In recent years, China’s export-oriented economy has been a driving force for economic growth, helping offset the pressure from weak domestic consumption and the long-term sluggishness of the real estate market.
However, the slowing U.S. economy may curb global demand for Chinese goods. The Chinese authorities’ strong support for the export manufacturing industry has raised concerns in various countries as this export-led economy is not sustainable. Despite China’s promotion of boosting domestic demand, without structural economic changes, it is merely scratching the surface.
On August 7, the General Administration of Customs of China released the trade data for July, showing that export growth slowed to 7% year-on-year, hitting a new low in nearly three months, below the 8.6% increase in June. Analysts had forecasted a 9.7% increase in Chinese exports for July.
The trade surplus for July was $84.65 billion, lower than June’s $99.05 billion and economists’ expectations of $98.4 billion. Meanwhile, imports grew by 7.2%, reversing the 2.3% year-on-year decline in June and significantly higher than Reuters’ forecast of 3.5% growth.
The unexpected slowdown in exports in July indicates that foreign trade, a key support for the economy’s recovery in the previous quarter, may weaken its contribution to third-quarter GDP.
Chief Economist for Greater China at ING, Song Lin, stated that due to base effects, China’s exports may maintain single-digit growth in the near term. However, considering the slowdown in external demand and tariffs, the export volume in the second half of 2024 will face greater pressure.
Wang Guochen, a research fellow at the China Economic Institute, pointed out that China’s merchandise imports and exports have been in negative growth since last year. Coupled with the continuous decline in China’s PMI below 50 for two to three consecutive months, indicating shrinking production capacity domestically, the reliance on exports will only exacerbate as domestic consumption remains weak.
“Although exports account for a low percentage of GDP, around 2%, they involve many foreign companies that drive job creation and contribute to tax revenues. If exports continue to languish, the Chinese economy will further decline, and the deterioration of exports will also increase pressure on the depreciation of the renminbi,” said Wang.
China’s merchandise exports are vital for achieving its economic growth targets. The country’s slowdown in exports could pose a threat to its economy, especially with the largest export destination, the United States, experiencing economic deceleration, which may dampen global demand for Chinese products.
The slowdown in the U.S. economy could have a particularly severe impact on emerging markets, disrupting China’s trade diversification strategy to countries like Vietnam and Saudi Arabia.
The evidence increasingly shows that the growth of the U.S. economy is slowing down. Recent global stock market declines have raised concerns about the Federal Reserve’s prolonged maintenance of high interest rates, with a sharp rise in U.S. unemployment rates adding to the evidence.
“We had expected the Fed to cut interest rates as early as the beginning of the year,” noted Wang Guochen, but it has been delayed until possibly September. If we assess the impact of monetary policy on the real economy over six months, the recession in the U.S. economy is inevitable. The debate now centers on whether it will be a hard or soft landing.
“Beijing has been emphasizing shifting exports to emerging markets. However, these countries cannot become more significant markets than the U.S. and Europe, and they may not be able to sustain constantly receiving Chinese goods, which affect their own industrial development. Countries like Mexico, Indonesia, Malaysia, and Thailand have imposed corresponding tariffs or anti-dumping investigations,” stated an expert.
The United States, Europe, and China have all entered a period of economic slowdown or recession, dampening global economic growth prospects. Countries reliant on international trade will face greater impact, posing more significant threats to the Chinese economy.
China’s import level as a percentage of the global manufacturing industry continues to rise and now exceeds 30%. Many countries are concerned about China’s dominant position in trade, leading to increased tariffs on Chinese products and the imposition of various barriers from the United States and Europe to emerging economies from Turkey to Indonesia.
The Chinese authorities are aware of the risks facing external demand and have been emphasizing stimulating domestic consumption. Last month, they pledged to prioritize consumer expenditure and released a 20-step action plan to encourage increased service sector spending. However, the plan did not include significant fiscal incentives to stimulate domestic demand.
According to Xie Tian, the prerequisite for boosting domestic demand is an increase in people’s income and employment, which has not improved in China. With falling property prices, ordinary citizens are saving for uncertainties, making domestic demand unattainable in such circumstances.
“They always have to do something to deceive the people, but one should not take it seriously. Why did the Third Plenum take so long? They know themselves, they are at a loss. It’s inevitable. Wang Guochen further explains that internal demand cannot be boosted now, while President Xi Jinping talks about internal demand and common prosperity. However, these policies are weak and vague on the consumption front, as their focus is mainly on the semiconductor industry and not consumer-driven sectors.”
Wang points out that even though China considers consumption essential, institutionally, they are not keen on promoting it. This is because the more you consume, the lower your GDP will be. For instance, if Shanghai consumes more goods from Jiangsu, Jiangsu’s GDP will surpass Shanghai’s, hence the phenomena of the past with regional economic disparities.
“Now, while the international ‘pie’ is inaccessible, everyone can only access their provincial pie. Hence Xi Jinping has mentioned recently that local authorities should behave more honestly and avoid establishing regional economic power bases. Therefore, institutionally, they also do not want to expand consumption,” he explained.
If more explicitly supportive policies are proposed to boost the market, there might be some short-term effects. However, in the face of high housing prices, education, and medical costs in China, these tax cuts may be diluted.
“The fundamental reason for insufficient domestic demand lies in income inequality and the inadequacies of the social security system. To comprehensively address China’s domestic demand issues, deeper reforms are necessary. However, the Third Plenum has not brought about any changes,” said an expert.
In this scenario, authorities boosting domestic demand is merely scratching the surface. If the underlying economic structural issues are not addressed, such efforts are merely psychological comfort.
“Furthermore, China’s economic policies are all in conflict, like fighting within themselves or contradicting each other. When promoting domestic demand, they also aim for economic transformation, upgrading industries, and environmental protection, all of which pose various contradictions,” he added.
Despite this, experts predict that China will continue to support manufacturing and drive exports, even though this export-oriented economy may not be sustainable.
Sun Guoxiang believes that China will persist in supporting manufacturing and driving exports, a form of new mercantilism aimed at reinforcing its own capabilities through economic and trade strength to transition manufacturing towards high-end intelligence. Nevertheless, this policy cannot create employment opportunities for the population domestically. Export is necessary to provide jobs from abroad to ensure domestic social and economic stability, essentially safeguarding the Chinese regime’s power.
“I personally believe that China’s future export-oriented economy will not change and will continue to push forward despite the difficulties. China will continue to attract developing countries through the Chinese market for free trade agreements,” stated Sun.
Wang Guochen also believes that the Chinese authorities will not abandon their priorities in manufacturing and export-led policies.
“The priority of manufacturing and Xi’s preferences are related. His mindset is simplistic, rooted in the early 20th-century industrial revolution thinking that value lies in visible goods; China continues to print money, which should lead to yuan depreciation. Nevertheless, even after earning from exports, the renminbi remains around 7.2 to 7.1, and it should appreciate. Wang pointed out that China’s cross-border e-commerce is infiltrating the U.S. market aggressively, helping China’s exports. “We estimate that China’s cross-border e-commerce exports and imports differ by four times, and Mainland China will increasingly utilize this channel to assist its exports.”
“The reason lies in China’s network control. Mainland residents cannot use Amazon’s website or app, but U.S. residents can access apps like Pinduoduo and Taobao, beyond U.S. control. This unfair trade will become a crucial means for mainland China to support exports and will lead to new trade disputes.”
However, Wang believes that Mainland China’s export manufacturing industry will inevitably decline.
He explains that emerging market countries have advantages – lower wage costs and are not subject to U.S. restrictions. While mainland China is striving to maintain export advantages, being overtaken by other countries is just a matter of time.
“In broad terms, it is certain that Mainland China’s export manufacturing industry will decline. However, when this decline will happen is still to be seen.”
“Currently, Mainland China’s economy is in garbage time. How long it can be dragged on for is a question,” he concluded.