China’s Resurging Exports and US-China trade war
In a surprising turn of events, China’s exports rose unexpectedly in March this year, bouncing back from a decline in the United States and European demand following interest rate hikes aimed at curbing inflation. According to the customs data, exports increased by 14.8% over the previous year to reach $315.6 billion, a significant rebound from the 6.8% drop seen in January and February. However, imports slipped 1.4% to $227.4 billion, although this was a smaller contraction than the previous two months when they fell by 10.2%. Additionally, China’s global trade surplus, a politically sensitive issue, widened by 82% over the previous year to $88.2 billion.
The unexpected expansion occurred as Beijing expects to meet its 5% GDP growth target this year. The aim is the lowest in over three decades, following a 3% increase in GDP last year under President Xi Jinping’s zero-Covid regulations. The trade figures were the first export increase since September, as demand declined, dragging on China’s economy and jeopardising a growth pillar. Manufacturing production has failed to recover from the pandemic’s impact, while consumer growth has been inconsistent. Shipments to Russia and Southeast Asian nations, mainly Vietnam, Singapore, and Malaysia, contributed the most to the profits. According to Hao Zhou, an economist, the surprise increase in exports last month suggests an “upside risk” for China’s first-quarter GDP results, which are due next week.
The unexpected rise in Chinese exports in March 2023 is a positive sign for the country’s economy and could have global implications. The increase could help offset domestic challenges and drive economic growth in the coming years.
CHINA’S ROLE IN GLOBAL TRADE
China’s ascension to becoming a global export powerhouse was not an overnight phenomenon. The country’s journey began with economic reforms in the late 1970s to modernise its economy and open up to the world. Despite gradually increasing its share of global trade over the years, China’s potential remained unrealised due to challenges in accessing foreign markets. However, China’s accession to the WTO in 2001 marked a turning point, unlocking its potential as a manufacturing giant and enabling it to expand its exports to the rest of the world rapidly. The COVID-19 pandemic highlighted China’s critical role in the global economy, and its export resilience allowed for a swift recovery from the pandemic, leading to a further increase in China’s share of global trade.
By 2010, China was the world’s largest exporter. The COVID-19 pandemic highlighted China’s keystone role in the global economy, with disruptions faced by Chinese suppliers leading to production halts and delays across the globe. However, China’s high export resilience allowed it to recover swiftly from the pandemic and even gain further ground across a range of export sectors. As a result, its share of global trade rose to nearly 15% in 2020. In 2021, China’s trade recovery has been impressive, with exports surging by almost 50% in the first quarter of the year compared to the previous year, reaching about $710 billion. This increase is partly due to last year's low base, but it is still 27% higher than in the first quarter of 2019. With its continued expansion in global trade, China’s role in the global economy is set to remain significant for the foreseeable future.
CHINA’S MARKET OVERVIEW AND IMPACT OF COVID-19
Since 2010, the People’s Republic of China (PRC) has been the world’s second-largest economy in terms of gross domestic product. Although its industrial policies prioritise consumption and services, investment and manufacturing remain the primary components of its economy. The PRC surpasses the combined economies of the next four largest countries - Japan, Germany, the United Kingdom, and India. Guangdong, its largest province, has a nominal GDP larger than Canada, while the Yangtze River Delta, centred around Shanghai, has a GDP about the size of Germany’s. Despite the COVID-19 pandemic, the PRC’s economy demonstrated positive growth, albeit unevenly. However, the country’s growth rate has recently slowed due to a shrinking workforce, reduced debt-fueled growth, increasing provincial debt, and trade tensions with the United States. The PRC’s private sector has successfully lifted millions of people from poverty in the past few decades, yet it is still not considered a ‘developed’ economy based on per capita GDP. In 2021, the US GDP per capita was almost six times higher than the PRC's. The PRC government’s “zero-covid” policies have negatively impacted household spending and private business activity, affecting its annual growth target of 5.5%. As a result, the International Monetary Fund (IMF) adjusted its 2022 GDP growth prediction for the PRC to 3.3% in July 2022. Private consumption is also expected to drop from 5.2% to 2.0% in real growth.
The COVID-19 pandemic has significantly impacted the economy of China, the world’s second-largest economy. According to the National Bureau of Statistics of China, the country’s GDP growth in 2020 was 2.3%, the lowest over four decades. However, unlike many other major economies, China’s quick response to contain the virus and subsequent economic recovery helped it avoid a recession. Despite the positive growth, the pandemic still caused significant disruption to China’s economy, with retail sales dropping by 3.9% and fixed-asset investment falling by 2.9%. Furthermore, the pandemic’s impact on the global economy also affected China’s export industry, falling by 1.1% in 2020. The government’s response to the pandemic included stimulus measures such as tax cuts, infrastructure investment, and lending support to small and medium-sized businesses, which helped boost domestic consumption and stabilise the economy.
The increase in exports could boost China’s economic growth, which has slowed down in recent years. The country’s GDP growth rate for 2022 was 5.1%, the slowest in three decades. However, the positive export trend could help drive economic growth in the coming years. The rise in exports could have global implications. China is the world’s largest exporter, and its performance could significantly impact the global economy. The increase in exports could also decrease prices for certain products, benefitting consumers in other countries.
WHAT DOES THIS MEAN?
This unexpected rise in exports could add to the complications for the Chinese government, which is already attempting to revive economic growth following a slump last year. Last year’s growth rate sank to 3%, the second-weakest rate since the 1970s, prompting the ruling Communist Party to set a target growth rate of around 5% for this year. Nonetheless, China’s policymakers may view this export rebound as a positive sign for the country’s economy, which could help support its efforts to achieve its growth targets.
If Chinese demand revives, it could provide a much-needed boost to global suppliers, replacing sluggish sales from the US, Europe, and Japan. China is the largest export customer for its neighbouring Asian countries and a crucial consumer market. Although the Chinese economy has gradually improved, it faces challenges from tighter controls on using debt in its real estate industry, which led to a slump in mid-2021. However, recent data shows that exports to the US contracted by 7.7% in March, an improvement over the 21.8% contraction in January and February. On the other hand, imports of US goods increased by 5.6% to $16.1 billion in March, recovering from a 5% decline in the first two months of the year. The Chinese trade surplus with the US contracted by 14% compared to the same period last year, down to $27.6 billion.
Meanwhile, China’s imports from Russia, mainly oil and gas, surged by 40.5% year-over-year growth to $11 billion, driven by discounts after Western countries cut imports in response to the Ukraine crisis. However, the Biden administration has warned Beijing against assisting Moscow’s military. Exports to Europe fell by 18.2% YoY, while imports of European goods shrank by 37.2%. Consequently, China’s trade surplus with Europe widened by 29.2% YoY to $20.7 billion.
CHALLENGES FACED BY THE CHINESE EXPORT INDUSTRY
During the epidemic, China capitalised on a sudden surge in consumer spending by locked-down customers in developed economies. While other Asian manufacturers faced Covid shutdowns, China maintained its plants open and running due to stringent Covid restrictions that kept breakouts to a minimum. It produced items to fulfil increasing overseas demand. In 2020 and 2021, its export volumes increased by an average of 10% yearly (or 17% in nominal terms, i.e. before inflation adjustment). That is more than double the average rate of increase in the three years preceding the epidemic.
However, commodity demand is beginning to decline as the West recovers from pandemic limitations, and people choose to spend their money on dining out, travelling, and socialising again or are tightening their belts due to the cost-of-living pinch. Furthermore, other Asian nations are resuming production and offering alternatives to Chinese-made items.
China’s export growth has already slowed significantly since July. We believe that the volume of exports will fall by 6% on average in 2022 and 2023 (resulting in nominal export growth of only 3.0%). As a result, instead of contributing 1.8 percentage points to overall economic growth in 2020/21, exports may contribute 1.1 percentage points this year and next.
Losing that significant growth driver will make maintaining overall economic growth difficult. All things being equal, economic growth would be 2.9 percentage points less overall next year. Given the loss of export demand, the only option to achieve a consistent growth rate of 5% (about in line with the authorities’ aim) in 2022 and 2023 would be to nearly treble domestic demand growth.
In recent years, the government has often sought the least assistance feasible, fearing that pro-growth measures could result in excessive debt, artificially inflated asset values, or increased income disparity. When faced with a choice between today’s growth and dangers that might significantly impact tomorrow, the government has prioritised future stability.
CONCLUSION
A rebound in China’s sluggish consumer and investment activity will boost global demand. Exporters of goods and popular Chinese tourism sites, notably in South and East Asia, would profit. A rise in bookings on travel websites suggests a possible comeback in worldwide spending by Chinese visitors, totalling $255 billion in 2019. As the world’s greatest consumer of commodities, China’s resurgence will also benefit metal and energy producers. Furthermore, because China accounts for 15% of global commodities exports, global supply chain tensions are projected to lessen further.
Higher demand, on the other hand, might support global pricing pressures. Copper, iron ore, and other commodity prices linked to China’s real estate sector have recently risen. Meanwhile, with China responsible for roughly one-sixth of global oil consumption, some analysts now predict that prices will rise beyond $100 per barrel in 2023. Prices for LNG will climb as Chinese demand returns, and competition for gas will heat up, perhaps leaving Europe with a gas shortfall next winter.
If China’s resurgence keeps energy prices high, inflationary pressures may last longer, forcing central banks to tighten monetary policy even more. With the effects of last year’s interest rate increases still being felt by consumers and companies, this will further drag on GDP. Given the globe’s weak economic situation, “any new adverse development” might send the world into recession, as the World Bank warned. Indeed, how the epidemic plays out in China and what Xi does next will significantly impact how the global economy looks in 2023.
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Pic Courtesy- Pankaj Jha
(The views expressed are those of the author and do not represent views of CESCUBE.)
