Chinese Govt Softens the Economic Blow

Written by Leslie Cameron  •  Special Features  •  July 2011 PDF Print E-mail

The second largest economy in the world is slowing down, but it is all part of the plan. China’s imports are decelerating to the slowest in nearly two years, according to the government. The results will be more thrift and a tighter economy overall.

With the pace slipping from 28.4 to 19.3, from May to June, investor’s confidence is plummeting as well. Worst of all was the contrast with the fresh data that inflation had spiked to its highest in three years, at 6.4 percent. Meanwhile, a leap in trade surplus stands as an indicator that interest rates may have to be increased in order to both manage prices and divert capital inflows.

The Chinese government had such faith the economy could withstand a tightening of the belt last week that, for the third time this year, the Chinese central bank raised interest rates. The rates, compared to the previous year, decreased from 19.4 to 17.9, between May and June. This indicates a slow down in demands from abroad, but also of new orders across Asian countries in general.

While forecasts placed exports at 18.7 percent, they already reached records of over $160 billion for last month. Meanwhile, imports were forecast to increase by 25 percent. They set a record of nearly $140 billion last month. So while May’s surplus sat on the higher side of $13 billion, June saw more than $22 billion. The forecasts predict $16.3 billion.

The hope of the Chinese government is to switch dependence on exports and investment to internal domestic consumption. To accomplish this, massive economic restructuring must be implemented. Growth by imports has been turned into the lightning rod for any speculative economic woes, but also a flag of hope for an even brighter future in China.

It was not unexpected that China’s exports would fall to a creeping crawl, since we saw the U.S. economy slumber and the June Asian and European factory growth follow suit. The Chinese economy is effectively becoming quite moderate in this current climate. This is particularly noteworthy in light of data regarding Taiwan’s exports to China.

The whole purpose of China mixing its economic policy is to provide a gentler let down than would otherwise occur. Inflation is the chief concern at the People’s Bank of China as they lower their vulnerability to future risks. Indeed, imports are suffering, but it is all part of China’s economic plan.

The scandal behind China’s economy, though, lies in its trade surplus. The U.S. criticizes the government of providing cheap currency to their exporters and that this sets up an imbalance with trade partners. Trade surplus spiked to its highest levels during the past seven months.

A governmental re-balancing of the economy is critical in light of the Japanese earthquake and the European debit crisis. Yet, because the domestic demand continues to be resilient and the trade surplus is expected to linger at least through the end of the year, China anticipates a $100 billion surplus for the entire 12 months. 

Leslie Cameron is a geo-political analyst for a securities firm based in Copenhagen.  She holds a Masters in Economics from London School of Economics, and has previously worked for a number of years on Wall Street for a major investment bank. She is also working on a forthcoming book on the recent financial crisis and its impact on the international political economy.

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