Weak Chinese trade data sent stocks down across the globe. According to The Wall Street Journal U.S. stocks were hit after the opening but pared their losses later in the day.
The Dow Jones Industrial Average closed little changed Thursday, nearly recovering from an earlier 184-point drop that followed weak Chinese trade data.
Official data released Thursday showed Chinese exports fell 10% year-over-year last month, sparking concerns about the world’s second-largest economy and global demand. Stocks around the globe fell and base metals such as copper tumbled. Investors moved to safe havens such as gold, U.S. government bonds and utility stocks.
There are two aspects to this news. First is that if China exports fall it consumes fewer raw materials, buys fewer high tech equipment from Japan, Germany and the U.S.A. and consequently drives affected stocks down across the globe. The second thing is that China’s economy is slowing down because its economic growth was based on exponential growth of its export market. But the world is only so big and there is not a lot of room for the Chinese export market to grow, especially in a world that that is still slowly recovering in fits and starts from the Great Recession. Considering that China has become a cog in the global economic economy how dependent is the Chinese economy on exports and is there a way to fix that?
Consumer Driven Economic Growth
Japan appeared set to take over the world economically at the end of the 1980’s until a mountain of bad debt came to light. Now a nation of savers and exporters is into its third decade of economic doldrums. China followed the Japanese example of central planning and selling to the world while saving at home. Unfortunately China has also run up a huge amount of debt, not so hidden as that of Japan a quarter of a century ago but very worrisome. There is not a lot of room for China’s exports to grow even in a healthier world economy. The general consensus of economists is that China needs to ramp up consumer spending and sell more within the country. That means letting small businesses grow and backing off the central state planning and heavy industry that characterized its early growth phase.
Debt and a Consumer Driven Economy
The Chinese drive toward a consumer driven economy may be hampered by excessive debt. The Journal notes that while household debt as a percentage of GDP is falling in the USA it is rising rapidly in China. They believe that Chinese consumers might soon feel the pinch and stop spending!
China’s overall economic slowdown has been cushioned by the relative strength of consumer spending. It is meant to be a virtuous transition, in which the economy shifts from investment in heavy industry and infrastructure to consumption-led growth.
Nearly a quarter of all mortgage debt outstanding in China was taken out in the past 12 months. Peer-to-peer lenders have also flourished, anecdotally helping home buyers with purchase deposits and down payments. The auto market, which has boomed this year, is also increasingly relying on finance to fuel sales.
Now the issue in China will be how much debt consumers can take on before they back off spending while exports fall to sustainable level.