China Trade Recovers As World Economies Wallow In Debt, Unemployment

China posted more extraordinary trade figures for January. Exports for the month rose 21% and imports were up 86%. Each of the figures is an improvement on the same measurements in late 2009.

Economists claim that the news will put pressure on Beijing to let the value of the yuan rise, but the Chinese government has turned a deaf ear to these requests in the past.

The reason that experts will be puzzled about the trade figures is that it is hard to understand where the Chinese exports are going.

There is very little sign that imports across the US, UK, EU, and Japan are up by large amounts. Unemployment is still high in these regions and consumer access to credit is low. Even consumers who are able to spend are in most cases reluctant to do so while a recovery is uncertain.

There are several explanations for the China export improvement. One is that the world’s largest economy is sending a large part of its goods to other nations which are in the midst of relatively robust recoveries. This would include India and Brazil. It is questionable that these countries are large enough to account for most of the improvement in the China export numbers.

Another reason for the jump is that Chinese manufacturers are selling their products at “below cost” prices which they can do because of financial support from the communist central government. These goods many be attractive to customers in struggling economies, but a trade war between China and the US is already in early stages and the dumping of products will only make that friction worse.

The rise in imports in China is even more of a mystery. Consumer spending in the country must be impressive and that raises the issue of where consumers are getting their money. The answer is almost certainly that the liquidity pushed into the economy by a $585 billion stimulus package is flowing through banks and into the hands of consumers and businesses. If the is the case, the activity is not likely to be sustainable beyond the end of stimulus activity. The availability of capital would also accounts for bubbles in real estate and equity prices.

China’s trade numbers are probably a false signal based on the nation’s habit of helping its consumers and selling products abroad at below market prices.  Those actions will almost certainly have unpleasant consequences.

Douglas A. McIntyre