DARK CLOUDS swirled above the Chinese economy after the world’s third largest economy suffered its worst decline in exports in nearly 13 years last month, providing further evidence of a deepening economic slump and putting further pressure on the country’s crucial manufacturing sector.

There is still no prospect of recession in China – the country is still expected to grow by 5-7 per cent this year – but the country is certainly suffering from falling global demand for its products on the back of the current economic downturn around the world.

A report by China’s customs agency showed that the nation’s exports in January plunged 17.5 per cent from the year before, while imports were down 43 per cent, both larger declines than expected.

The January slide in exports was much more serious than the 3 per cent drop reported in December.

In recent months, a host of export-dependent factories have shut down, leaving tens of millions of migrant workers without jobs.

In a research note, investment bank UBS said that the figures were skewed by the Chinese new year holiday, which took place in January and partially in February.

However, it said the worst was not yet over for Chinese exports, in line with the severe contraction its major trading partners are still going through.

Also domestic demand remained weak because of the sluggish construction market and the delay before the government's $586 billion fiscal stimulus feeds through. This plan is largely focused on public works, including railways, roads and public building construction, and it helped to drive bank lending to a record in January, the official China Securities Journalreported.

“Nevertheless, we do not see the need yet to revise our outlook on China. We had expected a decline of export volume of 5 to 10 per cent in H1 2009, and the latest data is not out of line with that expectation [excluding the new year effect]. Going forward, if the global economy does not start to stabilise and China’s exports continue to drop throughout the year, we may need to reassess whether a further decline in manufacturing investment and consumption growth would bring down growth more,” said UBS China research head Wang Tao in a research note.

The weakening import figures boosted China’s global trade surplus to $39 billion in January, the second biggest month on record.

Exports to the EU, China’s biggest market, slid 17.4 per cent, while exports to the US fell 9.8 per cent. Shipments of machinery and electronics dropped 21 per cent, steel slid 32.5 per cent and toys declined 14.7 per cent. Toy factories have been closing in highly public fashion in the southern provinces, prompting fears of social unrest.

Companies in Guangdong province and in neighbouring Hong Kong are steeling themselves for further tests in coming months as the orders dry up.