Lots o news recently about the negative export numbers here (over 26% drop from the May numbers last year). As this is a huge sector in China, this of course is something to be concerned about as GDP and employment are hit hard when trade is down substantially.

On the other hand, there are a few fundamental truths here that seem to be lost in this discussion:

1. China needs to rebalance its economy, away from exports and towards domestic consumption.

2. Poor exports are a function of international demand (i.e. this has more to do with the U.S. and EU economies than China’s economy).

3. China’s domestic stimulus plan is a good thing and is sorely needed during this recession.

I thought this stuff was rather obvious, even to an econ layman such as myself. So I am rather confused by yesterday’s article by Keith Bradsher in the New York Times. Bradsher is one of my favorite China reporters, so I assume that I am just missing something here:

Since China entered the World Trade Organization in November 2001, a rising tide of exports, combined with a torrent of investment, has lifted the country’s economy ever higher, while consumer spending has lagged.

OK, yes. See point #1 above on the need to rebalance the economy.

But now, the Chinese economy relies increasingly on growth at home, as data released Thursday made clear. A decline in exports has become a serious drag on growth, while government spending has led domestic investments higher at a remarkable pace and consumer spending appears to have been fairly strong as well.

More government investment, stronger domestic spending. This sounds positive so far. Certainly no one wants exports to fall off a cliff quickly, but the overall picture just reflects the global recession and sound domestic government policy. And then we have this:

Some economists wonder whether China is actually becoming too reliant on investment spending and whether the government’s economic stimulus program may be making this worse.

“For China’s nascent economic recovery to be sustainable beyond the short term, policy makers must take steps to ensure that consumption remains on a firm growth trajectory and that the investment boom does not exacerbate the economy’s structural imbalances,” the chairwoman of China equities at JPMorgan, Jing Ulrich, said in a research note.

Perhaps this article was simply too short to develop this criticism, but to me it sounds like a general argument against major stimulus programs. I thought the whole point was for the government to act as the consumer of last resort when the recession reduced other sources of demand. If exports are still in tough shape, doesn’t that argue in favor of continued, or even larger, public investments? And for an economy that is currently tilted way too much in the direction of exports, how exactly does this government spending result in a serious imbalance in the other direction?

Yu Song, a Goldman Sachs economist, calculated that after adjusting for inflation, Chinese investment spending had grown in May at a breakneck pace, rising close to 50 percent from May of last year.

The government’s stimulus program is powering much of that increase, with spending on railroads soaring 110.9 percent in the first five months of 2009, compared with the same period last year.

The Chinese media reported that retail sales in May, scheduled to be announced Friday morning, are likely to show an increase of 15.2 percent. That would represent a modest acceleration from April, when the increase from a year earlier was 14.8 percent, and a robust gain when adjusted for the gradual decline in overall prices in China.

Again, where’s the bad news here?

The big question for China is how long the economy can stay strong without the support of vigorous exports. Wages and profits have slipped in export-oriented coastal zones of China, limiting the spending power of consumers.

Once again, I may be showcasing my inner idiot here, but I thought that the whole point of balancing the economy was to get to a point in the future where China was not so reliant on the export sector. If investments and other macroeconomic policy (I would also throw in monetary reform) is successful, then when the next global recession hits China, the economy can remain strong even when demand from abroad dips.

Should we be worried about this spending creating new bubbles, unsustainable areas of speculation? One could argue that we are seeing a bit of that in the stock market, but I don’t see that criticism in the press these days.

Another possible problem is spending in sectors that already have excess capacity. Do we want the government building new steel factories? More shopping malls? Definitely not, but again, this would be an argument against inefficient spending, as opposed to spending in general, the latter seemingly being the message of Bradsher’s article.

The other thing that bothers me about this article is the major implication: government investment should be reduced because it is having a negative influence on the economy. So what’s Plan B? Should the government attempt to prop up the export sector as much as possible, with incentives and monetary policy? Aside from the fact that the government has already put many incentives into place (which I think is not necessarily a good thing), this is exactly the wrong thing to do if you want to balance the economy.

Alternatively, if you don’t like government spending and you don’t think that trade incentives are a good thing, then what else is left to shore up demand? There are simply not that many solutions, and I’m not hearing any of them from the Times article.