For the month of March, China
reported an unexpectedly large trade surplus
, defying expectations that China's foreign trade composite was in
a secular change towards enhanced consumption that would see its
trade surpluses shrink.
[caption id="attachment_59097" align="alignright" width="300"
caption="Xintiandi in Shanghai, China"]
Were these pundits mistaken, and is China back to re-emphasizing
the Guangdong model, a neo-Mercantilist agenda of maintaining
massive trade surpluses to the potential long-term detriment of the
) economy? Or was this merely a statistical outlier, a bump on
the road towards a consumption-driven economy?
Recent data, forward-looking indicators, and statements from
developed multinationals seem to indicate that the latter is the
more likely scenario. Lower manufacturing imports, a stronger yuan,
weak demand from Europe, strong April service-related data, and
mixed April manufacturing data all point to a continuation of the
trend away from an over-reliance on exports and a cautious move
towards consumption and services.
Investors listening to the conference calls of certain
manufacturing firms and multinational corporations were somewhat
taken aback at the tone these companies employed when addressing
the subject of China. In particular, earth moving equipment
manufacturer Caterpillar (
) made a point of downplaying the importance of China for its
"China is not a huge part of our business," said Mike DeWalt,
Caterpillar's head of investor relations, claiming that the country
represented only 3% of sales. (You could argue that the company's
indirect exposure to China is much larger however). In fact,
Caterpillar stated that they now see demand for construction
equipment contracting this year, as opposed to initial forecasts of
5-10% growth for 2012.
This soft demand is not confined to Caterpillar. During their
earnings announcement this week, Emerson Electric (
) saw a steep,
unexpected drop in Chinese demand
indicating very poor Chinese manufacturing sector performance.
German conglomerate Siemens (
saw China revenue drop 6%
, compared to a 9% increase systemwide, although the company
expects growth to pick up in the second half.
Import strength or weakness in the Chinese manufacturing sector
can be interpreted as a leading indicator for the state of its
export sector going forward. Capital Economics' analysts claim that
March import weakness "impl(ies) that
exporters have low expectations
for future orders growth."
The most recent Purchasing Managers' Index data is mixed on the
subject. According to the government, PMI came in at 53.3,
indicating an expansion. However, HSBC's reading was 49.3, implying
a contraction, although month-over-month growth.
Because of differing methodologies -- in general, the
government's data tracks the bigger, state-owned firms whereas
HSBC's numbers place more emphasis on small and medium-sized firms
-- the government and HSBC manufacturing data frequently report a
different picture of the state of the Chinese economy. As a result
of these disparate methods, it's difficult to glean anything
While PMI may not afford investors any particularly compelling
insight into the state of the Chinese export sector, fundamental
macroeconomic analysis can yield important observations.
The Renminbi has appreciated against major developed currencies
like the dollar and the euro over the past year, rendering Chinese
exports less competitive. The euro zone remains China's largest
trading partner, and with growth discernibly affected by the
sovereign debt crisis in Europe, China will have to look elsewhere
for export sector expansion.
While the American and South Korean economies remain relatively
robust, other trading partners like Brazil, India, and
Australia see growth slowing
. This is by no means indicative of a precipitous decline in
Chinese exporting prowess; however, export sector growth may be
limited in the short-to-medium term in light of these macroeconomic
Although the export sector may be under structural stress, China
may finally be making tangible, albeit incremental, progress
towards a consumption-based economy.
HSBC's services PMI number for April was a formidable 54.1, a
six-month high. Job hiring in the sector continues to grow and
shows domestic demand may finally be stabilizing after months of
previously soft demand. HSBC economists see the economy as a whole
beginning to recover
, claiming that "(t)he chance is slight for China to post lower
growth in the second quarter, compared to 8.1% growth in first
The move to a consumption-based economy will not be smooth, in
particular during a
period of political transition
. The percentage of
government investment driving domestic demand
remains uncomfortably high. The savings rate also needs to drop to
more desirable levels. Previously-employed protectionist methods
used to shield domestic manufacturers may be less feasible for
intangible goods without backtracking on progress in the
liberalization of certain rules and industries.
That being said, it appears as if China may be taking the
initial steps necessary to transform its economy away from the
Guangdong model to a more sustainable one geared towards