By Jason Simpkins
Associate Editor
China's exports advanced at a 28% pace in May, despite growing economic turbulence in the United States and Europe, underscoring yet again that the Asian giant doesn't need Western markets to flourish.
The strong export growth should also give China's central bank more room to maneuver in its battle against escalating inflation at home.
After growing 21.9% in April, Chinese exports climbed 28.1% to $120.5 billion last month, China's customs bureau reported. Exports to the United States grew 9.1% in the first five months of year, while exports to the European Union climbed 27.4%.
The increases demonstrate that global demand for Chinese goods remains strong, even though many Western markets are battling the fallout of a worldwide financial crisis. Indeed, the export statistics are serving as evidence of an economic theory known as "decoupling," in which emerging economies in Asia and Europe have developed enough market place muscle to no longer be dependent on the U.S. economy for growth.
And "decoupled" markets can survive - and even thrive - even if the United States were to spiral down into a recession.
The report "suggests that those saying that exports are collapsing are wrong," Stephen Green, head of China research at Standard Chartered Bank PLC in Shanghai, said in a report.
Trade did grow with the more mature economies of the West. But China got its biggest boost from such emerging markets as India. Two-way trade with India increased by 70% in the first five months of 2008, the fastest rate of growth among China's Top 10 trading partners.
China is also forging stronger ties with Latin America. In 2004, Chinese President Hu Jintao predicted that Sino-Latin American trade would reach $100 billion by 2010.
In reality, it reached $102.6 billion in 2007, surging 42% from the year before.
The fact that Chinese exports have more than weathered the global financial storm is a huge blow for critics who had earlier predicted this credit-related mess would cause China to stumble.
China's economy grew by 10.6% in the first quarter of 2008, despite complications stemming from the U.S. credit crunch, the Chinese New Year and the worst ice storm the country had seen in decades.
"We have a lot of evidence to support the decoupling view," Timothy Bond, Merrill Lynch & Co. Inc.'s (MER) chief Asia economist, said in a research note.
Indeed, the recent surge in exports is proof that China will continue to advance - with all but a complete collapse of the U.S. economy. The growth in sales overseas sales, regardless of what happens in the United States, but they also proved that Chinese trade isn't dependent on the weakness of the yuan.
The Yuan's Rebound
For years, the United States and other Western powers have claimed that China has kept its currency, the yuan, artificially low to boost exports. But the yuan gained more than 10% on the dollar in the year through May, and still exports surged.
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In the past year in fact, even with the freefalling dollar, China's trade surplus with the United States has grown from $12.6 billion to$14.3 billion, a gain of 13%. And the fact that exports are accelerating along with the value of the yuan will give China's central bank some latitude in dealing with inflation.
"Robust export growth could dispel domestic concerns that a stronger yuan is hurting exports too much," Gene Ma, head economist at China Economic Monitor, told BBC News.
The yuan has appreciated 5% against the dollar so far this year, making Chinese goods more expensive in foreign markets. At its current rate, the yuan will almost certainly improve on the mere 7% gain it posted against the dollar last year. And that will help China control inflation and shift from what its central bank called "heated" growth to a more-sustainable economic expansion.
In fact, the effects of a stronger yuan already can be seen. Consumer inflation slowed to 7.7% in May from 8.5% the month prior, two government officials said Tuesday, citing statistics bureau data.
"Inflation has peaked, at least temporarily," Ben Simpfendorfer, a currency strategist at Royal Bank of Scotland in Hong Kong, told Bloomberg. "Pork prices have stabilized to some extent. Vegetable prices certainly have."
Food costs account for 34% of China's consumer price index, and growth in agricultural prices slowed to 19.3% in May from 24.2% a month earlier, according to the Ministry of Agriculture.
The Consumer's Viewpoint
Furthermore, the recent surge in oil prices probably won't affect China's consumer prices because of generous government subsidies. The government can afford to subsidize the price of fuel and is likely to continue to do so, Mark Williams, an economist at Capital Economics Ltd., said in a recent report.
"Even if international oil prices remained at their current levels, the total net subsidy bill for the year would probably amount to less than half of one percent of GDP," Williams wrote in a June 5 report. "The costs of keeping prices down are still manageable given the strength of China's state sector. Officials are wary of anything that could raise inflation expectations."
And even though as producer prices climbed an astonishing 8.2% in May, inflation could still recede in the second half of the year - in part because figures will be compared with prices from last year when food prices soared uncontrollably.
"The worst is behind us now," Paul Tang, an economist with the Bank of East Asia Ltd. (OTC ADR: BKEAY) in Hong Kong, told Bloomberg. "The question is more about at what pace the improvement is going to be realized in coming months."
News and Related Story Links:
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BBC:
Oil costs hit China trade surplus
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Associated Press:
China trade surplus shrinks, producer prices rise
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Money Morning:
Asian Exports Continue to Surge Despite U.S. Slowdown.
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Wikipedia:
Decoupling.