China's unexpected export slump: Is economic change on the horizon?

13, Aug - BLOG

There is good and bad news for China's foreign trade sector and the economy as a whole. Exports fell to a three-month low in July, showing a 7% drop from 8.3% in June. However, imports rose much more than expected, reaching a three-month high of 7.2%. This dual result is due to China's heavy reliance on exports. In the first half of the year, demand for Chinese exports was much stronger than expected, but recent reviews and the prospect of new tariffs have led to a slight slowdown in both exports and the manufacturing sector, two key components of the economy.

The unexpected rise in imports, which fell and even ended up in negative territory in June, points to a possible recovery in domestic demand in the post-pandemic period, one of the main structural challenges Beijing faces. "We expected a return to low single-digit growth in July," ING's chief economist for Greater China Song Linn said in a note to clients. He noted that this rise to 7.2% year-on-year growth was "ahead of most market forecasts for the month".

How do USА actions threaten exports and the global market?

The risk to China's foreign sector now is that a slowdown in US economic growth could have a worldwide impact, slowing global demand for Chinese goods. Such an unfavourable scenario for foreign trade could force Beijing to focus on the domestic market to find ways to support the economy and achieve its target of 5% growth this year.

"The most important thing for Chinese policymakers is to defend the growth target," said Larry Hu, head of China economics at Macquarie Group. "If China can no longer rely on export growth, it will revert to domestic demand." Along those lines, Bloomberg economist David Koo says the unexpected slowdown in Chinese exports in July "suggests that foreign trade - a pillar of the recovery in the last quarter - may be less supportive of GDP in the third quarter." The expert calls the data "worrisome" given the weakening outlook for the US economy, emphasised by rising unemployment in the country. The unemployment rate rose 4.3% in July.

The evidence that the US economy is midway through is palpable and is fuelling the global crisis, especially after the huge fall in stock markets this week. This has led to speculation that the Fed may have kept rates high for too long. What happens next depends largely on how US consumers behave as the labour market slows and sentiment remains weak.

Chinese auto exports fall

Car exports continued to slow, with year-over-year growth falling to 18.1% from 18.9% in the previous month. The slowdown in exports mainly reflects increased price competition in the electric vehicle sector, as volume growth accelerated to 25.5% from 25.3% in the previous year. The slowdown is also seen in exports of steel (-8.4% y/y so far this year), footwear (-5.4% y/y so far this year) and mobile phones (-3.7% y/y so far this year).

But exports of consumer electronics rebounded in July, resulting in a 15.1% year-over-year increase in value, up from 14.8% a year earlier. As with automobiles, price competition is evident in the difference in volume growth, which is up an impressive 24.6% year-to-date this year. Semiconductor export growth also accelerated to 22.5% year-on-year as China continues to build capacity in the sector.