Despite record trade surplus, export boom in jeopardy in China

China’s export sector posted robust growth in July, providing much-needed support for the world’s second-largest economy, which will almost certainly miss its GDP target this year.

Exports measured in US dollars jumped 18% in July from a year earlier, marking the fastest pace of growth this year, according to Chinese customs statistics released on Sunday. Analysts polled by Reuters had predicted a 15% increase.

In June, exports increased by 17.9%.

Imports, meanwhile, grew 2.3% year-on-year, slightly below expectations and suggesting that domestic demand remains weak.

July’s strong export performance pushed China’s trade surplus to a record $101 billion for the month, the first time it crossed the $100 billion threshold.

By comparison, the trade surplus in July 2021 was just $56.6 billion.

“Monthly trade data shows that China’s factories continue to march towards a robust return from the latest Omicron wave,” said David Chao, global market strategist for Asia Pacific (formerly Japan) at Invesco.

“Despite a backdrop of slowing global demand, the export boom was largely driven by the normalization of production activity in places like the Yangtze River Delta. [região]”, he said. The Yangtze River Delta, which comprises Shanghai and parts of Jiangsu and Zhejiang provinces, is an important center for foreign trade.

Activity in Shanghai, the world’s busiest container port, hit a record high in July after the city gradually emerged from a grueling Covid lockdown that nearly crippled its economy for months.

Strong demand from Southeast Asia, Europe and Russia boosted exports in July. Remittances to ASEAN countries, the European Union and Russia increased by 34%, 23% and 22% respectively in the past month.

A weaker Chinese currency and rising export prices helped boost performance, said Larry Hu, Macquarie Capital’s chief China economist.

The yuan has weakened 6% against the US dollar so far this year, he said. A weak currency often helps a country’s exports as goods become cheaper compared to items priced in stronger currencies.

Hu also pointed out that China’s export price inflation is broadly in line with US CPI inflation.

“In July, about half of the growth in exports is probably due to the price effect,” he said.

much needed support

The stronger-than-expected resilience of the export sector – a key driver of China’s growth – provides a boost to its economy.

China is facing growing domestic challenges, including strict Covid-19 lockdowns, fragile consumption and a slumping housing market.

It looks increasingly likely that the economy will miss the government’s growth target of 5.5% this year.

Late last month, the country’s leadership failed to mention growth targets at a key Politburo meeting, a sign the government thinks it may not be able to meet its targets, according to analysts.

But a resilient business sector would help offset the broader weakness.

Exports accounted for 0.9 percentage points – or more than a third – of China’s GDP growth rate in the first half of this year, according to a Ministry of Commerce official in July.

The sector is also key to the job market, as it employed 180 million people last year – about a quarter of China’s workforce.

“Strong export growth continues to help China’s economy through a difficult year as domestic demand remains weak,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.

But cooling global demand and new Covid lockdowns in China cast a shadow over the economic outlook.

“After an exceptionally strong period, retail sales in advanced economies have now returned to their pre-pandemic trend,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note on Monday.

High inflation and rising interest rates also mean demand for consumer goods is likely to weaken further in many countries, he said.

“We think that cooling global demand will soon dampen China’s pandemic export boom,” he added.

China’s domestic weakness could also persist if the country does not change its zero Covid policy, analysts said.

Hainan, a tropical island located in the South China Sea, has imposed lockdowns in several cities since late last week as Covid cases spread.

That includes Sanya, a seaside town, where around 80,000 tourists were stranded because of the instant lockdown.