The contraction in consumer spending in the U.S. and Europe so visible in the statistics for October and November is having an immediate and powerful effect on global trade patterns. Bloomberg and Reuters are reporting that Chinese exports may actually have declined in November, as measured against a year ago. The last year-on-year decline in Chinese exports occurred in 1999.
Chinese GDP growth has been dropping like a rock. Last year at this time, the country's economy was still growing at around 10 percent a year. Now estimates are percolating up that say GDP growth next year could drop to 7 percent or even lower. The ramifications of such a slowdown are almost too huge to comprehend.
In Japan or the West, 7 percent GDP growth would be reason for jubilation. But in China, the ruling Chinese Communist Party's hold on power is predicated on its ability to deliver economic growth fast enough to cope with the massive aspirations of a nation where the majority of citizens are still very poor. Reports of labor demonstrations in Southern China, where factories are closing by the thousands, are rampant. China's leaders bet the future of the country on a strategy in which it would become the low-cost manufacturing center of the entire world. They are now trying to make the transition to an economy driven by domestic demand without any margin for error and under intense time pressure.
In BusinessWeek, Freddie Balfour writes that China's new half-trillion-dollar economic stimulus plan is already spurring optimism about a rebound in the Chinese economy next year. Steel prices, for example, are rebounding in expectation of massive new spending on infrastructure. But if China's exports continue to decline at their current rate, that optimism may well be misplaced.
We know one thing about next year. The governments of two of the world's largest economies, the U.S. and China, will both be spending hundreds of billions of dollars attempting to pull themselves out of a global downturn that threatens to swallow both countries. The financial crisis has already contributed to a change in government in the U.S. What could it mean, long-term, in China?