China Struggles with Falling Demand and a Watchful World Community

China is in all kinds of trouble. On the international stage they came in for almost instant criticism the moment the new US administration had their feet under the desk with accusations of currency manipulation and by implication unfair trade practices. At the same time, on the domestic front, their housing and stock markets show no sign of recovery from last year’s collapse. Now new trade figures show that China’s embarrassing (though no doubt welcome) trade balance hit the second highest on record at $ 39.11bn last month. Embarrassing because it will encourage further criticism from the west but at the same time it illustrates deeper problems. Exports dropped 17.5% in January from a year earlier but imports plunged 43.1% according to numbers from the Chinese Customs Bureau reported in the Telegraph  newspaper today. The drop in imports is partly a decline in commodity costs but is also a reflection of a significant drop in domestic consumption as domestic demand has failed to pick up the slack left by falling exports. Exports to the European Union fell by 17.4% and those to the USA by 9.8%. Shipments of electronics dropped 21%, steel slid 32.5% and toys declined 14.7%.

Protectionism is beginning to manifest itself in various ways. The ‘Buy America’ clause in the Obama stimulus package is one example but even more blatant is India’s ban on all Chinese made toys, an industry already badly hit by falling world demand. China makes three quarters of the world’s toys but a combination of fears over product safety and a global recession forced the closure of half the Chinese producers by the end of 2008. Global trade relations won’t be helped if recommendations by the Chinese Ministry of Finance research department that China should allow its currency to weaken from the current 6.84 to 6.93 to support export industries is adopted ” expect howls of protest from both Brussels and Washington if that comes to pass.

Export tax incentives have already been increased on December 1 and there are rumors of further changes being considered to include support for metals producers among other industries. Textiles have been supported with three increases since the summer of 2008, the most recent on Feb 1.

–Stuart Burns

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