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China’s Shocking Trade Figures… and An Even More Shocking Growth Scenario

I wouldn’t say the wheels are falling off the Chinese economic juggernaut… but today’s grim trade news certainly suggests that they’re loosening a bit.

For the first time in two years, China’s monthly exports dropped in January, stoking fears that the global slowdown is beginning to squeeze China’s economy.

The 0.5% decline is bad news for the manufacturing Mecca, especially since domestic demand failed to pick up the slack. The Chinese customs bureau reported that imports also slumped by an alarming 15.3% – more than four times higher than the median 3.6% drop that a Bloomberg panel of economists expected.

As a result, China’s trade surplus hit a six-month high of $27.3 billion. In turn, that drove the ever-contentious yuan currency to an 18-year high against the U.S. dollar. Expect some spicy conversations when China’s Vice President, Xi Jinping, visits the United States next week.

So what do we make of this surprising news?

China Welcomes the Dragon… But This One Has Lost its Fire

It would take a highly optimistic China bull to pin the blame solely on the “dragon” – a.k.a. the Chinese Lunar New Year, when factories and businesses are closed for four days in observation of the holiday.

For example, you don’t get a 15% import freefall just because places are closed for a few days. It’s symptomatic of a more deep-rooted drop in demand.

Quoted in Bloomberg, Joy Yang, Chief Economist for Greater China at Mirae Asset Securities, states:

“The weakness in trade and lending is more than holiday effects. [It] points to growing downside risks in the domestic economy, due to cooling in the property market and investment.”

Sure. But it’s not just a domestic downside risk. There’s a far greater threat from China’s biggest trade partner – the European Union…

How Europe’s Ticking Time Bomb Could Hammer Chinese Growth

For all the fretting about China’s dismal headline export and import figures, the real powder keg scenario is bubbling underneath.

Trade between China and the EU tumbled by more than 7% in January, as the European crisis rumbles on and Greek politicians shamelessly continue to dither.

“We believe the major drag and biggest risk to China’s growth in 2012 is weaker external demand caused by the ongoing eurozone debt crisis.”

So says Ting Lu at Bank of America Merrill Lynch in Hong Kong, quoted on the BBC.

And the International Monetary Fund has backed up that assertion with a downright awful worst-case economic scenario.

Let’s start with the IMF’s breezy 8.2% GDP growth forecast for China this year. A notable drop from the 9.2% the country notched in 2011 – due to the Chinese authorities deliberately trying to slow the pace of economic growth – but still not bad.

Now factor in another recession in Europe, with some estimates calling for a eurozone contraction of around 0.5% this year. In its February 6 report, the IMF says such a scenario could hack its China growth forecast in half – to just 4.2%.

4.2%, you say? That’s still not bad. The United States and Europe would kill for that kind of growth at the moment.

And while China’s decade-long, red-hot expansion and strong cash position (the country boasts $3.2 trillion in foreign currency reserves – the largest in the world, with Japan’s $1.2 trillion a distant second) would allow it to pump stimulus into the economy and cushion the blow, such a dramatic slump would be significant. One that would surely cause shockwaves throughout the global economy, in addition to the one triggered by a eurozone recession.

To which I say: Get your darn act together, Greece.

Best regards,

Martin Denholm

Martin Denholm

, Managing Editor

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