While most people are obsessing over China’s stock market crash, a more pressing concern is the decline of global trade. There are two major exporters, both of them in East Asia, whose exports have fallen dramatically from month to month. It is a devastating blow to the world economy, and one that could very well tip us into a full-blown economic collapse.
In recent years, China, Japan, and South Korea have endured the financial crisis well enough to remain as engines for global growth. However, there has been disturbing news, compounded by devastating reports, of a slowdown in exports. (Source: Financial Times, September 1, 2015.)
The decline of exports reflects lower consumption in other parts of the world, starting a viscous cycle where demand shortfalls lead to supply cuts. After all, when we stop buying things here, it means a lost sale somewhere else.
Despite accounting for less than 20% of world output, China and South Korea made up 40% of all trade surpluses. Both countries have an outsize influence on the inter-country flow of goods, which should worry every single investor. What happens if their exports continue to fall?
China’s Exports Take a Plunge
Markets were absolutely blown away in early August when China reported its export figures for the previous month. Shipments fell by 8.3% in July, reflecting what many analysts believe is a secular shift in the Chinese economy. (Source: Bloomberg, August 7, 2015.)
Few people believe that China could sustain its impressive growth streak on exports alone; there comes a time when a country must allow its living standards to appreciate. Rising wages may hurt the cost efficiency of firms, making their exports more expensive, but it is a necessary change.
Political stability demands that at least part of China’s gains filter down to its people. The population will grow restive unless they see incomes grow. It is essential for the country to foster a palpable sense of improvement.
A possible stumbling block is something you won’t find in the numbers. China has a strong culture of saving. Many of the working poor lead minimalist lifestyles and are unaccustomed to having an excess of anything. But they must overcome their impulse to save because increased consumption is the only way to fuel China’s growth for another decade.
South Korea Exports Crash 14.7%
In August, exports from South Korea fell 14.7% from the same month last year. Many have attributed the decline to softening demand from China, which makes up a quarter of its export market.
However, the fall in Chinese demand was only 8.8%, as opposed to the nearly 20% reduction in exports to Europe and Japan. The country sold 40% fewer petroleum products and 51.5% fewer ships as a result of plunging oil prices.
Not all the news was bad, however, with smartphone and semiconductor sales on the rise. Yet a depreciating yuan could touch even those industries. China and South Korea are extremely competitive on most fronts and there is a high degree of currency exposure both ways.
By cutting its interest rates and letting the yuan fall, China is trying to make their exports more attractive. Now many analysts are expecting South Korea to follow suit, as a means of staying competitive.
What both countries fail to realize, or choose to ignore, is that using monetary stimulus to boost exports is less effective when everyone does it. Currency depreciation is relative, meaning it must be measured against another currency. But when that currency is also falling, both countries get nowhere.
My concern is that a currency war is coming. Not only will it fail to stimulate the economy, but it will cause deficits to spiral out of control, even while inter-country shipments grind to a halt.
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