China hit by massive drop in exports

(FT, March 11) Chinese exports slumped 25.7 per cent in February as the collapse in global demand caught up with the country’s exporters and overshadowed a sharp rise in domestic investment. China’s exports have decreased since November, but until last month the rate of decline had been much slower than in other Asian countries with large export sectors.

Economists said the headline figure for last month, which was already much worse than expected, probably masked an even steeper decline given that there was a shorter number of working days in February 2008 due to new-year holidays.

“Weakness in final demand has fed along the Asian supply chain and is only now having its full impact on China,” said Mark Williams at Capital Economics. Taking into account holidays, he said, the real decline in last month’s exports was around 40 per cent.

If such a rapid deterioration in exports continues the government will face ever-louder demands from Chinese companies to depreciate the currency.

However, analysts said that if the drop in the trade surplus continued, having collapsed from $39.1bn in January to $4.84bn last month, international pressure to move in the other direction and appreciate the renminbi would weaken. Few economists expect China to move into a trade deficit this year, however some said they might scale back projections for the size of the likely trade surplus.

After dropping 43 per cent in January, imports fell by 24 per cent last month, which some analysts said was a sign that the government’s fiscal stimulus measures were beginning to have an impact.

Figures for fixed asset investment for the first two months of the year were also much higher than expected, rising 26.5 per cent against the same period the year before, compared to 21.9 per cent in December.

Within those figures, transport investment – one of the priorities of the fiscal stimulus plan – rose 210 per cent over the same period the year before, while property investment was up only 1 per cent, a sign of the continued weakness in the housing market.

Andy Rothman, economist at CLSA in Shanghai, said that government spending on infrastructure was likely to accelerate further over the next few months. “We expect this program to gain economic traction in March or April when project offices will have been established,” he said. “By late March, it is warm enough to dig holes and pour concrete across most of the country.”

As well as dramatic increases in bank lending in recent months, the government said cement output increased 17 per cent in January and February and car sales rose 11 per cent in February according to JD Power, encouraging some observers to predict that domestic demand was already recovering.

“China will still have one of the highest, if not the highest growth rate of any major country in 2009,” said Richard Yorke, chief executive of HSBC in China. Although a lot of the fiscal stimulus measures announced by the government were already in the budget for the next two years, “that is one reason why the Chinese economy will be able to implement the stimulus package so rapidly, because many cities and provinces had already planned for infrastructure projects over the next few years”, he said.