From Goods To Services

In August, China saw its exports to the rest of the world decline for the fourth consecutive month, offering little relief from its deepening economic challenges and contributing to a gloomy global trade outlook.

  • China has been grappling with sustaining the surge in overseas demand for its products that helped buoy its economy during most of the three-year pandemic period.
  • This struggle is particularly pronounced as Western consumers have shifted their spending preferences away from items like smartphones and furniture, redirecting their focus toward services.
  • Additionally, higher borrowing rates in the U.S. and other developed nations have dampened consumer spending.

Simultaneously, Chinese imports continued to contract in August, indicating lackluster consumer demand even after the country relaxed longstanding COVID-19 restrictions. Furthermore, a downturn in China's property market has weakened the demand for raw materials used in construction.

Challenging Times

Taken together, the sluggish trade data released by Beijing on Thursday underscores the challenges facing the world's second-largest economy in reigniting domestic demand. The repercussions of China's slowdown are reverberating globally, impacting oil prices and hurting commodity-exporting countries like Australia, Brazil, and Canada.

  • Chinese manufacturers are facing pressure to reduce prices to retain market share, potentially creating deflationary trends worldwide.
  • Despite Chinese policymakers' efforts, including interest rate cuts and attempts to stimulate home-buying sentiment, many economists believe these measures are insufficient to revive growth, given the rapid deterioration of sentiment.
  • China's outbound shipments in August dropped by 8.8% compared to the previous year, an improvement from the 14.5% year-on-year export decline seen in July, which marked the worst performance since February 2020.
  • Imports to China, including intermediate components, commodities, and consumer goods, fell by 7.3% in August year-on-year, a slower decline compared to July's 12.4% drop.

Despite the relatively better trade data, economists generally agree that exports are unlikely to provide substantial support for China's faltering economic recovery, especially as global trade is anticipated to contract this year.

Domestic Issues Linger

In addition to trade challenges, China is grappling with several domestic economic headwinds. Factory activity has contracted for a fifth consecutive month in August, and the prolonged housing market downturn has deepened. Private investment remains sluggish, and the youth unemployment rate reached record highs in the summer before Beijing stopped releasing this data to the public.

  • The accumulation of negative economic data during the summer months has raised concerns about China's long-term growth prospects.
  • Several investment banks have revised their GDP growth forecasts to below 5% for the year, compared to the official government target of around 5% set in March.
  • Despite these challenges, Chinese Premier Li Qiang, during meetings with Southeast Asian leaders, expressed confidence in China's ability to achieve its growth target for the year.

While Chinese policymakers have implemented various stimulus measures in recent weeks, including interest rate reductions for businesses and homebuyers, and tax relief for households, doubts persist about their effectiveness in reviving weak consumer sentiment.

Decoupling In The Works

In the first half of the year, China accounted for 13.3% of U.S. goods imports, down from a peak of 21.6% in 2017, marking the lowest level since 2003. Concurrently, trade with the Association of Southeast Asian Nations (ASEAN) has grown over the past year, making it China's largest export market, surpassing the U.S. and the European Union, according to HSBC.

  • While China's improved trade relations with Asian nations may help mitigate the impact of declining exports to advanced economies, economists caution that Beijing won't be immune if the U.S. and other advanced economies slip into recession.
  • Overall, global goods trade is projected to contract by 1.5% this year, partly due to tightening global monetary and credit conditions, before staging a modest recovery with 2.3% growth in 2024, as estimated by Adam Slater, the lead economist at Oxford Economics.

China's weakening trade activities are expected to have ripple effects across Asia, slowing industrial expansion and affecting commodity prices.

Disclaimer

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