China's best move: the one-trillion stimulus
- By Catherine Wood
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E-mail China.org.cn, September 13, 2012
As China prepares to install a new leader of its Communist Party, questions arise about how the nation's government will prevent an impending economic slump and keep export numbers afloat. Lower demand from the West has translated into an economic slowdown in the globally co-dependent Chinese manufacturing sector.
Ambitious projections have given way to disappointing figures this quarter, as export growth shrank to a meager 1 percent in July. The August year-over-year figures came in at 2.7 percent, displaying only minor growth. Sources indicate that the reason Chinese manufacturers are settling for figures lower than the usual annual growth range of 12.7 percent, is a drop in exports to China's largest trading partner, the European Union.
To make matters worse, a continued decline in exports has led to an obvious decrease in year-over-year imports [for August.] Part of the reason for the 2.6 percent dip – from August of last year – may be attributed to the decreasing price of commodities, but this certainly does not constitute the sole cause of the decline. Chinese factories took the largest hit, with year-on-year figures showing a 1.5 percent drop in component orders – making it obvious that the Chinese supply is outpacing world demand.
Imports by volume of oil are down 12.5 percent from this time last year, most likely because decreased international demand causes decreased transportation needs at home.
There are no favorable ways to deal with this decrease in demand, but something must be done to stave off an economic slump.
The laws of economics dictate that when supply surpasses demand, there will be a subsequent decline in the selling cost of any good or service. In China, this would mean lowered profits, more competition, and ultimately, fewer manufacturing companies. In the bigger picture, these indicators point to one big problem for China: fewer jobs. There are currently 200 million people in China who depend on export related industries for their livelihoods. It will be up to China's new president to find solutions before these become major problems.
With pressures for an adequate solution increasing, many countries look to China to solve the problem. The Chinese manufacturing sector is globally known for being "a big fish in a small pond." If China is unable to come up with the answers, both Japan and Korea's economies are doomed to take the next big hit.
While Europe is China's largest trading partner, China is Japan's largest trading partner. Ergo, a decline in Chinese imports will yield a decline in Japanese exports – just as a decline in European imports yielded a decline in Chinese exports. The effects of this can already be seen in Japan (the world's third largest economy after the US and China), which has released lowered GDP expectations, predicting contracted growth sometime in 2012.
Earlier this week, Korea announced a stimulus package to increase its domestic growth and protect employment – but it doesn't end there. Rumors of another drop in the Bank of Korea's interest rates, the second since July, are also beginning to circulate.
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