Beijing puzzle

--Imports decresed faster than exports did, so trade surplus increased even when economy slide --Shrinking imports reflected weak domestic demand from real estate --But government stimulus package will shore up the imports and heated credit will boost imports as well Jan 14th 2009 HONG KONG From Economist.com Why is China’s trade surplus still growing when its exports have collapsed? AFP REVISED figures published this week show that in 2007 China overtook Germany to become the world’s third-biggest economy. At the start of last year China also looked set to become the world’s biggest exporter, but for 2008 as a whole its exports remained smaller than Germany’s, because of a slump in the final months of the year. China’s exports tumbled by 13% (in dollar terms), in the fourth quarter, leaving them 3% lower in December than a year earlier. Yet, despite weak exports, China’s trade surplus rose to a record $457 billion at an annual rate in the fourth quarter—50% bigger than in the same period of 2007. What is going on? In the first half of 2008 China’s trade surplus did indeed shrink (see chart). But since then, although exports stumbled, its imports fell by much more—down by 21% in the 12 months to December (compared with over 30% growth in the first half). The slump in both exports and imports was exacerbated by the global credit freeze, which has made it harder for buyers to get letters of credit to guarantee payment. Imports were also dragged down by cheaper oil and commodity prices and weaker imports of materials and components used to make exports. Inputs for export processing account for over 50% of China’s total imports, and the sharp fall in purchases suggests that producers expect exports to weaken further. But a more worrying reason why China bought less from the rest of the world is that its domestic demand has weakened. Consumer spending and manufacturing investment have so far held up reasonably well, but construction—a big user of imported raw materials—has collapsed. The impact of this on imports was exaggerated in the fourth quarter by an aggressive run down of stocks of steel and other materials. With no end in sight for the rich world’s recession, China’s exports will continue to slide this year. Nomura, a Japanese bank, forecasts a drop of 6%—the first annual decline for more than 25 years. Imports, on the other hand, are expected to grow, albeit by a modest 3%. Imports of components for assembly and re-export will continue to decline, but once the government’s fiscal stimulus package kicks in, the large planned increase in infrastructure investment will boost imports of raw materials and machinery. If so, China’s trade surplus will shrink in 2009 and, for the first time in years, become a drag on GDP growth. The collapse in exports in recent months and the consequent job losses in southern China have triggered speculation that the government might try to push down the value of the yuan. After rising fairly steadily against the dollar over the past couple of years, the yuan has been held broadly constant since July. However, not only would a yuan depreciation risk provoking a protectionist backlash from America’s new government, it would also do little to help Chinese producers. China’s problem is not competitiveness: its exports are holding up much better than those in South Korea or Taiwan, which fell by 17% and 42% respectively in the 12 months to December, despite weaker exchange rates. The best way for China to support its economy—and to help unwind global trade imbalances—is instead to bolster domestic demand. One piece of good news this week is that following interest-rate cuts and the government’s scrapping of tight restrictions on bank lending, total bank loans jumped by 19% in the 12 months to December, up from growth of 14% last summer. Thanks to the healthier state of its banking system, China is perhaps the only big economy where credit has heated up rather than frozen in recent months. If sustained, this could help to support domestic spending—and hence imports. China’s economy certainly can not depend on exports over the next year.