2023-08-08 10:30:29
Chinese exports and imports are in freefall, due to the decline in global demand. The authorities’ room for maneuver seems limited.
The slowdown in the global economy is weighing heavily on China, as data released by the General Administration of Customs showed on Tuesday. In July, imports there fell by 12.4% on a year-on-year basis, the worst variation since January and almost three times more than expected on average by economists.
On the export side, it is a 14.5% dip which was recorded, the worst since February 2020, when activity in the country had practically come to a standstill by the start of the pandemic. After the 12.4% decline in June, a further decline was expected by economists, but not on such a large scale.
“The first question to ask is whether Beijing’s 5% GDP growth target is realistic.”
China victim of declining global demand
For China, this slaughter of foreign trade is a crushing blow. Exports are indeed one of the main levers of economic growth of the Middle Kingdom. If these slow down, employment is directly penalised, which in turn has an impact on domestic consumption.
After a strong recovery immediately following the post-covid reopening of Western countries, sales of Chinese companies abroad have been steadily declining since October (apart from a brief rebound in March and April). These are in fact penalized by rising interest rates and high inflationwhich are weighing on global demand, despite the end of health restrictions that might have boosted exports of goods produced in the country.
The mechanical impact on imports, which are also falling, is linked to the fact that the goods that China imports are mainly semi-finished goods, which are used to produce other goods. These include, for example, semiconductors or parts for the automotive industry. A tile for Germanywhich raises fears of a further contraction of the largest European economy, but also for the other Asian countries, of which China is usually the largest trading partner.
Towards a situation of deflation?
The problem is that on top of that, China’s domestic consumption is already particularly weak, explains Frank Vranken, head of investment strategist at Edmond de Rothschild (Europe), who believes that “the first question to ask is whether Beijing’s 5% GDP growth target is realistic“.
Consumer prices are also at risk of going into a deflationary phase. In June, inflation was at 0%, while for July, economists are counting on a negative price growth of -0.4%, the verdict being expected on Wednesday. Producer prices paid by companies, meanwhile, were already in June 5.4% lower their level of the previous year, which can however also be explained by the significant drop in oil prices.
“Weak foreign demand may lead to glut of supply from Chinese producers and exacerbate the downward pressure on prices”, indeed explains Frank Vranken. And in the coming months, “China will continue to export this disinflation to the rest of the world”.
The authorities to the rescue of the economy
Faced with this difficult situation, Beijing has sought ways to boost growth since the start of the year, although support so far has been targeted and limited. The authorities announced in particular policies to stimulate demand for housing, electric cars and other products. Last month, several ministries also presented a plan to encourage households to spend more on everything from electrical appliances to furniture. Several rate cuts have also been implemented to inject liquidity into the economy.
Markets appear to be expecting broader action from the central government. The real estate sector, in particular, is one of the areas of concern.
The markets, however, seem wait for larger measures from the central government. The real estate sector, in particular, is one of the areas of concern. This Tuesday, Country Garden, the country’s sixth-biggest developer, plunged more than 14% on the Hong Kong Stock Exchange following Archyde.com reported that the company missed a bond payment deadline. Strongly exposed to secondary cities where home sales are down sharply, Country Garden has already seen its orders fall by 60% last month year-over-year.
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