China's exports slump amidst US demand crunch

Signs that the Chinese economy is sputtering mounted recently, in the form of dismally feeble trade data that fanned expectations that Beijing would soon step up its efforts to buttress growth before a key leadership transition this autumn.

China’s giant economy has emerged as a key driver of global growth, and hopes are high that rising affluence, urbanisation and development will help mitigate the weakness of the European and US economies.

The turmoil in Europe and the anemic pace of economic growth in the United States have, however, increasingly dragged down exports from China and other export-oriented countries in Asia, prompting rate cuts and other economy-bolstering steps from governments across the region in recent months. More steps are likely to follow.

Data released showed that the growth in overseas shipments from China had ground to a near halt in July, with exports up just 1 per cent from the same month a year earlier, far below expectations and well beneath the 11.3 per cent in June.

Imports, too, disappointed, with an increase of 4.7 per cent, underscoring that domestic demand had not been buoyed as much as hoped by efforts to foster bank lending and infrastructure work.

Other government numbers painted a similarly disappointing picture: Industrial production, retail sales and fixed-asset investment all grew less rapidly than economists had projected.

“Things really aren’t going China’s way,” Alistair Thornton, an economist at IHS Global Insight in Beijing, said in a note. “Those looking for signs of resilience in China’s economic data were merely disappointed yesterday, but they are going to be distraught today.”

Combined, the July data show that Beijing’s efforts to shore up growth in the face of the global downturn have so far proved insufficient, and that a much-anticipated growth pickup is unlikely to materialise for another few months. The central bank cut interest rates twice in quick succession in June and July, and has also progressively lowered the reserve requirement ratio for banks, freeing up more cash for lenders to extend as credit. Central bank data, however, indicated that those moves had not translated into as much new lending as hoped. Chinese banks extended 540.1 billion renminbi, or $85.86 billion, of new local-currency loans in July.

The amount was larger than during the same month last year, but fell short of the roughly 700 billion renminbi analysts had expected.

“There cannot be a sufficient infrastructure spending boost without stronger lending, and we expect Beijing to push banks to extend more credit,” said Dariusz Kowalczyk, an economist at Credit Agricole in Hong Kong. “Demand is still there, and the economy is still growing at between 7 and 8 per cent; it is not heading for a hard landing,” he said. But, he added, the poor external demand and softer domestic demand are likely to prompt Beijing “to roll out additional policy measures to turn the economy around.”

At the same time, lower inflation, which dropped to less than 2 per cent in July, has given the authorities more leeway to act now. Moreover, the leadership transition this year could provide extra impetus to step on the accelerator sooner rather than later. “It’s important for the political transition to take place in an environment of growth,” Kowalczyk said. “They will want to do more to make the economy feel better; they have that time pressure breathing down their necks, and it is logical for them to use more levers to move the economy.”

As a result, many analysts believe a further cut to the reserve ratio for banks is imminent; some also believe the central bank may lower interest rates, too, in a bid to ignite more growth.

More spending and a push to bolster infrastructure spending are also likely.
On Friday, the central bank set its benchmark daily reference rate for the renminbi at 6.3447 to the US dollar, its weakest level since late November.

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