Exploding China Trade Surplus Sends Stocks to Worst Week in 3 Years

Exploding China Trade Surplus Sends Stocks to Worst Week in 3 Years

Fridays’ 300 point plunge (-1.62%) for the Dow Jones stock index capped off a -3.52% weekly slump for U.S. stocks; the worst decline since May 2012. The week before, traders were celebrating a “Santa Clause Rally that took U.S Standard & Poor’s stock index to an all-time-high on December 5. But when China announced on Monday that their trade surplus jumped 61.4%, U.S. stocks started tanking.     

The common perception is that China’s economic growth has led the world over the last decade. But since the March 9, 2009 bottom of the financial crisis, the U.S. Standard & Poor’s index has gained +206.8% and China’s Shanghai stock index has actually been the world’s worst-performing stock market, with a gain of only +63.8%.

The primary reason for U.S. stock strength and China weakness is that in September 2006 the Bush Administration forced China to dramatically appreciate the exchange rate of their “yuan” currency after China’s trade surplus with the U.S. reached $202 billion and millions of American manufacturing jobs were being outsourced to China. Between late 2006 and January 2014, the U.S. dollar exchange rate fell by -34%. The strengthening yuan made Chinese exports more expensive and U.S. exports cheaper.

The U.S. trade deficit with China stopped growing in late 2006 and stayed at about $20 billion a month through March 2014. China’s global trade surplus also stopped growing in 2006 and held steady at about $200 billion a month thru March 2014. Despite volatility in prices, the Shanghai stock index had zero appreciation over the next seven years.

But once the Chinese yuan started weakening in early February 2014, it wasn’t long before China’s trade surplus with the United States and the world took off again. Since April 2014, China’s trade surplus with the United States is up about 60% and hit an all-time-high in September of $35.6 billion. China’s global trade surplus has more than doubled since March, hitting new all-time highs of $49.8 billion in August 2014 and $54.5 billion in November.

Shortly after China’s trade surplus started climbing, the Shanghai stock market started soaring in July and is up with a world-leading gain this year of +38.86%.  Last week’s stock market carnage was global. French stocks got whacked by -7.0%; British stocks tanked -6.6%; German stocks plunged -4.9%; India stocks dropped -3.9%; and Japanese stocks were down -3.1%. The only up stock market on the planet that was up last week was China’s Shanghai exchange.

Powerful economic forces have been unleashed with only a 2% decline in the exchange rate of the Chinese yuan currency. Yet investors fear that the exploding Chinese trade surplus means that China’s government authorities have adopted a policy to drive the exchange rate of their yuan currency down. With the U.S. dollar strengthening, American jobs may be at risk of suffering another wave of outsourcing to China.

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