11 March 2009

Conflicting Signals About the Chinese Economy

This article is excerpted from the 11 March 2009 edition of “The New York Times”.

China’s exports plunged by a record 25.7 percent last month but investment spending surged as the country’s stimulus program took hold, Beijing authorities said Wednesday, providing conflicting signals about the health of the nation’s economy.

The data sketched a picture of a country that was spending huge sums at home in an attempt to offset ever-weakening demand overseas — with no conclusive sign of whether the stimulus program will succeed.

Economists and investors around the world have been puzzling over whether China can escape the worst of the global slowdown. The uncertainty has produced sometimes violent swings in stock markets and particularly commodity markets with each contradictory hint of China’s economic health and speculation about further government spending.

Investors in China seemed uncertain how to greet the latest data, with stock prices bobbing up and down in Shanghai before closing down 0.9 percent. But commodities and currency traders gave more emphasis to China’s export data and concluded that the economy may be weaker than previously thought; copper prices fell on expectations that China may need less, and so did the value of the currencies of resource-rich countries like Australia.

Exports have been a pillar of China’s impressive economic rise in the last three decades, and the sharp drop in February compared with a year ago was unexpected — economists had been predicting little change….

Goldman Sachs predicted that exports would not recover quickly. “We believe the downside risks of weaker external demand have just started to show up in China’s exports growth and will likely weigh on China’s overall activity growth,” Goldman’s economists said in a research note….

The growth in fixed-asset investment was larger than expected and marginally higher than its average for all of last year. But the averages concealed a significant shift in what is being built in China, as the government moved to replace crumbling real estate….

… China’s imports are also shrinking, falling 24.1 percent in February. One consequence of China’s decreasing trade has been a withering of its trade surplus, which fell to $4.84 billion last month, the smallest in nearly four years.

Mingchun Sun, China economist for Nomura International, lowered his forecast for China’s trade surplus this year to $155 billion, compared with $295 billion last year. But because so much of China’s exports consists of reprocessed imports — like assembling DVD players from imported computer chips and other foreign components — the Chinese economy may still reach the government’s target of 8 percent growth, he said….

[T]he precise effect on Chinese demand for American debt, and the composition of that demand, remains unclear. American data shows that China’s central bank was buying slightly more Treasuries late last year and slightly fewer bonds from Fannie Mae and Freddie Mac.

At the same time, traders in Hong Kong say that there are some indications that China may be increasing slightly the proportion of dollars in its nearly $2 trillion hoard of foreign exchange, at the expense of the weakening euro. …

Hidden in the gloom over exports were a few rays of hope. Shoe exports were down only 2.3 percent in the first two months of this year compared with the period a year ago, the General Administration of Customs said….