The Chinese Dragon Stirs

Investing Daily Article of the Week

by Ben Shepherd, Investing Daily

We’ve been opining a lot lately in this publication on China — and with very good reason. With a gross domestic product (GDP) of nearly $9 trillion, the country’s economy now stands as the second largest in the world and is responsible for a huge chunk of global growth.

That’s why the country’s recently released July trade data is so important and closely scrutinized.

According to China’s Customs Administration, the country’s exports rose by 5.1 percent in July on a sequential basis, beating the consensus expectation of a 3 percent increase. It was also welcome news after June’s reading showed the first decline in 17 months.

Not only was that good news for the Chinese, it also showed positive trends for the rest of the world, as exports to the US rose by 5.3 percent and shipments to Europe were up 2.8 percent. That signals solid demand in the US and indicates that the recession in Europe is at least easing, if not over.

Granted, July’s export reading doesn’t mean the Chinese economy is necessarily thriving, since growth is running at its lowest rate in more than four years. But those were the biggest gains since February and a sign that not only is the Chinese economy stabilizing, so too are the developed markets of the world.

The most important reading, though, had to do with Chinese imports, which shot up by 10.9 percent and were well in excess of the 2 percent forecast. Imports of iron ore and crude posted their strongest gains in months as industry rebuilt stocks, a good indication that Chinese businesses are expecting an uptick in activity in the coming months. It’s also a sign that domestic Chinese demand for goods is recovering.

That import growth also is positive for growth in the rest world, particularly the emerging markets which are highly dependent on Chinese demand for raw materials.

And steady growth in China is key to pulling the global economy up by its bootstraps, helping to break the cycle of low-single digit growth in the developed economies of the world by acting as a critical source of demand for all manner of goods.

July’s import data showed a sharp uptick in the delivery of soybeans from Brazil, iron ore from Australia and oil from Russia and Saudi Arabia. Those trade flows create jobs and demand in the source economies, creating a virtuous cycle of activity which will fuel growth around the world.

So July’s trade data is solid evidence that not only is the Chinese economy stabilizing, the rest of the world is recovering, particularly when you add in last week’s manufacturing data.

Considering that those improving trends are showing up in the months prior to China’s recently enacted stimulus efforts, it appears likely that the country’s GDP growth will probably hit the government’s 7.5 percent target for the year.

GDP growth might even exceed that 7.5 percent target, as the government’s railway investment program picks up steam throughout the rest of the year, the country’s exporters gain a tailwind from lower taxes and a lessened regulatory burden, and the recent liquidity injection by China’s central bank spurs business activity.

Even if the new data doesn’t signal a return to China’s blistering growth of the past two decades, its stabilization and steady improvement are sanguine for the rest of us. It’s already triggered a rally in equity prices around the world, a firming in global copper prices and a general sigh of relief from global investors.

For better or worse, China has become the new lynch pin of the global economy. The old saw used to be that as goes the US, so goes the rest of the world. With China poised to become the world’s largest economy sometime in the next decade, that US-centric preconception will have to be revised.