Aug. 31 (Bloomberg) -- China, battling its worst export slump in more than two decades, is finally getting consumers to pick up some of the slack.
The government’s 4 trillion yuan ($585 billion) stimulus plan -- coupled with record lending, tax cuts and subsidies -- has spurred a 60 percent gain in property sales in the first seven months from a year ago, driven car sales 70 percent higher in July and is stoking demand for televisions and computers.
This may lead to a 30 percent rise in China’s imports to $313 billion in the fourth quarter from a year earlier, the fastest pace since the onset of the global recession, according to Zurich-based Credit Suisse AG, Switzerland’s second-largest bank. Stronger Chinese demand is boosting sales for exporters including Taiwanese liquid-crystal-display maker AU Optronics Corp. and South Korea’s Kia Motors Corp. and may push the Korean won and Taiwan dollar to their highest levels in a year, the bank forecasts.
“China’s import boom will lift economies across the region and aid the world economic recovery,” said Olivier Desbarres, a currency strategist with Credit Suisse in Singapore. “Asian central banks are more likely to let their currencies strengthen, especially in Korea and Taiwan, where China is a very major driver of trade.”
The won may climb 5.4 percent to 1,180 per U.S. dollar in the next three months, the highest since September 2008, Desbarres predicts, while the Taiwan dollar may gain 6.2 percent over six months to NT$31, the strongest level since August last year.
Stronger Chinese demand may reduce the global economy’s dependence on consumers in the U.S. and Europe and rein in China’s trade surplus, curbing global imbalances in spending and saving that may have contributed to the financial crisis. The surplus fell $16.6 billion in the first seven months to $108 billion, on track for the first annual decline since 2003.
“We’re clearly seeing a surge in imports driven by domestic demand that is consistent with a new direction for China’s economy,” said Louis Kuijs, a senior China economist with the Washington-based World Bank in Beijing.
‘Grind Higher’
While purchases of commodities may slow after the State Council announced curbs on industries including steel and cement Aug. 26, domestic demand will still cause import growth to “grind higher,” Desbarres said.
Consumer spending accounts for 35 percent of China’s economy, a percentage that has barely changed since the government made it a priority in the 2006-10 five-year plan. In the U.S., the world’s largest economy, consumers represent about two-thirds of gross domestic product.
Spurring domestic consumption gained added urgency with the collapse in exports to $627 billion in the first seven months of 2009 from $803 billion a year earlier. In July, overseas shipments fell for a ninth consecutive month, dropping 23 percent to $105.42 billion. The decline “may continue for a longer time,” Premier Wen Jiabao was quoted as saying on the government’s official Web site Aug. 24.
Foreign Trade
Exports have driven a 15-fold increase in China’s economy to $3.86 trillion since the nation opened its doors to foreign trade and investment in 1978. China is the world’s second- largest exporter behind Germany and the third-biggest importer after the U.S. and Germany.
Chinese banks extended a record $1.1 trillion of new loans in the first half to support the stimulus plan, almost triple the year-ago amount. That helped the economy rebound to 7.9 percent growth in the second quarter from a 6.1 percent pace in the first three months, the weakest in almost a decade.
Government spending on road, rail and power projects has spurred imports of commodities such as iron ore and copper. The government has also halved retail taxes on car purchases and granted 20 billion yuan of subsidies for farmers to buy computers, air conditioners, televisions, refrigerators and washing machines.
“Demand is taking companies by surprise, cars and home- appliance sales have been so strong,” said Jing Ulrich, head of China equities in Hong Kong for New York-based JPMorgan Chase & Co., the second-largest U.S. bank. “This is the start of a very significant transition.”
Rural Subsidies
AU Optronics, the world’s third-largest maker of liquid- crystal displays, forecasts sales to Chinese TV makers may rise more than 40 percent this year because of the rural subsidies. Revenue from China has increased to 20 percent of its total from 8 percent in 2008, the company said July 23.
China’s flat-screen TV sales will almost double to as many as 24 million units this year, estimates Macquarie Securities, a unit of Sydney-based Macquarie Group Ltd., Australia’s largest investment bank. Personal-computer purchases will climb 20 percent to between 36 million and 40 million units, making China likely to overtake the U.S. as the world’s largest computer market in three to five years, according to the brokerage.
China may surpass the U.S. as the world’s biggest auto market this year with sales of more than 11 million vehicles, according to the China Association of Automobile Manufacturers. Sales rose 31 percent in the first seven months to 5.4 million cars and trucks.
Rising Profits
Seoul-based Kia Motors, South Korea’s second-biggest carmaker, said a 52 percent jump in Chinese deliveries to 61,000 vehicles during the second quarter contributed to a fourfold increase in profit to 347.1 billion won ($278 million).
Recovering exports for South Korea and Taiwan -- which ship mainly noncommodity products including cars, computers, electronics and industrial machinery -- show that “the shift to domestic demand in China is working,” said Tim Condon, chief Asia economist in Singapore for Amsterdam-based ING Groep NV, the biggest Dutch financial-services company. Commodities accounted for 21.1 percent of China’s imports in July compared with 21.6 percent a year earlier, according to Condon.
The South Korean and Taiwanese currencies are likely to appreciate because Chinese demand will cause their trade surpluses to swell, said Sean Callow, a currency strategist at Sydney-based Westpac Banking Corp., Australia’s largest lender. Taiwan’s surplus will almost double this year to $30 billion while Korea’s will nearly triple to $37 billion, estimates Zurich-based UBS AG, Switzerland’s largest bank by assets.
China’s Export Share
China accounted for 24.3 percent of Taiwan total exports last year and 21.5 percent of South Korea’s shipments, according to Credit Suisse.
The rebound in China’s imports that Credit Suisse is forecasting would follow a 20 percent plunge in the second quarter and a 7 percent drop in the third. The fourth-quarter gain will be boosted by a collapse in trade during the final months of 2008 that depressed the base of comparison.
Sustaining growth may be a “tall order,” given that four- fifths of China’s expansion this year is being generated by government-influenced spending on building projects, said Vikram Nehru, the World Bank’s Washington-based chief economist for Asia.
The programs are intended to bridge the gap until private- sector output recovers and global growth provides greater support, he added.
Surpassing Germany
While China surpassed Germany as the world’s third-largest economy in 2007, it is still less than 10 percent as rich based on gross domestic product per capita, Kuijs said. At $2,912, China ranked 98th in the world, behind Angola and Azerbaijan, according to a World Bank ranking at the end of 2008.
China may be able to maintain the import surge if it allows its currency to appreciate, making imports cheaper, and continues with policies to stimulate consumption, Kuijs said.
The central bank has kept the yuan stable against the dollar in the past year after the currency gained 21 percent between July 2005 and July 2008. The yuan has risen 2.8 percent against the euro in the past year and fallen more than 14 percent against the yen.
“The Chinese have done a lot of things in the past which were tall orders,” Nehru said. “If anybody is going to pull this off, it will be China.”
To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net
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