Some analysts are concerned about China's foreign trade performance amid a difficult external environment with the global purchasing managers index (PMI) continuing its decline. Additionally, the yuan is weakening and global investment is declining.
China's exports increased in March and April by 14.8% and 8.5% year-on-year respectively, but shrank by 7.5% in May, triggering concerns over China's foreign trade. But over the past three years, the average growth rate of China's foreign trade exceeded 20%. Why has China's foreign trade not collapsed as many had predicted?
China's economy is recovering, but the recovery is fundamentally different from previous cyclical rebounds due to three main factors. It is a recovery after the three difficult years of the Covid-19 pandemic; following some of the largest and most thorough adjustments of China's real estate sector; and the recovery is taking place at a time of momentous changes that haven't been seen in decades. In a recovery following a pandemic some indicators are bound to fluctuate and should not be interpreted as a downward trend. China's economy is in the process of recovery, but the pace is inconsistent and policy support is still needed.
The negative growth in imports over the past few months indicates that China is facing insufficient domestic demand. But exports continued to grow, even maintaining a double-digit growth rate, resulting in a sharp rise in the trade surplus. The overall trade situation in the past three years is still in good shape. There are three major reasons.
First, China's trade structure is now quite different from what it was a short time ago. The trade volume between China and the United States has contracted. China's exports to the U.S. fell 15.1% from January to May, but in 2021 and 2022 the trade volume did expand, as well as China's trade surplus.
Despite the overall positive growth in trade between China and the European Union, the U.S. has replaced China as the EU's largest trading partner. China's trade with Japan and South Korea is also shrinking. The trade deficit with Japan has contracted sharply and last year it was almost nonexistent. However, China’s trade with emerging economies, in contrast, continues to grow. Trade with members of the Association of Southeast Asian Nations (ASEAN) has been growing at a rate of more than 20% for several years, and the average growth rate from January to May this year was above 15%. However, the year-on-year growth rate for May alone was negative, mainly due to last year’s high base level – that is why, making conclusions with single-month results is not necessarily informative.
In addition, trade with markets involved in the Belt and Road Initiative (BRI), such as Russia and those in South America and Africa, is also on the rise. The nation’s trade structure, has changed fundamentally.
Second, the impact of U.S.’ moves to repatriate manufacturing on China’s trade may turn out to be limited. To secure its industrial supply chains, the U.S. moved to promote the re-shoring of its manufacturing players, friend-shoring in India and Southeast Asia for outsourcing, and near-shoring by forming a North American alliance with Canada and Mexico. This is not the first time that the U.S. has promoted manufacturing re-shoring, as in the 1980s it also happened while it was struggling with a surge in Japanese imports. But due to the power of the free market, the outcome turned out to be less impactful than anticipated. Also, while the U.S. has been promoting friend-shoring and near-shoring, trade between the countries it outsources from and China has also skyrocketed. For example, in 2021, China’s trade with Mexico surged. That is because the very first step for Mexico to become a manufacturing base is to have a large number of machinery and equipment assets, which China can produce competitively at the lowest cost. At the same time, to industrialize its production line, energy is a must. Mexico has to introduce a lot of power generation equipment to this end, and meanwhile also meet the green power requirements of the U.S. by seeking photovoltaic solutions from China.
Third, China has made breakthroughs in high-tech industries, especially in emerging sectors. In the first five months, combined exports of lithium batteries, photo- voltaic equipment and new energy vehicles (NEVs) increased by 66.9% year-on-year, directly driving overall export growth by 2.1 percentage points. China has become a major power in advancing the development of new technology and industries, forming new growth points for itself and enhancing its competitiveness.
Being the world’s largest car producer and exporter, China has unavoidably squeezed other major car exporters in the global auto sector, such as South Korea and Japan. This in turn further led to a sharp contraction of China’s trade deficit with these countries. So the external environment is getting more complicated and harsh, but this does not necessarily bring adverse effects. In some cases, it represents opportunities for China to consolidate its foundation and promote the continuous prosperity of its emerging industries. To sum up, opportunities and challenges coexist in the path going forward, and to tap these opportunities and overcome challenges, confidence will be key.
This analysis is based on a speech by Liu Yuanchun, President of the Shanghai University of Finance and Economics at a forum in June organized by the China Macroeconomy Forum and reported by the China Daily.
China now accounts for more than 14% of the world’s trade volume, higher than the pre-Covid-19 level of 12%.
