China has a lot of cash reserves so they are not hurting in one sense. However, not only is there trade increase 1% instead of 7% (or as the financial people like to say, 700 basis points), their overall GDP growth has dropped. Since the China GDP is based mostly on exporting, it isn't too surprising that the figures would correlate.
Normally this would lead us to think that the Chinese central bank would loosen monetary policy. A couple of issue prevent this. First, the inflation that should have hit the U.S. in early 2011 like a financial tsunami was sent across the Pacific via the dollar's status as a reserve currency. We got inflation, but China got more. The second issue is what is happening right now across the American Midwest -- the Corn Belt. My wife's nephew up in Wisconsin has a really good corn crop. He is going to get a lot of money for it with corn over $7.50 a bushel and rising rapidly.
Every week, we get another reduction in the estimated yield of corn and soybeans. Food prices are going up and will go up more through fall and winter. If China prints money to stimulate their economy, that only exacerbates the impending food inflation. You could get food shortages in China. The Chinese may be a generally peaceful, patient, and long-suffering nation, but hungry people do crazy things. We have already seen the results of food price inflation in Egypt and Libya.
The political players in a country will take advantage of hunger to bring down regimes. It has happened throughout history and will happen again.
So China has to be very careful about trying to stimulate an economy that seems to be stagnating from falling global demand. By the way, as Denninger points out, this would be the time of the year we would expect Chinese exports to climb (emphasis is in the original):
Let's also remember that this is the time period where export shipments usually ramp up in expectation of the Christmas Season. Goods in transit have to cross an ocean in a container ship, after which they go to warehouses and are stocked back for the holidays.
Flat exports during the month of July is extremely bad as this is the beginning of the ramp-up period that occurs every year. This data strongly implies that orders have collapsed for the upcoming holiday season, which in turn means that the economy is going to flush as we come into the end of the year, pretty-much spot-on with what I have been expecting.
With the drought threatening to drive up the price of basic food stuffs, not just for the Chinese, but around the world, all central banks have to be looking carefully at their monetary policy. In a time of escalating food prices, can anyone take a chance on running the presses? It would be a risky business.
More and more this reminds me of the late 1970s. We cannot use the same fix as we did in the 1980s -- that is, cutting taxes while increasing spending. Reagan's much-maligned tax cuts did generate much more revenue to the Treasury as the economy grew, but the Democrats in control of Congress at the time spent every dime that came in and more. Reagan was, in fairness, advancing Defense programs designed as much to run the Soviet economy aground as to actual defend the U.S.. Like it or not, that worked. But domestic spending should have been held in check, and it was not. We had a margin -- a manufacturing base back then that we do not have today. This time we have to reduce spending and close the deficit gap quickly.