The government in Beijing has been aggressive in using money policy to damp down property speculation as a way to steer China’s hot economy away from a meltdown.
Avoiding dangerous bubbles makes long-term sense, but there have been short-term costs: the benchmark Shanghai Composite Index is down more than 20 percent year-to-date. It fell 5 percent on Monday alone.
The chart to the right shows the growth rate over the past eight years for China’s imports and exports (lines), along with the nation’s trade balance (vertical bars). After a huge contraction in 2008-09 during the global recession, both imports and exports have bounced back strongly.
In April, imports (which include raw materials for manufacturing) were up 51 percent year over year and exports were up 30 percent.
Four straight months of strong year-over-year recovery in China’s exports was likely a key factor considered by the government when it imposed anti-property speculation policies last month.
But the sovereign debt crisis in the eurozone is another key factor. Europe is China’s largest trading partner, and the debt crisis has led to a significant devaluation of the euro against the Chinese yuan.
The yuan, which is pegged to the U.S. dollar, is up 14 percent against the euro in just the past four months. The stronger yuan makes Chinese-made products more expensive in the eurozone, and this hurts exporters.
The three-month trend of China’s imports, a leading indicator of future exports, has already headed down. Should a meaningful export deceleration occur in the intermediate term, Chinese authorities may reverse policies to protect economic growth.