China to Focus on Domestic Market as Exports Decline

For the month of February, China suffered its largest trade deficit in more than a decade. A decline in demand for China's exports has resulted in a sharp decline in sales. Meanwhile, Chinese consumers are ratcheting up their own spending levels with imported goods gaining a greater share of disposable income further closing China's trade surplus.

Last month, China's Premier, Wen Jiabao, announced the government's intention to focus economic growth more on domestic consumption, and less on exports. This policy is clearly an attempt to reduce China's economic dependence on outside markets and do more to encourage economic activity within its own borders. Of course, this is still developing and in recognition of the fact, the government has reduced its annual growth target from 8.0 percent annual growth to 7.5 percent.

Certainly, exports will continue to play an important role in helping the world's second largest economy maintain growth. However, shipping levels to both the U.S. and especially Europe have been on the decline for the past few years and according to a report by RS Platou Markets AS, a unit of Norway's biggest ship broking group, this trend is likely to continue.

“European imports from China will be much, much lower going forward,” said Rahul Kapoor, a Singapore-based analyst at Platou Markets. “If you see falling freight rates, that would imply that European demand is falling off a cliff.”

China's Emerging Consumer Class

Starting in earnest in the 1980s, China underwent an industrial reform fuelled by a massive population making the transition from farm laborers to factory workers. Jobs were needed for these migrant workers and while most positions were repetitious and required little in the way of specialized skills, China's workforce has evolved and is now home to some of the most technologically advanced manufacturers.

Wages have climbed as a result of this shift in the workforce and this has given rise to a more demanding consumer base. It is this group that China hopes can pick up the slack should export sales continue to decline.

Keep in mind, also, that almost half of the country's 1.4 billion citizens still live in rural villages and many are moving to the cities to earn regular paycheques. This group represents the largest pool of untapped consumers on the planet and China hopes to use the power of this group to help maintain current growth levels despite the projected slump in exports.

In order to promote activity, it is expected that officials will ease monetary policy. These actions could include lower lending rates as well as a decline in the mandatory reserves that banks must segregate from operating funds. This will increase the available cash in the banking system and promote lending.