China has become the world's second-largest economy, and most economists believe that the nation will surpass the U.S. for the top spot on the planet before too much longer. As a result, investors around the world watch the Chinese economy closely, and the recent release of trade data from the emerging market had a noticeable effect on world stock markets on Tuesday.
Even though the Shanghai Composite (NYSEINDEX: ^SSEC) managed to post a slight gain on the day, rising almost six points to 3,293, other stock markets in the region reacted negatively, with the Nikkei (INDEX: ^NI225) in particular seeing a 1% drop on the day.
Why trade matters so much
Historically, much of China's economic growth came from the fact that it was able to manufacture goods more cheaply than other countries. A surplus of labor and a relatively weak currency led to huge international demand for goods made in China, and that made the Chinese economy largely reliant on its ability to supply the rest of the world with manufactured products.
More recently, China has tried to diversify its economy by taking advantage of rising levels of prosperity among its citizens. By moving toward a more consumer-based economy, China could escape the cyclical nature of the manufacturing sector and build up a new potential source for growth. Yet progress on that front has been slow, and that's what makes the trade numbers released today so important.
The September figures on Chinese trade showed troubling signs of a continued slowdown. Exports fell 3.7% from the year-ago period, and with the numbers for August having shown a 5.5% year-over-year drop, economists are nervous that the decline could reflect a longer-term trend toward weakening demand for its goods. At the same time, a 20% plunge in imports for September following a 14% drop last month proved enough to sustain China's trade surplus, even though it suggests that Chinese residents aren't looking to purchase as many imported goods as those looking for a consumer-driven economy would hope.
Watch China closely
One area of strength, though, was in crude-good imports, which rose by more than 1.35 million metric tons to 27.95 million. For those looking for an end to the bear market in commodities, imports of crude goods into China mark an important measure of global demand, given the emerging market nation's appetite for raw materials. That's especially important for hard-hit trading partners like Brazil, which rely heavily on demand for commodities for their economic prosperity.
Overall, China's trade data only confirm the negative trends that we've seen elsewhere in the emerging-market nation's economy. In light of the shadow that the summer's big drop in Chinese stocks has cast on the entire Asia-Pacific region, investors need to pay attention closely to ensure that they don't get caught by surprise if conditions keep deteriorating.