How Is China Really Doing?

10/21/2011 8:30 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

Everyone is hanging on China’s growth numbers, whether it’s imports, exports, trade surplus, you name it. It’s time to look beyond the fears and desires of the West, writes Jim Trippon of Global Profits Alert.

With the recent news that China’s trade surplus was lower in September, many have observed that China’s momentum in this area is slowing down.

The export advantage China has routinely had was lower in September, as its trade surplus was $14.5 billion. August figures showed a trade surplus of $17.8 billion, while July saw a $31.5 billion surplus.

China has been pressured by the West—notably the US—on the currency front recently, as the US has accused China of artificially holding down the value of the renminbi. An undervalued renminbi, or yuan, contributes to being able to sell goods globally in exchange for higher-valued currencies such as dollars.

The US has maintained that China’s undervalued currency is a large factor in the huge trade gap between China and the US, and has proposed tariffs on Chinese goods unless China will allow the value of its currency to rise. China, for its part, maintains that it is allowing the value of the yuan to rise gradually, and that there are other systemic reasons in the US for its lagging trade balance with China.

A look at more of the latest trade numbers shows that China’s imports for September were $155.1 billion while its exports were $169.6 billion. Although China’s trade surplus fell from August and July, which was the highest in two and a half years, September’s exports may have reached a new high.

The surplus for China trade with the US rose to $19.9 billion, an 11.2% increase year-over-year. And China trades even more with Europe than it does the US. China’s trade surplus for September with the European Union was $12.9 billion, a decline of 7.2%.

So although China’s trade surplus has decreased, it’s clear that it’s still putting up impressive numbers in its trade activity, as its absolute export number shows.

NEXT: The Three Pressures

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The Three Pressures
China is currently facing economic pressure on three main fronts. Most noticed is the political pressure from the US regarding the currency.

The yuan, which had actually risen against the US dollar slightly in the last year and a quarter, was deliberately weakened to 6.37 to the dollar from 6.35 by China as a recent protest against the US Senate passage of the Currency Exchange Reform Act. There had been yuan appreciation to as high as 6.1 earlier in the year.

Beyond the currency pressure, China has been fighting its own inflation pressures. With its annual growth rate still in the 9.5% range, China has been attempting to dampen its too-rapid growth via interest-rate increases and other measures to bring down its growth rate to a more manageable level.

China’s benchmark interest rate was reported at 6.56% after a quarter-point increase in July. This was the third increase this year, the fifth in the last twelve months.

The inflation rate for September was 6.1%, while in August it was 6.2%, both down from a three-year high in July of 6.5%. China would like to see an inflation rate at 4%, which is roughly what the rate was at the beginning of 2011.

The third pressure China’s economy faces is the global slowdown in demand. As an export economy, China relies, of course, on selling its products to its trading partners.

This is where the recent figures on the trade surplus come into play. The world’s financial markets read the lower trade-surplus figures for August as confirmation that global growth of the economy is indeed slowing dramatically.

This shouldn’t have been any surprise. The US and Europe, the two largest trading partners with China, have been experiencing sluggish growth in the case of the US, and stagnant growth in Europe, as the European Union grapples with Greece’s debt.

As a sidebar to the slowing of the global economy, some in the financial markets were looking for Chinese demand to help pull the world’s economy out of its doldrums. This might even be called a fourth pressure, and is ironic, because much of the world is looking to an exporter to keep its importing robust.

Despite its status as an export country, China’s economy has supplied certain demand in the last couple of years: iron ore for its steel industry, as well as natural resources for energy such as coal and oil. The markets looked at China’s potential growth slowing and have been worried about this demand slacking off.

What to Expect
China will no doubt still be under pressure regarding its currency, although the likelihood of a trade war with the US is still, at least hopefully, remote. That presumes that cooler heads will prevail, particularly in the US.

As far as the complex picture of the global economy, China’s trade is still doing quite well, thank you, so the picture is far from gloomy there. The key is if all the pressures sort themselves out more gradually, rather than through wrenching changes.

If things happen gradually, China and all the global economies will be better off than going through the difficulties of the equivalent of economic shocks.

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