China Exports Are Down, but Growth Is Still Up

A construction crew works on a high-speed railway line near Shanghai Photograph by Qilai Shen/Bloomberg

With the European debt crisis, Japan’s return to recession, and the U.S. fiscal cliffhanger, China’s ability to keep on growing is getting a triple test. This week, both China bears and China bulls can point to numbers that seem to prove their cases.

For those downbeat about China’s chances, the grim export figures for November are the latest piece of evidence. Export growth fell to just 2.9 percent year-on-year last month, down from 11.6 percent in October. The November results were much lower than what many economists had expected: Barclays, for instance, had thought the number would come in at 11 percent; Daiwa was expecting 9.2 percent.

The culprit, not surprisingly, was Europe, with the U.S. and Japan also contributing to weakness. Exports to the EU fell 18 percent year-on-year, down from an 8.1 percent drop in October. The U.S. had been an area of strength for Chinese exporters, with growth up 9 percent in October, but last month exports to the U.S. fell 2.6 percent. Shipments to Japan went into the red, too, dropping 3.8 percent in November after rising 1.1 percent in October.

Europe and Japan will continue to weigh on China’s export performance in the new year, according to Daiwa economists Chi Sun and Minchun Sun. “We are revising down our export and import growth forecasts to 7.3% YoY (from 8.4% YoY) and 4.0% YoY (from 5.3% YoY) for 2012, respectively,” they wrote in a Dec. 10 report. “As we expect weak demand from developed markets, in particular the EU and Japan, to persist in 2013, we are also cutting our export growth forecast to 9.0% YoY (from 10.0% YoY) for 2013.”

Even with the poor export picture, though, the Daiwa economists expect China’s economy to rebound in the fourth quarter of 2012. They point to a 10.1 percent increase in industrial production last month, an improvement over 9.6 percent growth in October. “This suggests to us that real [gross domestic product] growth should have rebounded strongly in 4Q12,” Sun and Sun write.

Other good signs include lower inflation for the non-food consumer price index, which fell to 1.6 percent in November from 1.7 percent the previous month. Daiwa expects Chinese GDP, which grew at 7.4 percent in the third quarter and 7.6 percent in the second, to bounce back above the 8 percent threshold this quarter, with growth coming in at 8.2 percent.

The growth isn’t coming from the export sector. And it’s not coming from domestic consumption either, according to Bloomberg economist Michael McDonough. Rather, China is rebounding largely thanks to state spending on infrastructure projects. “There isn’t any real improvement in the real economy,” he says. “It’s all because of fiscal stimulus.”

Unlike the stimulus following the Lehman Brothers bankruptcy in 2008, when banks threw money at state-owned companies, this time the spending is more targeted at infrastructure projects, especially trains and subways. In October, the Railways Ministry announced it would increase its spending target for the year by 630 billion yuan. That was the second increase this year, following an earlier announcement in July. The original target for 2012 was from 411.3 billion. Investment had slowed in 2011 following a corruption scandal involving the railways minister, as well as a fatal crash on one of the China’s new high-speed train lines.

Now that the government is again ramping up investment in rail, the spending is spread throughout the country. For instance, on Nov. 26 the government announced it had approved a 25.7 billion rail project for the southeastern province of Fujian and a 31.2 billion yuan project in Urumqi, the capital of the Xinjiang region in the far west of the country. Guangdong province in southern China plans on spending more than 1 trillion yuan on rail and other transportation projects between 2011 and 2015, the government announced on Nov. 16. That’s more than double what the province spent in the five years ending in 2010. While the Chinese may not be getting the recovery they want, they may be able to pump up the economy on stimulus.

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