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The Rupp Report

The Rupp Report: Problems In China

Jürg Rupp, Executive Editor

China's exports and imports fell surprisingly in June 2013. According to reports from the Chinese Customs Administration, exports sank by 3.1 percent compared to June 2012, while imports decreased by 0.7 percent. It was the first export decline since January 2012. The unexpected 2-percent decline in foreign trade in June is — according to some newspapers and reports — a sign that the world's second-largest economy is losing steam. But is it really?

So-called experts expected an export growth of 3 to 4 percent in June. With the 3.1-percent decline to US$174 billion, exports in June were below the 10.4-percent growth for the first half of the year. Equally, the 0.7-percent import decline down to US$147 billion was miles away from the 6.7-percent plus for the first six months. In the first six months, total Chinese foreign trade rose 8.6 percent compared to the year-earlier period. Exports to Europe dropped by 8.3 percent, and those to the United States by 5.4 percent. Customs officials explained the decline of foreign trade in the second quarter was the result of weak global demand, the stronger exchange rate for the Yuan, increased labor costs and various trade tensions.

What's Going On?
If one believes in the official reported figures, China seems to be in a bad mood. Days ago, the partly deliberately administrated bottleneck, or curtailment, of liquidity in the banking system was causing several sleepless nights among some financial jugglers. However, officials mentioned that this situation is not a Chinese variety of the American banking crisis of autumn 2008. Now, the comments of the augurs are growing uncontrollably: China is on the way down, the Chinese dragon is sick, and so forth. An abrupt drop in exports and a disappointing import demand could foreshadow a weaker growth of the second-largest economy. But why these negative comments?

Nothing!
It is the other way around: Official statements by high officials could indicate that the weaker growth is deliberately accepted. Prime Minister Li Keqiang said China must restructure and modernize its economy in order to achieve a healthy development. The macroeconomists have to think long-term and ensure that the rate of growth, employment and other indicators "do not slip below our lower limits and do not exceed the upper limit of our inflation." Those are strong words.

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Yes, China's foreign trade statistics are distorted. Customs has taken actions since May against falsified export declarations to bring some "hot money" into the country. How does it work? Exports are invoiced at much higher prices than the real value. With this procedure, one can bypass the strict rules for capital inflows. The result is the fact that trade statistics were artificially inflated.

Slowdown Or Consolidation?

The most recently published figures are therefore likely to give a more realistic picture that indicates a further downturn of the global and domestic demand in terms of the Chinese economy. Or one could also speak of some consolidation, which is probably a better explanation in the long term. For a long time, China has thrown money at the markets to further boost its economy. Apparently, this strategy has changed to allow for some sanity, which might offer the same for some Western countries. Now again, the same experts that were wrong in the past have started to make predictions: They expect that second-quarter growth will be at 7.5 percent, and therefore below the 7.7 percent in the first quarter. In 2012, the Chinese economy grew by 7.8 percent, compared to the previous year. This percentage was the lowest one since 1999.

It Is Consolidation
On the brink of a Sino-U.S. economic dialogue in Washington, Chinese Finance Minister Lou Jiwei prompted some confusion with a statement. He was asked if there is any tolerance limit for economic growth. Lou replied that there is no doubt that China will achieve its growth target. However, the target of 7 percent would not be the lowest limit; a growth of 6.5 percent would be no big problem either.

Lou's statement provoked some excitement in two directions among market observers: On the one hand, in March, the government had set a growth target of 7.5 percent in its outlook for 2013. In recent years, this guideline was exceeded and had always been regarded as a minimum target. However, a tacit reduction of a central guideline value would be at the least highly unusual. On the other hand, the value of 6.5 percent, which was considered to be acceptable to Lou, left the players listening attentively. Up to then, the Chinese government never talked about lower figures in public. This accumulation of so-called negative messages about the transition of the Chinese economy and the desire of certain short-term-oriented actors to present stimuli led many observers to speculate about the government's current policy track.

Different Point Of View
However, not all augurs are of the same opinion: A survey among German companies about the satisfaction with the business in China, which was presented recently by the German Foreign Trade Chamber in Beijing, showed a surprisingly optimistic judgment. Significantly more members than in the previous year estimate the business prospects in China to be positive, and are satisfied with the business. Like comparable surveys, the conclusion is always the same: The competition in China and the cost of labor are rising, and the long-running problems to protect intellectual property are an evergreen. Yet, machine builders, such as the textile machinery manufacturers, are certainly less optimistic than other companies.

But Who Is Moaning?
For the neutral observer, some of these comments are astonishing. The whole world knows that with an endless printing of money, the economy is not on a truly healthy path, but is more an artificial blow-up of the domestic industry. But why are some people arguing about this tiny slowdown of the Chinese economy? Probably, they are more dependent on the prosperity of the Chinese economy than the other way around, on their exports to the Middle Kingdom. If one compares the gross domestic product (GDP) of some Western nations that have zero growth, or 0.5 to 1.0 percent, with the GDP of China, the answer is clear.

In spite of the decelerated growth, the central bank is not willing to further increase the amount of money to open the spigot. This is in strong contrast to some Western economies, in which money is still printed in unimaginable amounts. The current result of this behavior is well-known. The Chinese go a different way: Another reason for the unwillingness to print more money is the fast increase of inflation in June. Food prices increased 21.7 percent in comparison to last year. It's much easier to pillory someone or to make him do his homework. Are there truly some problems in China? No, not really.

July 23, 2013