Published March 12, 2009

China shocks with 26% export plunge

But capital spending picks up in response to massive stimulus

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(BEIJING) China's exports tumbled in February as the world's third-largest economy felt the full force of the global financial crisis, but capital spending accelerated in response to a massive government stimulus package.

With the world experiencing its deepest recession in decades, pessimists said the slump in exports was unlikely to end soon. Some said China could even record a trade deficit before long.

But optimists saw fresh hope in the more forward- looking investment data that China might pull out of its swoon faster than other major economies, thanks to the government's pump- priming and galloping credit growth.

'China has finally and spectacularly succumbed to the world financial crisis on the export side, and it's difficult to see why that would improve in the short term,' said Paul Cavey, an economist at Macquarie Securities in Hong Kong.

Exports in February slid 25.7 per cent from a year earlier, dwarfing forecasts of a 5 per cent fall, while imports dropped 24.1 per cent, close to projections of a 25 per cent decline.

The resulting trade surplus was just US$4.84 billion, a three-year low, compared with US$39.1 billion in January and a record US$40.1 billion in November, the customs administration said. Markets had expected US$27.3 billion.

Shanghai shares fell 0.91 per cent in reaction to the trade data, bucking a regional rally, while the dollar recouped early losses and rose across the board.

Chinese exporters had hitherto fared better than their competitors in places such as South Korea and Taiwan, encouraging conjecture that cost-conscious shoppers in the West were trading down to cheaper made-in-China goods.

But Isaac Meng, an economist with BNP Paribas in Beijing, said it was unrealistic to expect China to remain immune to the sharpest drop in global trade in 80 years.

'That's a terrible number. It will have a pretty big impact on Chinese domestic demand,' he said of the export drop, which was the steepest since bankers started keeping records in 1993.

'Probably 60-70 million workers directly work in these export sectors, so there will be secondary impacts on capital expenditure, employment and consumption,' he said.

The government estimates that 20 million migrant workers, who labour mainly in export factories and in construction, have lost their jobs so far because of a collapse in global demand and a slump in the domestic real estate market.

'Any recovery in the export sector will not take place until the third or even the fourth quarter of this year,' said Mei Xinyu, a researcher with the Ministry of Commerce.

China has not released official statistics on the contribution of net exports to gross domestic product last year, but Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong estimates that they contributed just 0.8 percentage point of China's 9 per cent GDP growth last year.

Tao Wang with UBS in Beijing estimates that the contribution was twice as great, at 1.6 percentage points - still significantly less than the contribution of consumption and investment.

Figures released earlier by the National Bureau of Statistics suggested that the government is already enjoying some success in its drive to make up for the shortfall in exports by boosting capital spending.

Investment in urban areas in fixed assets such as roads, power plants and apartment buildings rose 26.5 per cent in January and February from a year earlier, easily beating market forecasts of a 21.5 per cent increase..

'The figure shows the economy is doing very well and Beijing's stimulus package is working,' said Jiang Chao, an analyst at Guotai Junan Securities in Shanghai. In all of 2008, urban fixed investment was up 26.1 per cent.

Detailed figures showed the initial impact of the 4 trillion yuan stimulus plan unveiled by Beijing on Nov 9. Spending on projects backed by the central government rose 40.3 per cent in the first two months, while investment in transport, including railways, rose a whopping 210.1 per cent. -- Reuters