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Chinese Exports, Imports Sharply Contract

China unexpectedly reported a significant contraction in both its exports and imports in March, stoking fears that a sluggish domestic economy is taking a toll.

The Chinese government released customs data that revealed exports dropped 6.6% from the same time last year, defying the widely held expectation for single digit growth. Imports fared even worse, shrinking 11.3%.

“Internal and external demand remain weak,” said Ma Xiaoping, an economist at HSBC. “The recovery of China’s major trade partners–the U.S., Europe, Japan–wasn’t as good as expected.”

Customs data is notoriously difficult to interpret, especially given China’s historical resistance to full disclosure. Some economists have theorized that since last year’s export and import numbers were unusually high, the current fiscal picture seems bleaker than it is, in fact. Many have suggested that last year’s data might have been inflated by the rampant use of “overinvoicing,” or the practice whereby companies issue counterfeited export invoices in order to circumvent China’s draconian capital controls.

The Chinese government has taken great pains to stem the tide of overinvoicing, but the problem still remained widespread in March 2013. Andrew Tilton, an economist at Goldman Sachs in Asia, went as far as to call the practice the “main reason” for the stark contrast between the data in 2013 and 2014. Louis Kujis, an RBS economist, said, “”While the export data will add to worries among policymakers and in the market about growth slowing down precariously or China losing competitiveness, we would caution against such interpretations.”

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The danger for China, with respect to laggard exports, is the the tectonic shift the government is affecting economically depends upon a robust shipment of goods overseas. Chinese authorities are trying to buoy domestic consumption and midwife a stronger, more prosperous middle-class but, at least for now, the continued growth of employment opportunity squarely depends on the revenue from exports.

There are also global ramifications of a general slow down of China’s exports. A huge swath of the globe depends upon the goods China manufactures, including everything from apparel to iron ore. Southeast Asia, the US., Australia, Africa and the E.U. will all be considerably impacted, in one way or another, by China’s sluggishness.

Chinese officials downplayed the contraction. Premier Li Keqiang admitted that the current circumstances for growth were “not strong” and that the economy remains faced with “downward pressure.” However, he insisted that there is no need for a government stimulus of any kind. “We will not adopt stimulus for short-term and temporary economic fluctuations, but pay more attention to the healthy development of long-term efforts to achieve sustainable and healthy development,” he said.

Andrew Polk, an economist at the Conference Board, said, “”The real space to watch in determining whether or not the leadership is stimulating the economy will be the pace of credit growth.” The Chinese government, though, worried about the possibility that it will fall below its growth target for the year of 7.5%, has already quietly increased spending, especially on infrastructural projects. Last year, China grew at a pace of 7.7%.

Some economists agree that the situation for China is bad but far from dire. Julian Evans-Pritchard of Capital Economics said, “”Improving conditions in developed economies should continue to support Chinese exports,” said Julian Evans-Pritchard of Capital Economics in a report. “In contrast, we expect import growth to remain relatively weak as slowing investment spending is likely to weigh on imports of commodities and capital goods.”

Shuang Ding, an economist at Citigroup in Hong Kong, said that the real underlying problem would be a lack of available capital for business expansion. “I’m not that worried about exports. Imports are more worrisome. Tightening credit conditions are continuing to affect domestic demand, especially investment.”

Despite the steep decline in exports, China still managed a trade surplus of $7.7 billion in March. Exports in February dropped sharply by 18 percent.