No recovery in foreign trade: China’s exports collapse

No recovery in foreign trade: China's exports collapse

For China, the second largest economy in the world, the growth prospects are becoming increasingly gloomy. China’s exports and imports fell faster than expected in July. After sharp declines in the previous months, exports in July fell by 14.5 percent year-on-year in dollars, as the customs authorities announced in Beijing today. Imports recorded a similarly significant drop of 12.4 percent. Both values ​​were even worse than expected by analysts.

After a strong start to the year, the economy is slowing down noticeably and German companies are also disappointed by expectations. China’s economy grew at a slow pace in the second quarter as demand slowed both at home and abroad.

With growth of 6.3 percent in the second quarter, China’s gross domestic product sounds positive at first glance. But the comparatively high number was mainly due to the low starting position in the same period of the previous year: At that time, a number of cities in the country were in the corona lockdown, and the financial metropolis of Shanghai was even completely sealed off for two months. A comparison with the previous months is much more revealing for capturing the status quo: From the first to the second quarter of 2023, GDP in China increased by only 0.8 percent.

China’s importance for export sector

The Chinese market is becoming less important for German exporters. Despite hopes for a trade boost after pandemic restrictions were lifted, exports to China accounted for just 6.2 percent of total German exports in the first half of the year – the lowest share since 2016. But Carsten Brzeski, ING chief economist, said it was too early , speaking of the end of the China boom as the Chinese economy may still recover and the US economy may cool, which would change trade dynamics. “In the long term, however, China’s share of our exports will decrease significantly, and we should be prepared for the fact that China will no longer save our export sector,” says Brzeski.

China suffers from weak global demand

Although the Chinese government abandoned its strict “zero Covid” strategy late last year, many economic problems remain. The export-oriented economy is suffering from the currently weak global demand, problems in the real estate market and low domestic consumption. In addition, geopolitical tensions with the United States, which has imposed technological sanctions on China, are weighing on it.

This has prompted the Chinese leadership to hold out the prospect of further political support. Beijing is looking for ways to boost domestic consumption without loosening monetary policy too much to avoid triggering large capital outflows, while other major economies are raising interest rates to curb rising inflation. It seems questionable whether the Chinese government will achieve its self-imposed growth target of five percent for 2023.

Greater decline in foreign demand

The latest weak import and export figures suggest that growth could slow further in the third quarter. Declining activity in construction, manufacturing and services, declining foreign direct investment and falling industrial profits are all contributing to this trend.

“Most measures of export orders point to a much sharper contraction in foreign demand than has been reflected in customs data so far,” said Julian Evans-Pritchard, head of China Economics at Capital Economics. “And the near-term outlook for consumer spending in the developed world remains challenging, with many countries at risk of recession, albeit mild, later this year.”

The Chinese yuan fell to a three-week low and Asian stocks were weaker after the data.


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