Exports And The Problem With The “China Miracle”

The rate at which China’s exports are dropping has slowed and that means its economy is growing well. Exports and manufacturing account for too large a portion of GDP for that not to be true.

Exports declined 15.2% to $115.9 billion from a year earlier the best showing in 11 months. Bloomberg’s survey of analysts expected a drop of 21%. The news goes nicely hand-in-hand with the seeming success of China’s $585 billion stimulus package which has helped consumer and business demand within the world’s most populous nation. Exports and consumer demand have set up the economy to move back to growth rates approaching 10%.

There are only a few problems.

Oil moved to over $75 a barrel for the first time this year and gold hit another high. The prices for a number of metals and agricultural commodities are also at or near 2009 peaks. The inflation in those prices is likely to be stoked by a rapid rise of manufacturing and infrastructure building in the BRIC nations and other, smaller economies in Asia.

The trend in commodities prices will leave China squeezed between internal inflation and a need to pass along higher prices for its manufactured goods to keep its factories profitable. Wages for factory workers will likely have to go up to match an inflated cost of living.

The problem with passing along prices to the West is that the recovery in the West is still fragile, if it is real at all. The likelihood that American and European merchants can charge a great deal more for the products that they sell is low. China will face higher costs of its manufactured goods but will be without markets that can stand to pay more for imports.

China’s success has begun to have two heads and one is a sharp increase in material costs and oil.

Douglas A. McIntyre