China is exporting deflation to the world again Two quick words of caution on the explosive rise in China’s exports in July. (Amazing how China always beats OECD states in compiling trade data).
The category known as “non-specified exports” rose by 92pc in a single month, according to Morgan Stanley this morning.
This is widely thought to be capital outflows, disguised in the trade data through over-invoicing. It typically occurs through Hong Kong and Taiwan.
The 17.5pc rise in exports to Europe is probably real (since that data is harder to fiddle). Far from being healthy, it is alarming. Euroland is clearly not booming. A wealth of data suggests that the eurozone already has one foot in recession.
Hans Redeker from Morgan Stanley said the 5pc-6pc fall the Chinese yuan against the euro in the first half of the year is undercutting southern Europe.
Portugal and Italy – among others, with Spain a borderline case – have a great number of small companies in textiles, shoes, furniture, tiles, and increasingly electrical goods, machinery, and telecommunications that compete toe-to-toe with China. They are famously “fishing in the same pool”, mostly mid-tier technology.
The complementary index for European and Chinese exports shows that the EU is in direct competition with China on 35pc of 5,775 types of goods covered, up from 15 per cent in 2000. Germany is hit too, of course. Its solar industry has been largely wiped out by cheap Chinese copies. But it is southern Europe that is suffering the worst damage.
China’s imports from the rest of the world fell 1.6pc year-on-year. Some of this is a base effect, no doubt. Yet the underlying pattern is that China is draining global demand. To the extent that its record surplus of $47.3bn is genuine, it is essentially negative for the world trading system.
The country is not rebalancing. The reforms have not yet gone much beyond talk. It is still over-investing, and still exporting deflation worldwide.
The European Central Bank could take defensive action to weaken the euro by relaxing its extremely tight monetary policy (as defined by credit contraction and M3 contraction across Euroland, ex-Germany). Instead it is sitting on its hands, engaged in theological discussions about the definition of deflation, at best trying to talk down the euro without actually doing anything.
Other than that, China's soaring exports are marvellous news.
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