China’s economy needs global attention in good times and bad

While the Chinese economy is typically viewed as above average, especially when looking at its GDP output, which is routinely strong, there are indications that things may not be as good as advertised on the economic front there of late.

A recent Wall Street Journal report said that based on recent earnings results from companies that do business in China note that the business environment there “softened rather than stabilized in the second quarter,” with “other companies…struggling with an influx of Chinese goods in their markets that are pushing down prices.”

What’s more, the Chinese stock market dropped 8.5 percent yesterday for its largest daily loss going back to 2007, coupled with declining demand being voiced by multinational companies with large business operations there, along with U.S. exports to China down 6.1 percent through May, according to data from the U.S. Department of Commerce, which is also being reflected in export cargo declines out of the Ports of Los Angeles and Long Beach, the WSJ noted, but noted things may not be as bad as that statistic suggests, with Goldman Sachs research suggests U.S. exports to China account for roughly 1 percent of U.S. GDP.

Josh Green, CEO of Panjiva, an online search engine with detailed information on global suppliers and manufacturers, said despite the recent trends coming out of China, it is important to remember is that on a big picture level, its impact on the global economy is big and growing.

“If you go back in time a bit, China’s economy was all about exports,” said Green. “It is now undergoing a transition to being about imports, infrastructure, and a new consumer economy, and that is the more complicated economy that requires very sophisticated management. We are starting to see signs that the authorities in China are having trouble managing the transition to a balanced economy, with the big one being the stock market, despite serious attempts to prop it up.”

But the deeper story with China, according to Green, is that there is a consumer economy growing up in China, with growth in the retail stock market as more Chinese citizens are investing in the stock market, which was not prevalent in the past. The reason this is happening more now is that China now has more discretionary wealth than there has ever been there.

But when retail investors proliferate, Green said bubbles are created, with the fallout now occurring from that, and, in turn, has resulted in many citizens losing their savings in the stock market.

“These are the types of problems you see an economy go through when it is maturing, and China has so much at stake in getting this transition right, as does the whole world,” Green said.

While the general global view of China has been one as a country that primarily exports products, it is now entering an era where it is going to export economic conditions, explained Green. And he said that leads to an environment in which the entire world is going to be affected by what goes on in China, which represents a big change for the U.S. economy.

“In the past, all we needed to do was look around the country to see what was going on to get a handle on the economy, and most of the world looked to the U.S. to understand the trajectory of the global economy, but now while there is no question the U.S. is still a key player, we have seen early signs that what happens in China is going to have a big impact on our economic well being as well,” said Green. “That has played out with the second quarter earnings of many companies pointing to China as a drag on profitability. On balance, it is a good thing we have a globally interconnected economy but it is going to cause some unexpected shocks, when things happening half a world away reverberate back here at home.”

When asked how global trade nations can essentially hedge themselves from any potential shocks caused by the Chinese economy, Green said one piece of a strategy that is sensible is diversification. For a long time, China was the biggest answer to the question of where people bought product from, but, now, he said smart executives have realized they need to buy product from all over the world.

And in recent years there was a rush to see into China, which he described as a natural evolution of selling into China. While China is and remains an important market, Green said it will behoove global trade players to diversify, sometimes the Chinese economy may be worrisome and other times it won’t be, while having a wide variety of customers to serve. 

“Diversification is the name of the game, with the current trajectory of global trade solid for the short term,” he noted. “As long as China does a reasonably good job of managing its transition, and while there will be bumps in the road, the trajectory can continue to be healthy. Now, if there are some dramatic missteps and there is significant plunge in stock market that unsettles the geopolitical landscape, that could have real repercussions for the global economy and is not something you can really plan for effectively.”

As previously reported in LM, China’s unstable economy has contributed to an uneven flow of goods to and from the United States, report trade analysts. The impact is significant to ocean shipping providers, they add, since China is our largest trading partner outside of the North America Free Trade Agreement (NAFTA).

According to data from Cass Information Systems and INTTRA–a multi-carrier e-commerce network for ocean shipping–prices for imported goods moved via containers continued in a downward trend in May, led by a 1.2 percent drop in computer prices from China. This is the largest decline since May 2013.