Abelications

Richard (Rick) Mills
Ahead of the Herd

Page 1 of 3

As a general rule, the most successful man in life is the man who has the best information

There’s a three year downward trend in Chinese imports underway. The chart below, from Nomura Global Economics, shows the trend quite clearly.

China’s exports and imports declined again in June. Exports fell 3.1 percent yoy – the most since the global financial crisis in 2008 – while imports dropped 0.7 percent. The poor June report follows a May collapse in export gains – fake invoices had inflated data for the first four months of the year, the bogus data enabled exporters to evade currency controls and bring extra money into the country. Trade growth might come in below the government’s target of eight percent for the year.

The governments self imposed target of 7.5 percent economic expansion is also at risk:

• June’s export growth was down from May’s year-on-year gain of 13.5 per cent and import growth was down from 8.2 per cent.
• China’s global trade surplus contracted by 12.4 per cent compared with a year earlier to $27.1 billion. Exports were $174.3 billion while imports were $147.2 billion.
• Growth in exports to the United States, China’s biggest foreign market, fell to 1.8 per cent from May’s 3.5 per cent. Exports to the 27-nation European Union contracted 3.9 per cent.
• The trade surplus with the U.S. contracted by 15.5 per cent from a year earlier to $17.5 billion. The surplus with Europe shrank 20.3 per cent to $10.2 billion.

China’s communist leaders want to pursue a slower, more self-sustaining growth model based on domestic consumption, this model reduces reliance on trade and investment. China can handle slowing exports as long as the slowing is accompanied by rising internal consumption – a successful switch from being an export led economy to a consumer one. But since the start of 2013 a very different scenario is taking place, one that’s definitely not under our dear communist leaders control, imports and exports are both dropping, Chinese trade is being gutted while Japanese exports are rising on higher shipments to the US and China.

How did this happen?

To put it as simply as possible; a depreciation of the Japanese yen is making Chinese exports less competitive in the world market and Japanese imports more attractively priced for Chinese consumers. Less Chinese made goods are being bought at home and abroad.

Japans monetary policies – dubbed Abenomics (deregulation and economic stimulation by easy monetary and fiscal policies), after Japanese prime minister Shinzo Abe – are waylaying the communists plans.

Japan, the world’s third largest economy, is currently an economic ray of sunshine – the Japanese economy grew at an annualized 4.1 percent in the first quarter and their stock market is soaring. Abenomics goal is to end a long miserable decade and a half of deflation by kick starting the economy, this will happen because of massive yen creation. The fiat balloon will induce consumers to spend and corporations to reinvest profits, convinced by a rising stock market and surging exports that all is well.

The flood of fiat has depreciated the yen, over the first six months of 2013 the yen weakened the most against the U.S. dollar since 1982. The yen also dropped 12 percent against the euro and seven percent against the sterling, threatening European trade.

Japanese efforts are starting to pay off as factory output is rising (the most since December 2011), retail sales are slowly climbing and some inflation is starting to creep into consumer prices. The weaker yen is drawing investment away from emerging markets and toward Japanese equities – the Nikkei 225 has been soaring.