell twenty-five percent from last year in what’s been a steady downward trend. The February numbers were a surprise, even with the recently alarming numbers from China (which may be sunnier than the real picture). This dive may have been made worse by the Chinese New Year celebration, when businesses and government offices shut down for the better part of a week.
By contrast, January exports were down just over fourteen percent, more in line with what analysts were expecting to see in February’s numbers. Rather than any particular problem with the Chinese economy, the slump in exports is mainly due to a slowdown in global demand. That deceleration should not be wholly unexpected as the world starts to come to grips with the absurdity of assuming a future of unlimited economic growth on a planet of fixed size and limited resources.
It’s Hard to be the Grownup
For years China was a shameless currency manipulator. That was one of the chief ways that the Chinese were so successful in undermining the U.S. manufacturing sector. Recently China started craving legitimacy and a place at the big kid’s table on the world stage. The price for that seat was cleaning up its act as it relates to its currency. China did make some moves in that direction, prompting the IMF to allow the yuan to become one of the world’s reserve currencies. What China is discovering now is that being a grownup and acting responsibly on the world stage is hard to do.
Complicating Reform Efforts
Growth in China fell to a twenty-five year low of under seven percent. Despite government efforts to boost it, the Chinese economy has remained mired. Officially China’s growth target is an enviable seven percent but economists point out that projections issued by the government have an uncanny way of coming true, even if they have to fudge the numbers to get there. Weak growth also complicates China’s efforts to shift their economy away from the old manufacturing-and-infrastructure model to one more dependent on consumer spending and services. That was a change forced on the United States by forty years of the Chinese playing dirty with their currency, but one which, satisfying enough, allowed the U.S. to ride out the current slowdown in much better shape than China.
As Expected, Trump Weighs In
On the campaign trail Donald Trump called the Chinese the “grand masters” of currency manipulation. While that was certainly true in the past, even the recent past, today China is making an effort to play it straight on the world stage and its manufacturing sector and stock markets are suffering for it. But Trump may yet be proven right; currently China’s burning through its foreign capital at an alarming rate as investors pull out of Chinese markets. If the capital drain becomes bad enough it could result in another shock devaluation of the yuan which would certainly ripple around the global economy like a tsunami in the same way last summer’s three-day serial yuan devaluations triggered the August crash.
Let’s See What Happens Next
Economists warn that excessive gloom and doom may be premature and suggest the numbers for the next quarter may provide a more accurate picture of the state of the Chinese economy. Any surprise to the upside could boost the Chinese stock market and stem capital outflows. At this point it seems unlikely that China is going to pull a surprise miracle out of its economic hat and stem the outflow of foreign capital.
In the end it’s likely the Chinese will prove Trump right, even if today their government is working hard to do better. If it happens, a sudden devaluation of the yuan will be a shock to the global economy and, just like last year, will cost investors tens of billions. The added problem? Last year we weren’t dealing with an imminent credit crash from an imploding oil industry.