April 15, 2016
By Jacob L. Shapiro
Recently released data has been celebrated, despite explaining little about the Chinese economy.
Summary The reported growth in China's exports should not be taken as a sign that the Chinese economy is stabilizing. This single statistic is very misleading if not placed within its proper context. A deeper inspection of the recent growth actually reveals that the world's second largest economy continues to face serious and complex challenges.
New trade data released April 13 from China’s Bureau of Statistics has sent markets around the world trending upward. The news was greeted with confidence from investors, from the German DAX to the Japanese Nikkei, which were up over 3 percent and 6 percent respectively over the last two days. Reuters described the 11.5 percent year-on-year growth in exports as a “blistering” rate of increase. After nine straight months of decline in exports, the surprise numbers have been identified as a sign of potential stabilization in the Chinese economy. For a number of reasons, however, we tend to view such momentary market rallies with a certain degree of skepticism, particularly in this case.
The first reason we are skeptical is that, for the most part, we do not believe that any one data point by itself can reveal that much. A single month does not tell you if China is succeeding in its attempt to boost internal demand and consumption – in fact, even a year’s worth of export data in a vacuum can’t tell you about the underlying health of the Chinese economy. For one thing, it doesn’t take into account potential anomalies – such as a seasonal distortion due to the previous month’s Lunar New Year celebrations.
It also does not give you an answer to the more important question: Why have exports actually gone up? It is entirely within the realm of possibility (and perhaps probability) that China cut prices in order to boost exports. China does not include profits in these monthly reports, perhaps simply because such data is hard to collect from the entire economy, but also perhaps because it doesn’t want people to know. However, we do know for a fact that China has boosted its steel and steel product exports, much to the chagrin of an oversupplied global market. China exported more steel last year than any other country save Japan, and according to the Wall Street Journal, China’s steel companies would routinely undercut already deflated market prices by 20 percent to 50 percent. If China cutting prices is the reason its exports are up, suddenly what looks like a healing salve for the Chinese economy is actually indicative of much deeper problems.
Also, the particular statistic being cited as the most hopeful – the percentage change in exports on a year-on-year basis – is unhelpful in benchmarking how the Chinese economy is doing overall. Consider that at this time last year, China watchers opened the newspapers to reports of a 15 percent contraction in Chinese exports in March 2015, as compared to March 2014. So even if China’s exports increased by 11.5 percent from 2015 to 2016, we are still talking about an 11.5 percent increase on a total that declined by 15 percent the previous year.
A Reuters report pointed to the fact that imports decreased by less than expected, only 7.6 percent, as the real reason the numbers should be considered positive. But does that say more about outside expectations of a notoriously opaque economy or about the importance of a year-on-year percentage of import growth? Overall, Chinese imports are still declining, and it is not necessarily a positive sign that imports of copper and iron ore, for which there is an oversupply already in China, are not decreasing as quickly as projected. China may be oversupplied in these commodities because it is continuing to pour money into construction irrespective of actual demand.
The market rally may also reflect a general desire and in some circles a belief that China is simply going to go back to being the growth-oriented economic engine it has been for the better part of the last three decades. Even the debates about whether China is headed for a soft or hard landing denote some of this ambivalence. As we said back in February, this is a moot point. From our point of view, China has already landed. Reserves are shrinking, capital flight is increasing, unemployment is higher than most realize and could be surging and the old problem of non-performing loans is beginning to rear its head as well.
Years ago, Dr. George Friedman pointed out the challenges facing the Chinese economy. And yet, even while economic data began to accumulate that China was reaching the limits of its export-driven high-growth strategy, markets continued to remain bullish on China’s prospects. It has only been in the last year or two that the mainstream narrative has begun to shift appreciably, as more awareness of China’s underlying structural issues became more commonly known and accepted. We predicted that 2016 will be a year in which President Xi Jinping will increasingly consolidate power over the Communist Party and the People’s Liberation Army (PLA) in response to the potential backlash to these economic issues. However, we resist doomsday scenarios of the Chinese economy falling off a cliff just because exports decreased for nine consecutive months.
Despite the increased awareness of (and at times, like after the Chinese stock market crashed in January, outright hysteria over) China’s problems, much of the world is still accustomed to viewing China through a particular lens. There is a ready-made and well-developed narrative about impressive Chinese growth and China's path toward supplanting the U.S. as the world’s dominant economic power in the coming decades. Various researchers, consultants and think tanks helped for years to craft that narrative by citing particular economic statistics or arguments.
This is not to say that in the moment those statistics were wrong, or not the right ones to use. On the contrary, they may very well have been. The difference is that from our perspective, China is in a radically different place than it was a few years ago. For us, the various fluctuations and confusion coming out of the Chinese economy is the new normal. The old benchmarks for the Chinese economy may no longer be as useful as they once were in giving an accurate depiction of whether China is succeeding in its reforms or if it has been able to stanch the fears, and perhaps corruption, that last year resulted in an over $1 trillion decrease in reserves.
More important, from our perspective, is to understand the political dimension of this problem as it plays out. For example, we know that Chinese workers are losing jobs – the government is even whispering such things out loud. What happens to those workers? Will China continue to make progress in lifting its hundreds of millions of poor out of poverty without extremely high growth rates and with declining competitiveness of its exports? And if it can’t, because the economy isn’t generating the wealth necessary for the workers or for China to pacify them with money, where will those workers go and what will they do? Will Chinese state-owned enterprises begin to prioritize efficiency and profits – or will they be used by the government to give jobs to old soldiers who have been removed because Xi needs the PLA under control if his attempts to consolidate power are to succeed?
These are the questions we are constantly looking to answer about China. This week’s import/export figures are no more or less important than a number of other statistics. The numbers in this case do not tell us one way or another whether China’s economy is strengthening or weakening. They necessitate a model that frames them and puts them in an intelligible context. This model points us to some of the deeper questions that need constant monitoring – which we do for our subscribers every day.
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