Slowing export growth rates cull China's equities (Part 3 of 6)
China’s export growth declines
The below graph reflects an apparent decline in the rate at which Chinese exports and imports have been growing. The red line reflects the rate at which exports exceed imports (trade surplus). Though growth rates in trade declined in the wake of the year 2000′s dot com bubble and the 9/11 incident, subsequent stimulative measures on behalf of the Bush Administration (the Bush Tax Cuts) reinvigorated the US economy, including the US consumer. Chinese trade activity subsequently remained brisk until the 2008 crisis arrived.
In November 2008, the Chinese government announced a $586 billion stimulus package to maintain economic growth targets of over 7% per annum. As in the United States, under the $700 billion Troubled Asset Relief Program (or TARP), these measures staved off a crisis and led to a strong bounce in economic activity. However, as a few years have passed, these stimulative measures have begun to wear off, and growth rates have returned to lower than normal levels.
Sustainable growth, or moonshot growth?
As reflected above, China’s trade activity grew dramatically from 1999 through 2007—averaging nearly 20% per annum growth rates. China’s GDP in 1999 was a mere $1 trillion US dollars then, though it reached nearly $3.5 trillion by the end of 2008—more than tripling in size over these nine years of strong growth. China’s GDP was approximately $5 trillion in 2010, though it now stands at $8.2 trillion in 2013. China’s GDP growth rate averaged 9.2% from 1989 until 2013, reaching as high as 14.20% in December 1992, though falling as low as 3.90% as of December 1990, while China was in its earlier phase of expansion. China’s GDP hit a more recent high of 11.9% in the second quarter of 2010, in the wake of the massive government stimulus package. However, China’s GDP growth rate has been steadily decelerating, and it stood at 7.5% as of the end of the second quarter in 2013.
The above graph of trade activity reflects the associated decline in China’s GDP growth rates. Though absolute levels of GDP and production are impressive, the astronomical historical rates of growth in both the trade and domestic sectors of the Chinese economy show signs of slowing. As noted in the prior series on wage inflation in China, China has enjoyed exporting into strong economies in the United States and European Union prior to 2008. Post-2008, both the United States and European Union have relied upon government spending to fill the consumption gap created by consumers, which lost an average of 40% of net worth in the United States from 2007 to 2010, as housing and equity markets declined globally. Will things pick up again, or is the moonshot growth driven by foreign consumption slowing?
New world order post-2008
There has been some recovery in global economies in the United States, European Union, and China as a result of governmental fiscal stimulus, though levels of national debt have grown dramatically as a result. The United States has managed to create 2.9% nominal and 2.0% real GDP growth for 2013 (Fed estimate update, September 18, 2013). After six quarters of contraction, Euro area GDP finally turned positive (+0.3%) in the second quarter of this year—though Eurostat estimates nominal GDP at 2013 at +1.1%, with real Euro Zone 1 GDP to come in at -0.7% for the year in 2013. This was a far cry from the 3.0% levels seen in 2006 and 2007.
Simply put, China’s main trade partners have hit significant economic challenges post-2008. Despite the US and EU governmental fiscal measures, stimulative effects are fading, real, inflation-adjusted growth is weak in the United States and negative in the Eurozone. The outlook for a significant near-term recovery is mediocre at best. For example, the natural rate of population growth in Germany was -2.3%, though immigration added 3.4% to Germany’s population growth in 2011, resulting in overall population growth of 1.1% for Germany in 2011. With real German GDP growth rates at 0.7% for 2012, and estimated at 0.4% for 2013, we see a deterioration in living standards, as the population growth rate exceeds the economic growth rate by 0.4% to 0.9%.
However, Germany’s shortfall in economic growth has historically been mitigated, to a large degree, by productivity growth, which stood at 0.4% in 2012, having declined from 1.8% in 2011. The German Productivity index stood at 112 at the 2008 peak, though it fell to 95 after the 2008 crisis. This index returned to peak levels as of 2011, though it has drifted downward since, dipping below 100 earlier this year and currently standing at 102—far below the 2008 peak (Deutsche Bundesbank).
Regardless, on net, Germany has seen living standards stagnate the past few years, as natural population growth declines and is substituted by immigration, while productivity growth declines. Unless productivity exceeds 1% in Germany, flat real GDP growth with 1% population growth means that economic conditions would flatline. Clearly, Germany and the European Union need productivity growth to fuel economic growth and sustain consumption, including Chinese goods. A similar pattern exists in the United States, where consumption remains strong, though investment remains weak. This casts a shadow over future productivity gains and overall economic sustainability.
As a result of the post-2008 global growth dynamics, China will be exporting its finished goods into some soft global economies. Weak investment in G7 economies will likely lead to weak productivity gains in the near future. This will likely result in a combination of less consumption or more debt in both the private and public sectors. As China’s Golden Age of cheap labor appears to be coming to an end, it could also be that the Golden Age of strong consumerism in the United States and European Union could be on the wane for the foreseeable future as well.
This global growth deceleration is rippling through the global trade supply chain. With slowing demand in the United States and European Union, China will be importing fewer raw materials from other emerging market countries—and Purchasing Manufacturing indices in emerging markets, such as Brazil, have moved from expansionary to contractionary levels since the beginning of 2012.
For investors who think China can orchestrate a smooth deceleration in economic growth without significant disruptions to the banking system, contain inflation, enhance productivity, and grow domestic consumption, perhaps the weakness in Chinese equity prices over the past two or three years would present a more attractive price. China’s iShares FTSE China 25 Index Fund (FXI) is down roughly 15% from its November 2011 post-2008 highs. For China skeptics seeking to embrace the more recent economic trends seen in Japan and the United States, as reflected in Japan’s Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan (EWJ), as well as the USA S&P 500 via the State Street Global Advisors S&P 500 SPDR (SPY) and Blackrock’s S&P 500 Index (IVV), the US and Japanese markets may appear more attractive than China’s iShares FTSE China 25 Index Fund (FXI) and South Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further analysis as to why Chinese equities could continue to underperform Japanese equities, see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.”
For related analysis, please see the following series and articles.
- Japanese exports: Are we seeing an “Abenomics”-led recovery in Japan?
- “Abenomics”: A bull market for Japan’s consumers?
- Analysis: Capital investment in Japan
- U.S. consumer spending: Sustaining the unsustainable?
- U.S. investment: Have capitalists gone on strike?
- China’s exports: Is the golden age of cheap labor coming to an end?
Browse this series on Market Realist: