*****Imports to China crash 43.1% percent in January*****

Market Watch reports that China's January exports slump at fastest rate since 1998.

(emphasis mine)

China's January exports slump at fastest rate since 1998
By Chris Oliver
Last update: 11:45 p.m. EST Feb. 10, 2009

HONG KONG (MarketWatch) -- China's exports contracted at the fastest rate in more than 10 years in January from the corresponding month a year earlier, while imports fell by an even wider margin. Exports declined 17.5% to $90.45 billion after declining 2.8% in December, according to data released Wednesday from the General Administration of Customs. The decline was the biggest in percentage terms since October 1998, according to calculations by J.P. Morgan. Imports retreated 43.1% to $51.34 billion, following a 21.3% decline in the previous month. The trade surplus widened to $39.1 billion from $38.98 billion in December. Analysts said the figures misrepresent the true trade picture because of the annual Chinese New Year holiday, the most import on the Chinese calendar, which fell in late January. Discounting the impact of the holiday, analysts said the emerging story still was one of deterioration in trade. "The sharp contraction in imports reflects slowing domestic investment and lower demand for intermediate goods, and likely signals continuing export weakness in the future," J.P. Morgan said in research note emailed to reporters Wednesday

My reaction: Imports to China keep plummeting, as expected.

1) Imports to China fell 43.1% to $51.34 billion, following a 21.3% decline in December.

2) Imports would have fallen even further this January if it wasn' t for the Chinese New Year holiday, the most important period on the Chinese calendar, which fell in late January (last year it fell in February).

3) The trade surplus widened to $39.1 billion from $38.98 billion in December. This is unsustainably high.

4) Chinese Exports declined 17.5% to $90.45 billion after declining 2.8% in December. So, while China is still running record deficits (which require money printing), it is getting less and less benefits from it.

5) China' s shrinking exports is evidence of supply destruction. Unable to pass on higher costs, Chinese exporters are going out of business.


Conclusion: China' s falling imports and record deficits are a story I have been following for close to 2 months. Here are two of my previous entries on the subject to bring new readers up to speed.

I first reported on China' s record trade surplus last year when Imports to China crash 17.9 percent in November:

I realized today that if demand for goods from developed nations like US is truly falling faster than demand for goods from emerging markets, then the best place to verify this trend would be to look at what's happening with China's imports. With this in mind, I looked up this Herald Tribune report about an unexpected drop in China's imports and exports.

Unexpected drop in China's imports and exports
By Andrew Jacobs and David Barboza


According to statistics released by the Chinese government Wednesday, exports fell 2.2 percent from November 2007 to November 2008 the largest year-over-year monthly decline since April 1999.
...
Imports to China also plunged sharply last month, falling 17.9 percent and widening China's trade surplus to a record $40 billion, from $35.2 billion in October.

In a survey of more than a dozen analysts last month, no one predicted that imports would decline. The drop in exports stretched across all major trade commodities with steel leading the downward spiral.


My reaction:
Everyone is focusing on how much Chinese exports dropped, but that is missing the real story: Chinese imports fell 17.9 percent in November and China's trade surplus widened to a record $40 billion! Meanwhile exports only fell 2.2 percent!

This confirms everything I have been writing about! To put it in perspective,
China's trade surplus was $262 billion for all of 2007. If we multiply China's $40 billion November surplus by twelve months, we get a $480 billion annual trade surplus, nearly twice the 2007 number! This trend is likely to get worse as time goes on, and China's trade surplus in 2009 is likely to approach 1 trillion dollars!

Furthermore, it is important to realize that since China's exports fell 2.2 percent, the benefits of buying billions of dollars to undervalue its currency are also falling.

Is China going to continue its dollar peg while its trade surplus skyrockets and its exports fall? Do I even need to ask such a dumb question? Of course they won't! It is no coincidence that, over Christmas, China announced its intentions to make the yuan an international currency! You even have the Chinese central bank quoted as saying that,
"The US dollar is unlikely to be stable next year". How much more evidence do you need to figure out where all this is going?

China's plunging imports is one of the biggest stories of the year as far as I am concerned. It seals the dollar's fate.


In my article on Hyperinflation in China, I explained why China' s record trade surpluses are bad news for the dollar:



The US's trade deficit requires China to print money!

The little discussed downside of the dollar peg is all the money China has to print to maintain it. China's Central Bank puts the extra dollars it receives from its trade surplus into its growing foreign reserves and then prints yuan to pay Chinese exporters. This results in an increase in China's base money supply by an amount equal to the increase in its foreign exchange reserves.
While China's ability to keep accumulating US reserves is endless, its ability to keep its money supply under control is not.

The true threat to the dollar peg

If there is one development which could force China to drop its dollar peg, it is out of control inflation. Rampant inflation would result in millions of citizens starving and would create widespread social unrest. Keeping food prices low is a matter of political survival for Chinese authorities. So, facing the choice between losing their grip on power and losing the dollar peg, they will not hesitate for a second to sacrifice the dollar to save their own skin.



China is running record trade surpluses

China's imports are crashing much faster than its exports. In December, Chinese imports fell 21.3% while exports fell only 2.8%. As a result, China has been running record trade surpluses these last three months: $35 billion, $40 billion, and 39 billion.

The reason for China's surplus is obvious when you think about it. Consider the following list of goods a country can exports and ask yourself what would hold up best during a severe global economic downturn.

*** Commodities (Oil, gas, steel, etc)
*** Capital goods (Airplanes, Caterpillars, Machinery for new factories, Machinery for new mining/oil exploration projects, etc)
*** Durable goods (SUVs, CARs, appliances, business equipment, electronic equipment, home furnishings, etc)
*** Luxury goods (brand name products, designer clothing, artwork, etc...)
*** Cheap consumer goods (everything you buy at Wal-Mart)

The answer is that the demand for cheap consumer goods will hold up better than anything else. This can easily be seen in the retail sales this holiday shopping season. Wal-Mart, which imports 70% of its products from China, was the only retail to post a year-on-year increase in sales. So while the world economy might be imploding spectacularly, demand for Wal-Mart's cheap Chinese goods is holding up quite well. The implications of this are that while China's exports will fall, they will fall less than those of any other country.

The current trade surplus is still completely unsustainable. If China's continues running a 40 billion dollar trade surplus all year, its base money supply will double by the end of 2009. Also, since China has halted the appreciation of the yuan, its trade surplus is unlikely to shrink as demand for cheap consumer goods is set to remain strong.

This entry was posted in China, Currency_Collapse, News_Developments, Trade_Deficit. Bookmark the permalink.

0 Responses to *****Imports to China crash 43.1% percent in January*****

  1. Anonymous says:

    Eric,

    I just wanted to say how much I appreciate your willingness to share your keen insights. Your blog is now one of my daily stops.

    SteveR

  2. Anonymous says:

    Same here, I also check it daily. Thanx for all the work you put into this

    -bd

  3. Anonymous says:

    Your viewpoint on China's limit to print money (in order to defend the peg) under control is new to me, but certainly makes sense.

    Thanks for your effort.

    Alan Leung

  4. Leon says:

    Eric,

    Your theory of China printing new RMB in exchange for trade surplus is completely flawed.

    Here is why.

    Let's simplify FX reserves to two components: trade surplus and capital inflow.

    trade surplus cycle:
    shoe maker makes USD100, exchange it from local bank for RMB700, local bank goes to central bank to exchange this USD100, note, central bank DOES NOT print RMB700 for this, instead there are several things that it could do, let's use the simplest, IOU. central banks issues RMB700 IOU to local bank and can take RMB700 from local banks reserve or cash asset for this exchange, then central bank gives this RMB700 in exchange for local bank's USD100. NO EXTRA MONEY IS CREATED!

    Capital inflow is bit different, but nonetheless, it does not create fresh new money.

    Your points are refreshing, although wrong on this and other topics. I look forward to see your findings in the future.

  5. Leon said...
    NO EXTRA MONEY IS CREATED!
    Money IS created, but sometimes it is then sterilized, temporarily preventing money supply from expanding.

    shoe maker makes USD100, exchange it from local bank for RMB700, local bank goes to central bank to exchange this USD100, note, central bank DOES NOT print RMB700 for this, instead there are several things that it could do, let's use the simplest, IOU.

    You got this wrong. China's central bank never issues IOU to exporters. In your example, the central bank has two of options to deal with shoe maker:

    1) Unsterilization currency intervention. Central bank credits the farmers account RMB700. This is a direct increase of the base money supply by RMB700.
    2) Sterilization currency intervention, central bank credits the farmers account RMB700, but then takes step to prevent money supply from expanding. The most commen ways of sterializing currency interventions are:

    A) Selling sterilization bills (what you are describing I think)
    B) Raising reserve requirements of banks.

    Recently, China has reversed its sterilization effors on both accounts. It is selling less sterilization bills and it is lowering bank reserve requirements.

    For more info, read these entries:

    Hyperinflation will begin in China and destroy the dollar

    How China sterilizes its currency interventions

    The Cost of China's Financial Repression and Sterilization

    -----

    currency intervention = actions taken by central bank to maintain currency peg
    Sterilization currency intervention = a currency intervention where central bank takes actions to prevent money supply from expanding
    Unsterilization currency intervention = a currency intervention where central bank allows money supply to expand.

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