China lost its edge

China old woman military ReutersSeventy-nine-year-old Wang Baorong, dressed in military style clothes, performs square dancing at a park square in Beijing, China, April 9, 2015.

China has lost its edge.

Export data released this weekend shows that a strong yuan is hampering one of the pillars of the country’s economy at one of the most delicate times in its history — during its painful transition from an investment to a consumption based economy called “the new normal.”

Exports came in weak for the month of June, rising only 2.1%. That’s better than the contraction of 2.8% we saw in May but analysts don’t think that’s going to cut it for China.

“…low single-digit export growth year-to-date against a background of the strengthening global economy is not particularly impressive. With real estate construction also weak, China’s main external and domestic engines of demand are both misfiring,” wrote Bloomberg economist Tom Orlik in a recent note.

This is all happening too early. In China’s perfect world, exports wouldn’t start weakening until domestic consumption contributed enough to the economy to help it grow. June imports fell 6.7% suggesting that the domestic demand isn’t strong enough to let exports or real estate construction fall by the wayside yet.

“China has faced slumping exports before,” Orlik wrote [emphasis ours]. “The difference this time is China has lost its competitiveness, and weak global demand is no longer to blame. China’s currency has risen 13 per cent in real effective terms in the last year as the yuan has stayed pegged to a strong dollar. Combined with higher wages, that has dealt a blow to the competitiveness of exports.”

What’s more, it doesn’t look like exports are going to improve much going forward — at least not based on today’s numbers. As Orlik points out, China’s export order indexes are showing no signs of life — zero growth.

So what can China do? It could depreciate the yuan — weaken it so that its exports are cheaper and more attractive. Unfortunately that would probably cause financial instability and spur people to take their money out of the market.

No one likes capital flight, especially in a place where outflows just started to stabilise after taking a serious plunge through all of 2014.

With the stock market whip sawing and the property market slumping, investors don’t need another reason to get out of Dodge. And again, China needs their money to grow until it’s strong enough to grow itself.

You see the problem

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