China Could Face 2012 Trade Deficit That Threatens Social Stability And 70% Of Jobs

10/18/2011 @ 4:07PM |1,418 views

Do you think that will stop growth in Australia and Canada who's economies have boomed on a commodity boom supplying China?

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China’s third quarter GDP numbers, with growth falling to 9.1% year-over-year, reveal a troubled export sector under increasing cash-flow pressure.  Employing about 70% of the China’s workforce, the export sector will face their toughest years since the early ’90s as the head of China’s official research agency warned of the serious risk of a trade deficit in 2012 for the first time in two decades.
“China’s export-reliant enterprises are facing their toughest time in years. The possibility of a full-year trade deficit cannot be ruled out next year,” said Wei Jianguo, head of the China Center for International Economic Exchanges and former vice-minister of commerce, according to China Daily.

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Weakness across the globe has already stifled demand, putting pressure on Chinese exporters.  But an even deeper problem is the European sovereign debt crisis.  Europe is China’s largest trade partner, Wei explained, with trade in 2010 reaching $480 billion, about 16% of total trade volumes (total trade with the U.S. hit $456.8 billion in 2010).
As the crisis in Europe took a turn for the worst, with Greece failing to implement austerity measures and structural reforms and contagion spreading to Spain and Italy, and the continued slowdown of France and Germany (which Goldman Sachs’ head economist, Jan Hatzius, says are already in recession), trade with China has fallen steeply. (Read Goldman’s Hatzius: U.S. To Avoid Recession As Bernanke Unveil QE3, Europe Doomed).
Along with a fall in trade volumes has come a fall in China’s trade surplus with Europe, which totaled $183 billion in 2010 and will likely round off the year around at around $50 to $100 billion, Wei warned.  China’s trade surplus with Europe fell for a second consecutive month in September to $14.5 billion. (Read As Europe And The U.S. March Toward Recession, Markets Are Waiting For Godot).
“Growth in emerging markets will not compensate for China’s losses in Europe,” said Wei, noting that the slowdown in the U.S. was also affecting exports, which fell to 17.1% in September from 24.5% in August.  While emerging markets will be the world’s engine of growth in 2012, as the IMF has foretasted, they won’t be able to pick up the slack left behind by Europe and the U.S., Wei believes.
With China’s economy on path for a government-engineered soft landing, the situation for exporters appears set to deteriorate even further.  Both domestic demand and export growth will suffer from policy tightening and weak external demand, according to a report by Barclays on the GDP release, and China won’t be able to decouple from the developed world if there is another global recession.
The export sector employs about 70% of the country’s workforce, according to Wei, and if these enterprises failed it would deliver “a massive blow to the economy.”  Small and medium-sized firms in Zhejiang and Guangdong, two of the main provinces for export-production, “are under intense cash-flow pressure and are unable to get loans,” Wei said. (Read China Buys Shares In Major Banks As Shadow Banking Credit Grows).
With the Chinese economy set to slow to 8.5% in Q4 and 2012 GDP to average 8.4%, according to Barclays, the Chinese government will have to be on its A-game to avoid a crisis in the export sector that could undermine their precious social stability.
Experts like George Friedman agree that the Chinese government is fearful of social unrest and recognizes the risk of a slowdown.  Friedman, like China-bear Jim Chanos, believes the Chinese economy will crash from these cash-flow pressures and the growth of its shadow banking sector as smaller companies begin to default on their loans and spark a chain reaction.
To avoid such an outcome, Wei suggested that China use part of its $3.2 trillion in foreign reserves, something like $50 to $100 billion, to support the export sector.  Fast growing companies like Baidu and Dang-Dang have escaped pressure to a certain extent, but the export sector’s inherent reliance on the global economy puts it on a dangerous path.
It remains to be seen whether China manages to execute an expected soft landing.  What is clearly a reality, though, is that added to the intense pressure on the banking sector coming from policy tightening and an ever-growing shadow credit system, the apparent invulnerability of the export sector is now being called into question, sowing serious doubt over the near future of the world’s second largest economy.