* Shock drop in exports, imports from year earlier
* China pledges to cut taxes, boost spending
* Factory-gate inflation plunges
By Langi Chiang and Zhou Xin
BEIJING, Dec 10 (Reuters) - China’s exports and imports shrank unexpectedly in November as the world’s fourth-largest economy slowed in a startlingly abrupt way in response to the global credit crunch.
The drop in exports from year-ago levels was the largest since April 1999, while the decline in imports was the steepest since monthly records kept by bankers began in 1993.
Other Asian export power houses, including South Korea and Taiwan, had already reported a drop in shipments last month as the shock to confidence that followed the collapse of Lehman Brothers in mid-September reverberated through the world economy.
Economists had expected China’s exports to rise 15 percent and imports to be up 12 percent compared with November 2007. But the data showed exports fell 2.2 percent from a year earlier and imports dropped by 17.9 percent.
“Global demand for Chinese products is vanishing,” said Gene Ma, an economist at China Economic Monitor, a Beijing consultancy. “Secondly, the credit freeze in importing countries has made it hard for Chinese exporters to sell abroad.”
China’s leaders wrapped up a three-day strategy meeting on Wednesday by setting steady growth as their top objective in 2009, pledging to ramp up public spending and cut taxes.
“At present, China’s economic operation is facing greater difficulties,” a state radio report on the meeting said. “Downward pressure on the economy is increasing.”
Because imports fell more sharply than exports, China’s trade surplus actually soared to an all-time high of $40.1 billion last month, eclipsing the previous record of $35.2 billion set in October, the customs administration reported.
A plunge in the price of oil and other commodities cut China’s import bill, but economists said the drop also reflected spreading weakness in home-grown demand as businesses and consumers battened down the hatches.
“It’s just a start. Exports and imports will continue to fall in the coming months, probably until next June,” said Zhang Shiyuan, an analyst with Southwest Securities in Beijing.
The government has been unusually frank in acknowledging its worries that the economic downturn will cause unemployment to soar, jeopardising social stability.
Export firms employ tens of millions of rural migrants. With factories closing by the thousands in southern China, many of these workers are heading home much earlier than usual for the Lunar New Year, which falls in late January.
“With few policy options with which to revive exports, Chinese authorities are understandably focusing on measures to boost domestic demand and push forward with infrastructure initiatives, in an effort to absorb some of the migrant workforce,” Jing Ulrich, head of China equities at J.P. Morgan, said in a note to clients.
The government launched a 4 trillion yuan ($586 billion) stimulus plan on Nov. 9 to boost infrastructure spending over the next two years and the central bank followed up on Nov. 26 by slashing interest rates by 1.08 percentage points — four times its usual margin.
A burning question among economists is whether Beijing will go one step further and engineer a drop in the value of the yuan to give exporters more of a competitive edge in global markets.
The Chinese currency has risen sharply in value this year against a basket of currencies of its main trading partners.
The central bank raised eyebrows last week by allowing the yuan to weaken modestly against the U.S. dollar. Many economists cautioned against reading too much into the move, but others are not so sure.
“The government is likely to launch new policies soon to help the export sector, and that may include a change in exchange rate policy,” said Zhu Jianfang, an economist with CITIC Securities in Beijing.
In another sign that the economy has simply run into a wall, the statistics office reported earlier that wholesale price inflation collapsed to 2.0 percent in the year to November from October’s reading of 6.6 percent. [ID:nPEK42337]
Economists polled by Reuters had expected a rate of 4.4 percent.
“The situation is quite severe. We are slipping into a deflationary recession risk pretty fast,” said Isaac Meng, an economist with BNP Paribas in Beijing.
Reports from the leadership’s economic meeting made no mention of a growth target for 2009, but state media have said Beijing was determined to “protect eight” — a reference to the 8 percent growth rate widely thought necessary to create enough jobs for the millions entering the workforce every year.
The economy expanded 11.9 percent in 2007, its fifth straight year of double-digit growth. But the pace has slowed sharply in recent months and the World Bank is forecasting just 7.5 percent growth in 2009. LINKS > For comments on the trade data.[ID:nPEK354260] > For comments on producer prices.[ID:nPEK40192] (Reporting by Eadie Chen, Zhou Xin, Langi Chiang and Simon Rabinovitch; Writing by Alan Wheatley; editing by Stephen Nisbet)