Can Chinese firms substitute all foreign income with domestic demand?

• Industrial output has improved in China after the Covid-19 paralyzed production, but export orders are still sluggish. Although export data in April 2020 was rather positive, it was mainly explained by the pent-up demand for parts and components which could not be sourced before. The Chinese government has so far stepped up export-tax rebates as an additional support. Firms have also addressed the weak external demand by switching to the domestic market.
• In the past few years, the importance of external markets for Chinese firms grew from 7% in 2013 to 11% in 2019. However, 2019 was indeed a difficult year with export growth plunging into negative territory due to the US-China trade war. The collapse in exports was faster for state-owned enterprises (SOEs) and foreign firms, while private companies held up relatively well. The situation has changed in 2020. All types of firms are now suffering from lower export growth with a sharp decline in the private sector, which has become more important due to their surging market share from 39% in 2013 to 50% in 2019.
• From the sectorial view, semiconductors and information technology are the most affected as 49% and 37% of their total revenue came from overseas respectively in 2019. Although the two sectors only constituted 8% of total revenue among Chinese listed firms, they generated 29% of overseas sales. That said, these two sectors may not look huge in equity indices but remain important for Chinese exports. It should also be noted that semiconductors and information technology will probably be hit beyond the pandemic-related economic slowdown as they are the target of US pressure on China’s technological rise.
• Besides, there are also sectors that may not be able to cushion the disappeared foreign income with domestic demand unless there is a big fiscal stimulus. The automobile sector is an obvious example, which has suffered from negative growth in domestic sales for two consecutive years. The structural problems in slower disposable income growth and frontloaded demand due to subsidies are the key drags.
• With a low share of foreign revenue, it seems possible for some Chinese firms to switch to the domestic demand but only for short-term relief. Sagging external demand is still a problem for Chinese corporates with some more than the others. Private firms, especially in the semiconductor and information technology industries, will be hit harder not only because of the higher share of overseas sales but also the tough pressure from the US. All in all, external demand is still vital for a full rebound for sectors with high reliance on foreign sales.

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