Global Slowdown and Chinese Exports

From the FT this morning:

China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.

A global economic slowdown stemming from problems in the US subprime mortgage market and the resulting credit squeeze “will be the biggest challenge to China’s economy next year”, a report from the ministry’s policy research department said.

The report is Beijing’s first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has “decoupled” from the US. “If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders,” the report said.

Exports account for more than a third of China’s economic growth and 10 per cent of overall GDP, a radically different situation from just four years ago, when exports contributed nothing to headline growth figures.

Huang Yiping, chief Asia economist for Citigroup, said: “I agree with the government that a marked slowdown in the US would be very bad for China.

“We haven’t seen overcapacity or a so-called hard landing in China because it has been able to export all its excess capacity until now.”

The ministry’s report was pessimistic about the chances of avoiding a US and global slowdown, pointing out that although central banks in the US, Europe and Japan had taken numerous steps to alleviate the credit crisis, the situation had continued to deteriorate and “panic in the credit market remains”.

The US receives a fifth of all Chinese exports, making it the second-largest destination for Chinese-made goods after the European Union.

China’s central bank estimates that every 1 per cent drop in US economic growth translates into a 6 per cent fall in Chinese exports.

Exports to the US have slowed significantly since the start of the year, dropping from a 20.4 per cent year-on-year rise in the first quarter to a 15.6 per cent increase in the second. Growth fell to 12.4 per cent in the third quarter following the eruption of subprime loan problems.

The ministry said a combination of falling US interest rates and rising Chinese rates was limiting Beijing’s ability to rein in soaring property and stock market prices and inflation was running at its highest level in a decade. It also noted that continued turmoil in global financial markets could encourage greater capital inflows to China, straining the country’s financial and regulatory system and increasing inflationary pressure.

While potentially devastating for Chinese exports, a US slowdown could help reduce China’s soaring trade surplus, which hit a monthly high of $27bn in October, having increased more than 59 per cent to $212.4bn in the first 10 months from a year earlier.