Slumping trade a sign of great fall for China

The 2.2% drop in exports from November 2007, reported by the government Wednesday, underscores the rapidly deteriorating conditions in China's economy. In October, the nation had posted a 19.2% jump in exports from a year earlier.

"It basically reflects what you're seeing on the ground: Factories are closing," said Andy Xie, an independent economist in Shanghai.

"It's very grim," he added. "You can bet the next few months are going to be worse."

China's exports to the U.S. fell especially hard, dropping 6.1% as Americans socked by the recession reined in their spending.

Wessco International in Los Angeles is forecasting a 10% to 20% decline next year in the volume of toiletry kits, stationery, bags and other products that it makes largely in China for airlines, hotels and cruise lines, said Petros Sakkis, Wessco's manager based in Hangzhou. That could be mitigated by new business that Wessco is chasing in China, the Middle East and Europe, he said.

Less than a year ago, U.S. companies with production operations in China were fretting about the appreciating Chinese currency, soaring raw material costs and pressure from local governments that seemed to want only high-end manufacturing. But all that's eased since the global financial crisis took hold and spread to China.

"China needs us again," Sakkis said.

China's imports fell more dramatically than exports -- down 17.9% in November from a year earlier. The drop, partly reflecting the decline in commodity prices, boosted China's monthly trade surplus to about $40 billion, a record high, although it was hardly news to cheer about in Beijing.

Some analysts said the wider gap could add to trade tensions between China and its major partners: the U.S. and Europe.

The erosion of imports indicates weakening domestic demand. And the pullback in export orders from around the world has dealt a blow to China's industrial base and wiped out countless jobs, triggering labor unrest that poses a severe test to the Communist Party leadership.

"On the one hand, government doesn't want exports to drop dramatically and hurt social stability," said Zhang Bin, deputy director of international finance at the Institute of World Economics and Politics, a government think tank in Beijing. "But on the other hand, it is necessary for China to have a structural adjustment and industry upgrade . . . to decrease some exports and transfer resources from the manufacturing industry to the service industry."