China Exports Surge 46%, But Who Buys The Goods?

China’s exports rose 46% in February compared with the same month a year ago, underscoring concerns about whether its economy has begun to overheat. The Chinese customs agency, which made the announcement, also said that imports were up 45%.

The news raised the old lament that China should let its currency rise to make its goods more reasonably priced and to help balance trade values between the People’s Republic and the nations that buy its products.

More important than the yuan and China inflation question is the issue of where the manufactured goods go. The trade surplus of the world’s most populus nation moved to $7.6 billon last month, but there is very little evidence that consumer and business spending in Japan, the UK, EU, and US have jumped enough to accommodate all the Chinese production.

The data point to one of two conclusions. The first is that developed nations are still restocking inventories that fell in 2009 as companies in regions gripped by severe recession stopped buying manufactured goods to save money or because they had not access to credit. But, the rebuilding of inventories when it is not matched by consumer demand is by its nature a temporary action. That means Chinese exports would slow again later this year.

The other possibility is that China is selling goods at below-market prices. Although the move would create a series of trade wars, it could also increase China’s share of the world’s manufacturing as many factories in the West are still idle or producing below capacity because of weak demand.

China may well risk more tension between itself and nations including the US as it pushes its capacity to be the low-cost manufacturer for the world. If part of its exports are sold below market, it pits governments in the largest nations against their own importers which want to drive down their costs of goods sold. China’s action may be bad for the manufacturing sector in nations like the US, but it is good for the retail industry.

China’s increase in exports is so phenomenal that it is unlikely to be caused by a return of consumption to the market place in nations which have barely emerged from the  deep recession.

Douglas A. McIntyre