China Trade Figures Ominous

This is really bad news…

From the Economist”

China’s exports and imports plunged in November. Exports fell by 2.2% last month from a year ago; imports plummeted by an astonishing 17.9%. One analyst sums up the news as “a shock figure”.

The gloom is spread all over the place. Exports dropped across all big traded goods and all parts of the world. Exports to America fell by 6.1%; those to the ASEAN countries, which had grown by 21.5% in October, fell by 2.4%. The faster decline in imports meant that China’s monthly trade surplus reached a record $40.1 billion. Exports last fell in 2001.
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Such numbers would be nasty enough for any big economy, but they are particularly shocking because China’s racing trade has been an engine of world trade, and thus global growth. During the 1990s China’s exports grew at an annual average of 12.9%; from 2000 to 2006 that growth nearly doubled to 21.1% each year. China’s rapidly rising imports have also driven growth elsewhere. The chief economist of a Chinese bank calls the latest figures “horrifying”.

The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceeding months; exports grew by more than 19% from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.

The consequences for the Chinese economy, which has seen dizzying rates of growth since economic reforms began in 1978 (growth in the 1990s averaged 10.5%), could now be dire. Its growth is unusually driven by its exports, which have made it the world’s factory. According to the World Bank, 27% of world GDP in 2006 came from exports (up from 21% in 1990). The corresponding figures for China that year show it to be particularly dependent on exports: 40% of its GDP came from exports in 2006, compared with 30% for highly open America and 11% for Britain. Thus the potential for a drop in exports to drag down China’s growth is correspondingly greater.

If China is not exporting, the world is not buying, not just the US. Further, much of the international growth that has fueled US exports, is due to China’s strength. should that wane as it appears to be, the US is due for another leg down.

Here is the tough part. The US can fuel export by cheapening the dollar. The problem with that is then oil and energy price rise as they are imports and the cheaper dollar buys less of them.

The cheaper dollar then leads to increased demand for agricultural exports, raising their prices here at home, more expensive food.

What to do? The world economy is going to slow no matter what governments around the world do. Credit is tight and until is gets looser, thing will slow. The trillions of dollars pumped into the system will not caused credit to flow, it will just go to cover losses on existing credit. What gov’t can do is stop the decline of the dollar and keep food and energy prices low. Will they do it? Sadly…no…

How to play it? Ag giants like ADM (ADM), Gold ETF (GLD) and Oil ETF’s (DXO), (DBO).

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Disclosure (“none” means no position):Long ADM, none
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