Italy’s Dilemma and China’s Export Problems

It seems hard to draw a direct line from the sovereign debt crisis in Italy to China’s recent trade balance figures. But the line can be drawn and may have been already. The relationship between the economic and financial disaster in Europe and the Chinese economy is already powerful and could be ruinous for both.

China announced its trade data for October. Exports grew at the slowest rate in two years. Shipments rose only 15.9%. Imports were higher by 28.7%. The import pace will slacken if exports do not pick up.

The EU GDP slowdown had to effect demand for Chinese goods eventually. Most major economies in the European region now are close to recession. Several already have posted negative GDP. The fear is that austerity plans in many of these countries meant to close  budget deficits will sap whatever stimulus that government expenditures have on local economies. Europe’s promise as a destination for exports from China, as well as from the U.S., erodes every day.

The Chinese problem is more complex than just one of low exports. The consumer economy of the People’s Republic runs on the creation and expansion of a new middle class made up primarily of factory workers. As the demand for the output from those factories slows, so will the market for imports. Goods made in the U.S., Japan and Europe will find a less ready market in China. The downdraft of the economic cycle will be complete. And, within China itself, the demand for manufactured goods by its own middle class will falter.

China has an option that Europe does not. It can restart the stimulus programs it began in 2008. The first package involved an investment of $585 billion in the economy. That investment probably kept China from a sharp slowdown in its growth as most of the rest of the world entered a recession. The trick may not work again if it takes Europe several years to recover economically. Stimulus effects eventually die when they cannot be sustained by normal economic activity.

The argument that China’s economy is “decoupled” from that of the West has been made for several years now. China’s economy, the theory says, is so large and expansion within the country is so powerful that outside forces cannot undermine its 9% annual GDP growth rate. That theory is about to be tested, and it will not hold up.

Douglas A. McIntyre