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Sluggish exports at West Coast ports indicated soft Chinese domestic demand

Tuesday, 01 September 2015 | 00:00
Long before investors lost faith in the Chinese stock market, something seemed amiss at the ports of Long Beach and Los Angeles, where the stevedores and longshoremen process about 40% of U.S. trade with China.

Jock O’Connell, a trade adviser in California with 28 years’ experience studying the docks, wasn’t seeing the patterns he would expect from a rapidly growing Chinese consumer class. The number of containers coming from China was continuing to grow, but beginning in 2013, fewer were being sent in the other direction.

Global stock markets had a rude awakening last week when investors suddenly woke up to a faltering Chinese stock market and unmistakable signs that the world’s second-largest economy was slowing. Close observers of U.S.-China trade patterns, however, had for several years seen the telltale signs many in the markets missed.

“A couple of years ago, everybody was still agog about the growing, burgeoning economy in China,” Mr. O’Connell said. “I started looking at our export figures to China and thought maybe we’re doing something wrong.” Goods produced in the U.S. that are popular with the Chinese middle class, such as almonds or California wines, weren’t posting the surging growth he expected.

In the decade to 2010, a growing share of U.S. exports went to China, from less than 2% to more than 7%. Then the trend stalled. The share climbed again in 2014 and has since declined.

Warning signals on the ground, however, weren’t easy to see. The ports on West Coast of the U.S. had been choked with congestion because of logistical tangles in the shipping industry and labor unrest. When those issues were resolved this spring, trade didn’t bounce back.

In hindsight, imports from China should have provided more of a warning signal, too. Beginning in 2002, after China entered the World Trade Organization, it began flooding global markets with inexpensive goods made by low-wage laborers.

Paul Ashworth, the chief U.S. economist for Capital Economics, believes that prompted a major shift in U.S. inflation dynamics. “Over the last 12 to 15 years, there’s been continual goods price deflation in the U.S.,” Mr. Ashworth said. “It’s all China-driven.”

Before 2002, inflation for U.S. services and inflation for U.S. goods typically moved together, driven by the health of the American economy. Beginning in 2002, inflation remained steady for services but began to plunge for goods. Restaurants and barbershops face little direct international competition, but retail shelves are increasingly full of Chinese goods.

In 2010 and 2011, it appeared the downward pressure from Chinese factories may have abated, suggesting Chinese customers were flush enough to start buying goods themselves.

But by 2013, prices were again spiraling down. Chinese authorities confronted factories churning out products with nobody to buy them. In 2013, China’s Ministry of Industry and Information Technology ordered companies in 19 industries to cut their production levels. Chinese cement, steel, chemical and paper factories had to curtail production.

Still, the goods flooded in, implying weak domestic demand in China. The United Steelworkers, which represents workers in American factories that manufacture tires, among others, became concerned enough to file a trade case seeking tariffs on Chinese tires. In January, the Commerce Department issued a preliminary finding that those tires were unfairly subsidized.

Some slowdown in China’s economy was inevitable. The country’s aging demographics and slowing population growth meant that the boost it won from a surge of new laborers was hard to replicate. China’s pool of working-age people—defined as those ages 16 to 59—started shrinking in 2013 and is expected to continue to dwindle.

Economists have also been distrustful of China’s official economic statistics, which have shown only a modest economic slowdown. That has led many economists to track figures such as electricity generation, cement output or passenger-car sales to get a better read on what is happening, said Megan Greene, chief economist for John Hancock Asset Management.

The performance of China’s stock market was another signal that masked the country’s underlying problems. The Shanghai Composite Index climbed by 47% from October to January. From January to June it climbed a further 53%.

“Throughout last year, a lot of people said, ‘We hear some negative news, but look, the stock market is doing well, so something must be good,’ and they dismissed the signs of a serious slowdown,” said Patrick Chovanec, chief strategist for Silvercrest Asset Management Group and a former professor at Tsinghua University in Beijing.

Now, Shanghai’s market gains for the year have been wiped out, and investors who ignored signs of a slowdown have had to abruptly reconsider. For his part, Mr. Chovanec believes investors overreacted in both directions.

“First of all, you should have been paying attention to this much earlier, but if you paid attention, you’d have come to the conclusion it’s a very disruptive adjustment for China but by no means an entirely negative one for the world,” he said.

China remains the world’s second-largest economy after the U.S., a position that is unlikely to change anytime soon. In coming years its growth might slow further, but China could ultimately end up with a more sustainable economy. A slow-growing country can’t keep building new roads forever, but a rising middle class could guzzle a lot more California wine.

Investors, at least briefly, have been forced to pay attention.

“It used to only be if the U.S. sneezed that everyone got sick,” said Ms. Greene of John Hancock. “Now other major economies, especially China, can sneeze and the rest of the world feels it.”
Source: Wall Street Journal
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