China’s Mighty Export Juggernaut declined for Third Year in a Row

Posted by PITHOCRATES - January 14th, 2012

Week in Review

Once upon a time there were those in the United States who said we should do what the Japanese were doing during the Eighties.  The government was partnering with business.  Interfering with market forces.  To keep the economic good times rolling.  If you remember this time this was when the Japanese were buying up U.S. assets.  And it was joked that soon America would be a wholly owned subsidiary of Japan Inc.  But, alas, the good times did not continue to roll.

All that government interference into market forces created asset bubbles.  Artificially high prices for artificially high demand.  But then the bubble popped.  And the market corrected those prices.  To match them to real demand.  And Japan Inc. went into a deflationary spiral that lasted a decade or more.  Which we call Japan’s Lost Decade.  The Nineties.  A long deflation is a painful thing to go through.  This was the lesson of Japan Inc.  Apparently a lesson few learned.  Especially in China (see Export growth in China declines posted 1/10/2012 on BBC News Business).

Growth in China’s exports slowed in December because of sluggish demand from the US and Europe…

The latest figures could fuel worries that the world’s second largest economy is losing steam…

…the trade surplus for 2011 as a whole narrowed to $155.1bn, compared with $183bn in 2010, said customs officials.

This means the trade surplus, which is politically sensitive and has caused tension between China and the US, shrank for the third straight year.

China partnered with business.  Created an economic boom the likes few have ever seen.  Manufacturing output took off to the stratosphere.  Thanks to what once appeared as an inexhaustible supply of cheap labor.  And government policies that favored Chinese exports and hindered foreign imports.  They flooded the world with inexpensive goods.  But that cheap labor may be more exhaustible than they once thought.  And it’s looking like that this increasing amount of inexpensive exports simply can’t be absorbed by countries with struggling economies.  You put all of this together and the Chinese have got themselves a bit of a problem.

To attract labor to their growing manufacturing plants they had to increase their minimum wage.  So their workers are earning more.  Which has increased local prices.  Higher labor costs means higher costs for businesses.  Which they recover through higher prices.  All supported by that growing export market.  Which is starting to shrink.  So they have been increasing supply to meet an artificial demand that is in reality a falling demand.  Which has created a surplus of highly priced goods that won’t be selling any time soon.  There is another name for this.  An asset bubble.  Kind of like what Japan Inc. had on their hands.  And the chances are this bubble will pop like Japan Inc.’s bubble popped.  Sending the Chinese into a deflationary spiral that could lose them a decade.  Like the Japanese lost.

The market will always adjust prices so supply meets real demand.  Sooner or later.  The sooner it does the less painful the correction.  The later it does the more painful the correction.  And China’s mighty export juggernaut has been going on for a long time.  So their inevitable correction will probably be a painful one.

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