Tensions created by China's tearaway economic growth emerged on full display Thursday, when figures showed an almost 50% gain in exports in May and a near-record rise in house prices in the same month. The data kept pressure on the government to raise the value of the yuan, stoked fears of more moves to cool the economy, and sent stock prices sharply up - and then down.
China's exports increased 48.5% over the level in May 2009, significantly greater than the 30.5% year-on-year gain recorded in April. Last year, China overtook Germany as the world's largest exporter, with US$1.2 trillion in export revenue compared with Germany's $1.12 trillion.
The rise in China's exports to $131.76 billion last month, compared with a smaller 48.3% gain in imports to $112.23 billion, drove up the country's trade surplus to $19.53 billion. The increases of 50% in exports to the European Union and 44% to the United States will add to pressure from China's trading partners for the government to let the yuan appreciate. A stronger yuan would make Chinese-made goods more expensive and less competitive in countries such as the United States, where politicians challenged with rising unemployment are under pressure to maintain jobs and keep factories open.
The trade gap suggests pressures to appreciate the yuan, which is little changed against the US dollar since July 2008, remain and will provide evidence to some that China's currency is still undervalued, a Bloomberg report quoted Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group, as saying.
Even so, the declining value of the euro versus the US dollar has led to a 20% gain of the yuan against the euro, reducing the country's competitiveness in the eurozone compared with other exporters such as South Korea, the Bloomberg report said.
With money still flowing into the Chinese economy from a 4 trillion yuan (US$585 billion) stimulus package announced in late 2008, and the economy growing at an 11.9% pace in the first quarter, cash is flooding into housing and other assets. House prices in May jumped at the second-fastest rate on record, climbing 12.4% from a year earlier, down slightly from the previous month's 12.8% year-on-year increase. The strong market continued to raise fears of overheating despite the government already taking measure to curb speculation and contain an incipient bubble.
Any collapse in the housing market could have severe follow-on effects on the economy as a whole. JPMorgan estimates that housing accounts for half of the country's demand for steel (iron and coaking coal) and a third of the aluminum that it produces; the cement industry is also implicated in the sector. Were a housing bubble to burst, demand for all manner of primary materials would therefore fall.
Implentation of the government's recent tightening measures in the property sector will also slow China's economic growth, "which will affect corporate profit margins," Everbright Securities said in a note. The brokerage lowered its average net profit growth forecast for 2010 to 21% from its previous estimate of 31%.
The Shanghai Stock Exchange Composite (SSEC) index rose as much as 2.8% early yesterday, but as the export and other data was digested retreated to end the day down about 0.82% at 2,562. The benchmark index is now down about 22% from its year-to-date high of 3,282, touched in early January. The next ledge for a breathing-space is just below 2,400, and after that a less-than-secure backstop in the high 2,200s.
[Now, however, it has recovered above the earlier technical support at 2,557, the last long-term support from early 2007 and which was semi-confirmed in April 2009. At the beginning of April the SSEC’s technical indicators were strongly positive, but they began to weaken when it failed to punch through the 3,150 level, which marked the top of a former medium-term trading range. By the middle of April, short-term technical indicators were beginning to turn negative. That trend in turn quickly accelerated and continued worsening strongly until the end of last month when they relented a bit.]
[“Collapse” might be too strong a word, but since the beginning of April the Shanghai Stock Exchange Composite has had only one positive and one break-even week. It has fallen nearly 20% from 3,147, crashing through multiple technical supports including at 2,667 and 2,557, above which latter it has now unsteadily recovered. Most remarkable was that the failure last summer to punch through the 3,500 at a time when risk aversion was being minimized and hot money was flowing into not only Shanghai and other Chinese markets but also into other major Asian markets as well.]
[Likewise, its failure to punch through 3,150 to the upside at the beginning of April this year marked the reconfirmation of a descending-tops trend line that began with that earlier failure to surmount 3,500. However, the long-term descending-tops line begun in 2007 is still in evidence. It is now passing through the chart right at the level to which the SSEC has recovered so far this week. The equity-market action, therefore, remains at a potential turning point. Significantly, there is no evident up trend upon which to build. There remains moderate long-term support in the low 2,500s and stronger medium-term resistance at 2,667.] It is still significantly below both the 50-day and the 200-day moving average, and short-term technical indicators remain weak or even negative.
There is little mystery in the contrast of high export figures and a poorly performing stock market. The gain in overseas shipments in May comes a year after exports fell by a record as the global financial crisis savaged demand. The superficially positive aspect of the latest data was also contradicted by the Purchasing Managers Index (PMI), an indicator of manufacturing activity, which fell to 52.7 in May from 55.2 in April. (A number above 50 is a sign of economic expansion.)
The latest export statistics, while pointing to recovering consumer demand in Europe and North America, also do not yet reflect the deepening economic woes in the eurozone as governments in the region cut spending following the Greek debt crisis. [Yet even in India, where the stock market is arguably stronger than in China, there is an awareness that a “double-dip” decline Europe and North America would take Asia and its markets along in the downdraft.]
China itself is far from out of the woods on its own account, given continuing concern at the high level of bank lending, inflation at 3% and the signs of a real estate bubble. Workers are also stepping up demands for higher pay, a strike at a Honda plant in Guangdong province only the most publicized recent example.
And China itself is far from out of the woods on its own account, given continuing problems with bank lending (for background, see China tries to cool down, Asia Times Online, January 14, 2010), inflation (for background, see China diminishes US Treasury holdings, Asia Times Online, February 19, 2010), and the real estate bubble (for background, see China bubbles away, Asia Times Online, February 19, 2010).
The last of these received impetus, and it is an indicator of market sentiment more than of empirical reality, that headlines focused on the export surge rather than on the second fastest ever increase in housing prices, 12.4% in May 2010 over May 2009. The fastest recorded increase was last month’s 12.8% year-on-year increase. This has occurred despite the government cracking down on speculation in the effort to contain the bubble.
Still, government measures to curb housing speculation may be having some impact, at least in the capital. JPMorgan estimates that residential property sales in Beijing are down 80% from the high in December 2009 and by half from just a month ago. Barclays Capital also projects that, even if house prices decline 20-30% in the near future, increased public housing construction could limit the impact on the economy and on raw materials demand.
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First published in Asia Times Online, 10 June 2010.
Passages within square brackets did not appear in the article as originally published and are copyright by the author.