Who is going to pull the global economy out of its funk? No one knows. But it’s not going to be China – regardless of how many more times the central bank is going to tweak its policies and cut interest rates. That’s what China’s trade fiasco is saying.
Soothsayers were once again shocked on Sunday by just how far China’s imports and exports have deteriorated.
Exports dropped 6.9% in October from a year ago, to $192.41 billion, after a 3.7% drop in September, the fourth month in a row of year-over-year declines. Exports had peaked last December at $227.5 billion and have since dropped 15.4%.
Shipments to the US edged down 0.9% year-over-year, to the EU 2.9%, and to Japan, which is suffering from the Abenomics hangover, 7.7%. Is China’s economy getting the feverishly hoped-for boost from supplying the overseas holiday shopping season? Not yet.
China has been getting hit by two simultaneous forces: weak global demand and loss of competitiveness due to rising wages, land costs, and other expenses. It’s no longer the low-cost producer. And as it switches to robots for manufacturing, which it is doing at lightning speed, it has to confront a new reality: robots are the great equalizer; unlike labor, they cost the same everywhere.
Imports plunged 18.8% year-over-year to $130.8 billion, after a 20.4% cliff-dive in September, the 12th month in a row of declines. This isn’t weak global demand, but a swoon in demand in China. Part of the plunge is due to falling commodity prices and weak demand for commodities in China. But even then: for the first three quarters of the year, import volume, which eliminates prices as a factor, was down 4%. Imports peaked in Mark 2013 at $183.1 billion and are now down 28.6%.
The dismal import picture is a sign that China’s economy is weakening, including in key sectors like the property sector that the government has been trying to reflate. But no one can get a real handle on how weak the economy really is, perhaps not even the government. But it wants the rest of the world to believe that the economy grew at a phenomenal 6.9% in the third quarter.
With imports plunging much faster than exports, China’s trade surplus rose to $61.64 billion, on track for a record year. For all sides concerned, that’s the worst possible way of growing a trade surplus.
The weakness in China’s economy and its exports to the rest of the world are showing up in the weekly China Containerized Freight Index (CCFI): On Friday, it dropped to the worst level ever.
The index, operated by the Shanghai Shipping Exchange, tracks how much it costs, based on contractual and spot-market rates, to ship containers from China to 14 major destinations around the world. Unlike a lot of official data from China, the index is an unvarnished reflection of a relentless reality.
It has been cascading lower since February and has since dropped 31%. At 742 currently, it’s down 26% from its inception in 1998 when it was set at 1,000. This is what the collapse in shipping rates looks like:
The more volatile and immediate Shanghai Containerized Freight Index (SCFI), which tracks only spot-market rates (not contractual rates) of shipping containers from Shanghai to 15 major destinations around the world, had surged over the two prior weeks from record lows. The spot rates it captures are seen as a harbinger of contractual rates. And that surge had given rise to hopes that the worst might be over. But last week, it re-plunged 15.6% to 641. Rates to the US West Coast plummeted 19.1%, to the US East Coast 14.4%, and to Europe 31.8%.
In the US, demand has been dogged by business inventories that have ballooned to the worst levels since the Financial Crisis, even as buyers have become less than enthusiastic. Businesses are now trying to get their inventories back in line by whittling down their orders. And carriers – along with the rest of the economy – feel the pain.
These shipping rates are a function not only of anemic demand from around the world for Chinese merchandise but also of oversupply of shipping capacity. “Overcapacity” is deadly for business. It has been hounding the commodities sectors as well, along with much of the industrial economy in China.
An outgrowth of cheap credit, malinvestment, and central-bank-infused over-optimism about future growth, the process of creating overcapacity heats up the economy, but it then represses prices and becomes a deflationary force that mauls businesses.
This process has trapped the container shipping industry that has invested billions of dollars every year to expand its fleet and add mega-containerships, without seeing the growth in global trade needed to support that expansion.
Even the largest carrier in the world, which instigated the overcapacity drive, is struggling. Maersk Line’s shipping volume, despite a large increase in fleet size, rose a scant 1.1% in the third quarter. When its owner, A.P. Moeller-Maersk of Denmark, shocked stockholders with a profit warning on October 22, it said that “the container shipping market deteriorated beyond the Group’s expectations especially in the latter part of the third quarter and October,” and it expects “no market recovery within 2015.”
That was in October. And now Maersk CEO Nils Smedegaard Andersen told Bloomberg, “We believe that global growth is slowing down,” and is worse than forecast by the IMF and others, as trade is “significantly weaker than it normally would be under the growth forecasts we see.”
But, thank goodness, he didn’t see any signs yet that the global economy is headed into the same kind of crash experienced during the Financial Crisis. The current slowdown “shouldn’t lead to an outright crisis,” he said. “At this point in time, there are no grounds for seeing that happening.”
At this point in time. Very comforting.
The loosey-goosey monetary policies since the Financial Crisis have generated overcapacity in all kinds of other industries though they’ve consistently failed to generate demand. The capital that has been plowed into this overcapacity is now getting destroyed, including in the US. Read… Giant Sucking Sound of Capital Destruction in US Oil & Gas
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Robotics may be the great equalizer, but what are they going to do with the displaced workers ? Most countries have some form of the problem, but China has an extreme version if only because of the numbers of workers. A few years ago, it was estimated that China had a hundred million transient workers who migrated around from factory to factory. Keeping that many workers employed won’t be easy.
Social peace has always been the regime’s main priority, so it will be interesting to see what they do.
In 2009 China handed out 13 million pink slips on Chinese New Years.
http://www.zerohedge.com/news/2015-11-09/lets-go-big-cut-ecb-consensus-forming-even-deeper-rate-cut-reuters-reports
Hi, Wolf:
what do you think about this? Negative rates are actually about the modern bank model, based on borrowing money market funds (near the central bank rate) and doing something with the funds to collect the spread. NIRP means negative money market rates. So this is actually about bank funding action. NIRP won’t get the banks lending into the real economy. It will simply punish savers more, and favor banks.
Low interest rates destroys capital. Negative rates destroys capital faster. A perfect example is all this overcapacity that isn’t being utilized – something that only happened because of false interest rates.
NIRP exists because they are attempting to protect the banking/monetary system at all costs. They can get away with this for a little while, but they are essentially burning their house down at the same time.
Folks (like me) will just keep cash in a safe deposit box, or under a mattress. Or maybe Treasury Direct. Or Bit Gold. Or guns/ammo. What they can’t do is make me borrow more money – and that is what they ultimately what they (proverbially) want because the system has to keep expanding or it implodes.
That is what they are trying to do with NIRP and it ain’t gonna work.
Regards,
Cooter
Destroy capital [of savers]. Lower rates drive mal-investment. They increase capital for investment for risk-takers. Government is driving risk (which they mistakenly think is the same as growth. LOL. What do you expect from a bunch of lawyers with no MBA and little real experience building a business).
As to the article. Can this be solely due to drop in oil price? Spot “prices” on shipping seem directly related to oil price. Perhaps import/export are lower nominal value due to lower costs due to lower oil costs.
Come Christmas, we’ll know for sure.
My thought is China used to sell cheap crap. Now they just sell crap. K-mart anyone?
We are always looking at various levels in the economic pyramid to judge its health.
Let’s have a look at its foundations, the global consumer:
1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.
2) Japanese consumers have been living in a stagnant economy for decades.
3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.
4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.
5) South American and African consumers are busy struggling with economies that are disintegrating fast.
Oh dear.
“The once wealthy Western consumer has had all their high paying jobs off-shored”
so in essence the US corporations have eaten their seed corn and created a society that can’t afford to buy the products that they used to make but are now made offshore…..and they can’t afford said products at any price.
i just moved and would love to buy some new furniture but i simply can not afford it and i see no end in sight for that.
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett
The 1% went to war on the global consumer, very silly really.
Before they win, everyone loses.
Capitalism is like Siamese twins at war with each other.
The 1% and 99% always fighting each other to get more, but if either side win they destroy each other.
The 1% were in the ascendency in the 1920s and blew it up with a Wall Street Crash in 1929.
The 99% were in the ascendency in the 1970s and blew it up with constant strikes making individual nations uncompetitive.
The 1% are in the ascendency again and have already caused another Wall Street Crash (2008) plunging the world into a global recession that seems without end.
The 1% haven’t worked out that they have gone to war against the consumers that buy their products and services.
Obviously this was all spotted by Marx a long time ago, but he had never seen the results of the 99% in power (Pol Pot’s Cambodia, Stalin’s Russia, Mao’s China, etc …). He came from a wealthy family and was only too aware of the greed, self-interest and hypocrisy in his own class.
Capitalism is an endless fight between the two sides, but neither side can win, to do so destroys themselves.
A more balanced approach is needed but the very thing that makes Capitalism work, self-interest and greed, ensures neither side is ever happy with their lot and always wants more.
Germany is worth a look. The economy is less financialized than the US. Like Japan it traditionally had no business schools and like Japan, ‘Education’ does not exist as a separate faculty/ discipline.
One half of the high school grads go into apprenticeships.
The wage difference between worker and management is nowhere near the disparity in the US.
In his book ‘Boomerang’ Michael Lewis describes how a German banker narrowly escaped jail after investing in US subprime mortgages. (In 2006- Goldman etc. desperately began looking to dump mortgage backed securities. Everyone’s target was the Germans, who believed you if you said it was A rated.)
He didn’t go to jail but had to return a year’s salary of $800, 000. In the book the number is printed in italics; no senior US banker would expect so little for a month’s salary.
Union-management relations are less adversarial than in the anglo-sphere. A union member sits on the board of larger outfits.
They never did have our style of real estate bubble.
Not perfect but worth a look.
If you live in Florida you can buy furniture with no payments due for 2 years or more. Same day delivery. No kidding.
Where I lived there is a high quality furniture auction every Sat. Much higher quality stuff than Icrapea. $80 gets a fine piece. $150 a fine couch. $300-$500 for extremely high quality pieces.
Buy select used- the same quality new would cost a fortune.
There is no longer any doubt that a large number of previously higher paying manufacturing and other kinds of higher paying jobs all around the globe have been transferred from human to robot workers. This is a process that has only just started.
So, for the sake of restoring lost demand to the economy its only fair that we should now expect those robots to step up and start buying the over priced cars, houses, and condos on the high end and low priced crap at the box stores and online on the lower end and low end that their human counterparts used to buy.
Of course robots don’t need that stuff. And, humans who can buy have discovered that there is no reason to buy at high prices anymore. In fact now that prices are dropping fast, humans want bargains. They don’t just want bargains, they want to pay bona fide deflationary prices or they won’t buy.
So if the economy wants to grow it will have to produce things robots want to buy. Of course, robots can’t buy anything at all because they work for no pay.
The only alternative is for the government to perform its modern day governmental function and force humans to buy this stuff just as they are attempting to force many poor souls to buy worthless health care insurance or face penalties. That is the modern capitalist way of creating demand where it does not otherwise exist. NIRP is not sufficient because to extent it works to produce any demand, such demand may not be directed into the area that the lobbyists who are providing cash to lawmakers want.
People grossly exaggerate the ability of robots. They see them welding car frames and think that is how the car is built. Actually, welding the frames is about it. The components: starter, alt etc. are bolted on by humans using power tools. Even such simple tasks are not economically feasible with robots.
As for humanoid robots- just because Honda’s robot can walk, sort of, doesn’t mean it can cook your breakfast, beginning with taking out an egg and cracking it.
We all agree that China has lowered prices for many things.
Just for variety I’m going to point my finger at another culprit- an over paid public sector that is sucking the blood out of the economy.
A number of California cities have gone bust ( e.g. San Jose, ya that San Jose) largely due to police, prison guards, fire etc. salaries and early retirement pensions that begin at 50 and are much richer than most private sector ones.
People love to rave about banksters and CEO’s
A few years ago, A freedom of information request revealed that the University of Toronto, Canada had 500 employees making over 100k per year.
That’s one university- out of at least 40 nationwide.
Do you think there are 20, 000 CEO’s in Canada making over 100K?
And of course along with our education gang we have like you the whole health administration- not just doctors and nurses- the hospital here has as many administrators as doctors.
For the most part none of these people are fireable or even in the case of universities accountable.
I have some inner info about one. A gals mother was head of the union. Gal gets a job in cafeteria. Now eligible for ‘closed competition’ job postings ( which should be illegal )
Gets job requiring a lot of computer skills.
First question: “What’s an app? ”
This soon drives co-worker nuts, which of course leads to a bullying charge and of course dumbo goes on stress leave etc.
This is not unusual- the university work places are very expensive funny farms.
Good post Nick Kelly. In USSA gov jobs only go to relatives or minorities. WASP? Don’t waste your time applying. People who actually produce value are not allowed. Period.
“Killing the Host” by Michael Hudson is a must read book for anyone who wants to understand the dire consequences of unleashing the powers of finance.
The power of finance is the power of debt.
Debt is jam today and penury tomorrow.
Tomorrow is here, the repayments are due and the world has reached max. debt.
The power of debt to give the illusion of wealth.
The housing booms and busts in progress around the world:
Same houses, higher prices, higher mortgages, less purchasing power for home owners
Bankers have a ready market for their debt products during the boom, but from all other aspects the housing boom is bad news.
Fictitious wealth is generated during the boom that disappears during the bust.
All that is left are the interest payments to the bankers, draining the economy.
Pretty much the same as every other asset bubble.
A chance for bankers to shift their debt products and little else.
Does anyone have a chart of the import and export volumes over time?
Sorry to interrupt with a comment that is only related to the topic, but a fairly amazing thing has happened.
Ben Bernanke, on his book tour in Canada, has all but told Janet Yellen not to raise rates.
The piece by Brian Milner in the Report on Business section of the Globe and Mail (Nov.8) is headed: ‘Former Fed chairman warns of outside threats in interest rate decision’
He begins by saying he won’t second guess Janet Yellen and then does precisely and explicitly that.
At one point in the multiple caveats he says of the recent US strength, which is course the key metric in the decision: ‘we need more data..’
and wonders if the uptick is a blip.
Since he is undoubtedly aware that such public musing by a former boss would normally be inappropriate, he must be genuinely fearful of a rate hike for the onetime poster stars the BRIC’s, notably Brazil and China.
Inside the Fed, they have a term called ‘announcement effects’.
The FED can’t (and won’t) hike. I am so damn sick of listening to them threaten (over and over and over) about how they are going to do it, only to not do it. Every time.
The MARKET will raise rates and the FED will get drug along, kicking and screaming.
Regards,
Cooter
Ah yes, our dear Flip-Flop-Fed. I think they’re going to hike once – probably in Dec – and then freak out….
Has anyone told Central Banker’s the story of the boy who cried wolf?
There is a wolf ….. oh no, there isn’t
We are going to raise rates ….. oh no, we’re not
I am going to send a copy of Aesop’s Fables to the BIS in Switzerland so all its directors can have a read.
JAWBONING? Doesn’t anyone remember years of Jawboning in the 1960s and 1970s? Maybe I’m just getting old–but wasn’t the Fed always threatening to raise interest rates (to, as the imbecilic Gerald Ford put it “whip inflation now”)? And didn’t they not do it quite often? Why is anyone surprised by this?
Central bankers and credibility – probably one of the greatest oxymoron of our time. Great news Bernanke is in Canada; I was just waiting to get my hands on a signed copy of “The courage to print”. /sarc
The Globe and Mail has kindly (and astutely) printed my letter drawing attention to Ben Bernanke’s second guessing of Janet Yellen’s stated leaning towards a rate increase, which is something like a breach of protocol.
He is worried about external factors- the looming collapse of the BRICS.
Ironically, there were times during in his tenure when they were doing fine.
He would probably agree that, given hindsight, he should have raised during his tenure and left Yellen some leeway.
Another piece of advice for Yellen that is puzzling is the similar caution from the IMF. Since the US has the most votes in the IMF, is this the US cautioning itself? Or did LaGarde do this on her own?
And these are the pressures on Yellen we know about. Who knows what the embattled BRICS are saying privately?
The export numbers tell us that the rest of the world isn’t doing too well, the import numbers tell us that commodity prices are down and they don’t need as much of them … because exports are down.
It’s somewhat reassuring for China that 3/4 of the population can live on a dollar a day and the government has almost 4 Trillion dollars in the bank for the recession – and recessions do happen. Used to be every 7 years.
Wasn’t that Keynes’ idea, save for the slow times and spend during the bad times before the politicians perverted the formula to always spend borrowed or printed money?
There’s not going to be financial crisis until somebody really big doesn’t get paid. And, as long as the top 20% are happy with the government guaranteeing payments to the big-guys things will continue as-is, for a long time.
Chinese collector snapped up a painting for 170.4 million. https://sg.news.yahoo.com/modigliani-sells-170-4-million-york-005555925.html
Apparently the price a Chinese pays for a painting is inversely proportional to the freight index :)
China certainly cannot continue building record breaking bridges forever: https://en.wikipedia.org/wiki/List_of_longest_bridges_in_the_world.
Early in this century, China was an importer of steel, and even European steel makers benefited. Today, it has a steel making capacity greater than the rest of the world. They need to dump steel wherever they can, and in the schizophrenic EU, they can.
You probably know China bought all the steel making equipment outlawed in the USA. Eventually the USA companies got smart and busted it all up rather than auction it.
Ever see that exhibit “The Body”. It was gross. A few Chinese cadavers with lots of gray pollution in them.
In case you don’t read past the lines: the community health effects of Chinese activity take years to backfire. Right about now is when they could be really taking a toll. China probably upped its birth rates to try to find more suckers willing to sell their 20’s for cancer and crippleness.
Is China playing a blinder.
It is centrally planned, which allows big picture, strategic thinking.
The West relies on competition to maximise profit for individual players, with no mechanisms for big picture thinking and strategic, long term planning. It’s markets have moved to high frequency trading to make a second a long term investment.
After 2008, China noted that it had all the surpluses, while the West was drowning in debt and if there were any big debt write downs, it would effectively miss out. Western debt would be written off giving them a free lunch.
China started building up its debt but engaged in useful investment in infrastructure while the West carried on inflating the prices of stuff that exists already, houses, stocks, fine art ….. etc …..
China is now ready for the debt write downs when the world recognises it can’t handle its debt.
China still has scope to lower interest rates to make its debt more affordable, in the West that luxury disappeared seven years ago.
In the West, the inflated prices of assets that already exist will go down to their pre-bubble levels.
China will have its infrastructure and empty cities ready for the future.
Nothing like lots of empty cities to demonstrate superior planning.
But the world’s largest mall with 5 % occupancy will not be held in reserve since they are demolishing it.