Slumped China's Exports

Aug 23, 2023

TABLE OF CONTENTS

1/ SUMMARY

2/ THE IMPORTANCE OF CHINA'S EXPORTS

3/ WEAK EXTERNAL DEMAND AFFECTING EXPORTS

4/ EXPORT STRUCTURE ADJUSTMENT AND SHARE DECLINE

SUMMARY

Global markets are sluggish, inflation remains high, and major economies around the world continue to raise interest rates. The demand for "Made in China" exports has weakened, and China's export data has been in decline since May 2023. In contrast to the optimistic assessments of other institutions regarding the import-export situation, we believe that global economic recovery will take time. China's exports still face challenges in the long run, and the road ahead is arduous.

Among the world's major economies, China's economy has become highly reliant on exports. In 2022, China's exports reached $3,592.14 billion, with a YoY growth of 7%, contributing to nearly 20% of GDP growth. However, based on data released by the General Administration of Customs on August 8, this year's July exports continued to show negative growth compared to the high base of 2022 and the weak external demand. In dollar terms, July exports were down by -14.5% YoY (previous -12.4%, Bloomberg's expectation -13.2%), continuing the trend of significantly lower levels than historical averages. China's exports have been consistently weakening, and we analyze the main reasons as follows:

1) Weak external demand is impacting exports, and the support for China's exports remains unstable, keeping pressure on exports. The surge in exports resulting from the fulfillment of orders made after the pandemic restrictions were lifted has largely concluded, leading to an anticipated decline in short-term export growth. The ongoing global economic slowdown, coupled with subdued consumer sentiment and weakened external demand, has created a cycle of challenges. Overseas PMI indices are showing sluggishness, and the PMI indices of major economies continue to decline, making short-term reversal difficult.

2) China has redirected a portion of its reduced exports from Europe, the United States, and major developed economies in Asia to emerging economies in Asia and key economies in the Middle East and South America. However, these shifts have not been sufficient to offset the decline. Against the backdrop of an overall reduction in export volume, China's exports to Europe, the United States, and major developed Asian economies have continued to decrease, resulting in a more diversified trade structure. At the same time, emerging economies in Asia and key economies in the Middle East and South America have emerged as important destinations for Chinese exports. Notably, exports to ASEAN countries and Russia have shown significant growth, yet the overall impact still falls short of bridging the gap left by reduced exports to traditional markets.

3) China's share of global exports has entered a post-pandemic phase of contraction. During the peak of the global pandemic in 2020-2021, China managed to fill some of the export gaps in Europe and the United States by maintaining stable production and supply chains. However, as the global pandemic transitioned into a more normalized state in 2022, exports from Europe and the United States rebounded, leading to a squeeze on China's export share.

THE IMPORTANCE OF CHINA'S EXPORTS

Exports serve as one of the primary driving forces behind China's economic growth, holding a significant position in the country's development. According to data released by the Ministry of Commerce, China's exports amounted to $3,592.14 billion in 2022, representing a YoY growth of 7% and contributing to nearly 20% of GDP growth. However, when compared to other countries, the United States, as the world's largest economy, has an export-to-GDP ratio of only about 12%, and even the third-largest economy, Japan, has a lower ratio than China. In fact, during the peak of Japan's economy in 1990, this ratio was merely 10%. The export industry's extensive supply chain drives the growth of China's manufacturing sector and stimulates the development of related industries such as services, logistics, and finance. This, in turn, boosts the country's GDP and employment rates. Furthermore, China's engagement in exports facilitates cooperation with economies worldwide, paving the way for open channels of international collaboration and promoting investment in China.

WEAK EXTERNAL DEMAND AFFECTING EXPORTS

Amidst a global backdrop of sluggish demand, China's exports continue to face pressure. While China's exports remained relatively robust in the first half of 2023, this resilience can be attributed mainly to a surge in orders from Chinese companies seeking opportunities abroad after the relaxation of pandemic control policies towards the end of 2022. This led to a substantial increase in the number of orders. Considering the typical production cycles of businesses, many of these orders from early 2023 started being delivered between March and April, resulting in positive year-on-year export figures for those two months. However, the situation changed as the US Fed and the ECB embarked on aggressive interest rate hikes in March and July of 2022 respectively. This move caused a shift in consumer purchasing power in European and American societies, as they turned away from the previous regime of indefinite quantitative easing. Additionally, the inflation that remained unresolved in the wake of interest rate hikes further dampened consumer willingness to spend, leading to a decline in China's exports starting in July. While the continuous depreciation of the Chinese yuan to some extent benefited China's export trade, it still proved inadequate to counteract the negative impact of reduced purchasing power on international trade within the larger context of a global economic downturn. The ongoing low levels of overseas PMI readings and the general decline in the manufacturing PMI of major global economies contribute to the persistently weak overseas demand. In this short-term scenario, the subdued demand from overseas continues to exert pressure on China's exports.

EXPORT STRUCTURE ADJUSTMENT AND SHARE DECLINE

China's exports to traditional trading partners such as Europe, the United States, and major developed economies in Asia have experienced a contraction as part of the ongoing structural adjustments. According to data released by the General Administration of Customs, in the first half of 2023, the exports to the top 20 countries or regions accounted for 71.11% of China's total exports, marking a decline from the previous year (where the share was 75.08% in the first half of 2022). Amidst the backdrop of a decrease in total export volume, the shares of exports to key trading partners have undergone significant declines. The effects of global economic recession and inflation have led to varying degrees of contraction in exports to major trading partners such as the United States, Hong Kong, Japan, South Korea, and the European Union. Notably, the share of exports to the United States has seen the most significant reduction, decreasing from 17.52% to 14.39%, and experiencing a YoY decline of 17.87%. This represents the largest decline since the period following the US-China trade war, excluding the pandemic lockdown period. In terms of Asia, exports to core trading partners like Hong Kong, Taiwan, Japan, and South Korea have also decreased considerably. Meanwhile, in Europe, exports to the United Kingdom and major EU countries have seen declines, with almost all European nations witnessing a reduction in China's export share. Additionally, amidst the backdrop of the Russia-Ukraine conflict and geopolitical tensions, China's exports to Russia have seen a substantial growth of nearly 80%, achieving a historic peak increase. However, the proportion of exports to Russia remains at around 3%, indicating that it falls short of filling the export share gap created by other countries.

Changing export structure in China has limited effect of redirecting export shares. The structure of China's exports has changed, with export shares gradually flowing towards some emerging economies in Asia, as well as major economies in South America and the Middle East. However, the impact of this redirection has been limited. In the first half of 2023, among the top 20 major trading partners, China's exports to six countries—India, Russia, Singapore, Mexico, Brazil, and the United Arab Emirates (UAE)—have shown increases. This shift has absorbed some of the export shares previously held by Western countries and major developed economies in Asia. Nevertheless, the export shares of these six countries, on average, only constitute around 2.45% of China's total export volume. In contrast, the decline in the export share of the United States alone has already reached 3.13%, but it still accounts for a substantial share of 14.39%. Even though Russia, Singapore, Mexico, and the UAE have shown notable year-on-year export growth, their combined export shares are far from reaching the level of decline observed in the United States after the reduction. This discrepancy can be attributed to several factors. The export reduction to developed countries and regions is a result of the economic pressure induced by the US dollar's interest rate hike cycle. Moreover, countries like the United Kingdom and the United States have employed a combination of policies to combat inflation, sacrificing economic growth to unwind the aggressive quantitative easing measures taken during the pandemic. Additionally, restrictions on Chinese goods' exports by Europe and the United States continue to persist. Conversely, some emerging economies in Asia and major economies in South America and the Middle East have been able to absorb China's reduced exports to Western countries and major developed economies in Asia. This success is mainly due to their relatively better economic performance, which provides a buffer for domestic demand. However, due to their smaller economic scale, the capacity of these economies to absorb exports remains limited.

Post-Pandemic Decline and Squeezing of China's Export Share. Following the pandemic, China's related export shares experienced a decline and were squeezed out. From 2015 to 2019, China's global export share remained relatively stable at around 13%. However, in the years 2020 to 2021, due to China's efforts to ensure stable supply chains and cost advantages during the pandemic, China replaced European and American countries in terms of export shares. The export shares of economies such as the United States and the European Union notably decreased, dropping from 19.8% and 25.6% at the end of 2019 to 17.4% and 22.2% at the end of 2021, respectively. During this period, China's global export share increased to 15.3%. Entering 2022, as overseas production orders gradually recovered, China's export share continued to decline. The export shares that China had temporarily taken over from the European Union, the Americas, and other countries during the pandemic were reclaimed. Additionally, some of China's original export shares were taken up by emerging economies. For instance, a significant portion of China's export share to the United States was replaced by Mexico and Canada. By the end of 2022, China's annual export share had decreased by 0.6% to 14.4%. As of the first quarter of 2023, China's export share accounted for 14.02% of the global total.

In summary, amidst a global manufacturing PMI slowdown and an environment characterized by insufficient demand sentiment, China's exports are confronted with the challenges of structural adjustment and declining market share. Looking ahead, the global economic recovery will require more time, and China's foreign trade exports will continue to face pressure in the long term. The road ahead is demanding and arduous.

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