China's Export Machine Gets It Ears Boxed

"Strong wind does not last all morning; strong rain does not continue all day"–Lao Tsu, Tai Te Ching

China’s mighty export machine, the envy of the 21st century economic world, is starting to slow. The effects have already moved well beyond the mainland’s shores and they are only just beginning.

According to The Wall Street Journal, "China’s exports in June grew 17.6% from a year earlier, slowing sharply from the 28.1% increase in May and below market expectations." The reason seems to be a poor economy in the US which is likely to spread quickly to the EU and Japan. In other words, China’s problems will get worse.

China now has troubles which are fraternal twins. Inflation has stepped up sharply. Depending on who is measuring it is in the 8% range, but food costs are rising much, much faster.

As exports slow, the rate at which Chinese middle class wages will rise is also likely to get hit. When companies are selling less, they cannot pay their people more. That leaves the central government in a bit of a bind.

If the combination of a slowing economy and rising energy and food costs may hurt the US, they could hurt China worse. The mainland’s financial dynamics are a caricature of America.

Exports are the meat and potatoes of China’s opportunity to become the world’s largest economy. The excess capital that goes into its sovereign funds and invests in advances in technology and industrial improvements are all driven by the money which comes into the nation for its goods.If the money flow lessens, the entire system is compromised.

There is a temptation to compare China to the Japan of a generation ago. Japan was on its way to becoming the world’s largest economy. Its stock market was rocketing up, and with it the value of real estate. Exports were the fuel of the entire system.

China’s ability to increase GDP is based less on what it consumes within its boarders that what it sends abroad. The cycle to change that will take a long time. The wealth inside its borders is not great enough. And, the process to correct that is becoming arrested.

Douglas A. McIntyre