{"id":78263,"date":"2015-09-15T04:09:53","date_gmt":"2015-09-15T08:09:53","guid":{"rendered":"http:\/\/countingpips.com\/?p=78263"},"modified":"2015-09-18T07:27:32","modified_gmt":"2015-09-18T11:27:32","slug":"chinas-bleak-trade-data-should-worry-you","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/09\/chinas-bleak-trade-data-should-worry-you\/","title":{"rendered":"China\u2019s Bleak Trade Data Should Worry You"},"content":{"rendered":"
September 15, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"China's<\/p>\n

By Shelley Goldberg<\/a>, Senior Correspondent<\/em><\/p>\n

Recent trade numbers from China, the world\u2019s second-largest economy, reinforced the concern that the country\u2019s economy has some major cracks in its framework.<\/p>\n

Data released on September 8 is painting a grim picture for one of the world\u2019s major economic forces.<\/p>\n

Slumping imports and exports\u00a0in China\u2019s overseas shipments declined 5.5% in dollar terms from the prior year on signs of weak demand from overseas buyers, while imports plunged by 13.8%.<\/p>\n

China\u2019s trade surplus swelled to $60.2 billion in August, nearly matching the record monthly surplus set in February.<\/p>

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These statistics are exacerbating the existing fear of a more severe slowdown in China<\/a>, and even the possibility of a hard landing.<\/p>\n

In fact, last Monday, China\u2019s statistics agency lowered its estimate for gross domestic product in 2014. The agency reported that the economy had expanded by 7.3% in 2014 compared with the 7.4% previously reported.<\/p>\n

But many are questioning the viability of even these lower numbers.<\/p>\n

Volatility has intensified throughout the global markets. This data is only the latest in a laundry list of disappointing economic news out of China. Industrial production, financial services, factory, real estate investment, and even the service sector have contributed to the world\u2019s loss of faith in the Chinese economy.<\/p>\n

A currency devaluation, at least five interest rate cuts, and the government\u2019s bungled handling of a stock market bailout have failed to shore up the sagging economy. Now, there\u2019s worry that the apparent confusion in Beijing could be a sign of more trouble to come.<\/p>\n

It\u2019s a Structural Thing<\/h2>\n

The move we\u2019re seeing is structural rather than cyclical, and it\u2019ll likely play out for years to come due to a number of macro factors.<\/p>\n

First, the developed markets have reached a saturation point in terms of the amount of resources they require, as reflected in lower global commodity prices across the complex, from energy to metals to agriculture.<\/p>\n

As the world becomes more efficient \u2014 not only in production but in the consumption of natural resources \u2014 the global rate of consumption growth is rising at a slower pace, even while the world\u2019s population continues to grow.<\/p>\n

In developed markets, there\u2019s a growing emphasis on efficiency, renewable energy, and recycling.\u00a0Fuel-efficient cars, power-efficient homes and businesses, and efficient farming are all reducing the consumption of resources along with what\u2019s called the \u201ccircular economy,\u201d or putting back into the cycle that which we\u2019ve already taken out.<\/p>\n

In less-developed nations, this practice will take time to materialize (decades in some cases), but we\u2019re already seeing signs of it coming to fruition.<\/p>\n

Secondly, there\u2019s a labor and demographics issue.<\/p>\n

Chinese working labor peaked in 2014, partly due to the imposed one-child policy from the 1970s. Wages became the number one problem as China was forced to compete with cheaper labor overseas from countries like Vietnam and Mexico.<\/p>\n

Meanwhile, as growth rates in Japan, the United States, and Europe have all slowed, those countries\u2019 economies have become less consumer oriented. Thus there\u2019s less demand for imports of everything along the production chain, from raw materials\u00a0to parts to finished goods.<\/p>\n

It\u2019s for these reasons the Chinese government aims to transition from an export-led economy to a retail consumer-driven one. But this isn\u2019t an easy transformation, as it takes time to change the mindset of almost 20% of the world\u2019s population.<\/p>\n

In the meantime, production for many Chinese businesses has ground to a halt. Abandoned \u201czombie\u201d factories are surfacing and workers have stopped receiving paychecks.<\/p>\n

The likely result will be a disgruntled population and uprisings similar to the Arab Spring of 2010 and 2011 and the more recent riots in Greece.\u00a0Such signs have already been exhibited in many cities and villages in China over the last few years.<\/p>\n

Thirdly, while state-directed capitalism helped lift millions of people out of poverty, the model still has its limits due to its emphasis on asset creation and growth at any cost and a tenuous regard for return on capital. The result was a negative return on assets in many industries, steel being a perfect example.<\/p>\n

China not only produces 50% of the world\u2019s steel, it also consumes vast quantities of iron ore, thermal, and coking coal. The strategy led to a dangerous overcapacity as the investment spigot kept flowing regardless of the return expected on incremental capital formation.<\/p>\n

Money Walks<\/h2>\n

Meanwhile, China is burning through its huge stockpile of foreign exchange reserves at the fastest pace in history, as it seeks to prop up its currency and abate the rising tide of money exiting the country.<\/p>\n

China still holds the world\u2019s largest cache of foreign reserves \u2014 a whopping $3.56 trillion as of the end of August, according to government statistics.<\/p>\n

Yet the amount has decreased steadily from a peak of close to $4 trillion in June 2014. Slowing economic growth encouraged investors to direct money overseas in search of higher yields.<\/p>\n

As a result, the People\u2019s Bank of China (PBOC) was forced to sell huge amounts of assets from its foreign reserves to maintain the strength of the renminbi<\/a>.<\/p>\n

The exodus of investors\u2019 money accelerated after August 11 when the PBOC made the surprise move to devalue the renminbi by the most in over 20 years. China\u2019s foreign reserves dropped by $94 billion last month, according to Moody\u2019s, as the central bank aggressively defended its currency.<\/p>\n

The New Normal<\/h2>\n

Eventually, investors must come to realize that slower growth in China will be the new normal, just as they did with Japan, and now, most likely, with the United States.<\/p>\n

Nevertheless, positive signs are on China\u2019s horizon. First, a weaker currency makes China\u2019s products cheaper for overseas buyers. That should help exports.<\/p>\n

While economists feel the initial 3% to 4% drop in the currency\u2019s value against the dollar would have a limited impact, the effect could be augmented if the currency yields to market pressure for further depreciation.<\/p>\n

On top of that, Premier Xi Jinping has tendentiously introduced policies aimed at combating corruption, opening up the banking sector, and giving markets a free hand.<\/p>\n

Over the last three to four months, Jinping has taken measures that don\u2019t solely control or please the equity markets, but that support the real economy. He has also worked to create rescue funds, go after people who short the market, and cut interest rates, all of which focus on shoring up the capital markets.<\/p>\n

In my option, we should keep new investment opportunities in China at arm\u2019s length for the near term. Then, tread with caution and look for opportunities focused on changing demographics and strong links in the trading partner chain.<\/p>\n

Good investing,<\/p>\n

Shelley Goldberg<\/p>\n

The post China\u2019s Bleak Trade Data Should Worry You<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Shelley Goldberg, Senior Correspondent Recent trade numbers from China, the world\u2019s second-largest economy, reinforced the concern that the country\u2019s economy has some major cracks in its framework. Data released on September 8 is painting a grim picture for one of the world\u2019s major economic forces. Slumping imports and exports\u00a0in China\u2019s overseas shipments […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-78263","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/78263","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=78263"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/78263\/revisions"}],"predecessor-version":[{"id":78284,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/78263\/revisions\/78284"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=78263"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=78263"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=78263"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}