The Chinese Communist Party announced on Wednesday (August 7) that the growth of exports in July was lower than expected. Analysts believe that the new data reveals a crisis for the CCP policymakers, as their heavy reliance on exports to overcome domestic economic weakness may be facing increasing risks.
According to data released by the General Administration of Customs of China on Wednesday, China’s exports in July increased by 7.0% compared to the same period last year. The growth rate of exports slowed down, falling below market expectations and the 8.5% growth rate in June, marking a new low in nearly three months.
Louise Loo, Chief Economist of Oxford Economics, told the Financial Times that “Chinese policymakers may see this and fear that the slowdown in the export engine may be faster than they imagine.”
The long-term stagnation of China’s real estate sector and the worsening financial situation of local governments have had an impact on consumer confidence and household spending, thereby affecting the Chinese economy. In this situation, rather than stimulating domestic demand, the CCP has been investing in advanced technology, manufacturing, and innovation to enhance “new quality” productivity. However, this has led to overcapacity in China, exacerbating its reliance on external demand.
“The problem is that, in our view, external demand is never a permanent driver; it will always fade away,” said Louise Loo.
The CCP’s policies have resulted in overcapacity in China, leading to dumping goods overseas, which has triggered resistance from economies such as the United States and the European Union. The US and EU have imposed varying tariffs on Chinese-made electric cars.
Pantheon Macroeconomics reported that after seasonal adjustments, China’s monthly exports to the US slightly declined.
More and more evidence indicates that the US economy is slowing down. The employment report released by the US Department of Labor on August 2 showed that there were only 114,000 new non-farm jobs added in July, significantly lower than expected and the average increase over the past 12 months (215,000). The unemployment rate also rose to 4.3%, reaching the highest level in nearly three years.
The impact of weak US consumer spending is likely to have global repercussions, affecting demand for Chinese products ranging from consumer electronics to clothing and machinery.
According to Bloomberg, potential demand shocks from the US may be difficult to contain. The US is China’s largest export destination. A slowdown in the US economy could also impact the globe, dampening demand for Chinese goods worldwide. Therefore, the economic downturn in the US could disrupt Beijing’s priorities. Beijing had been relying heavily on external demand, relegating domestic consumption to a secondary position. However, with a less favorable trade outlook, exports are being restrained.
David Qu, economist at Bloomberg, stated, “The unexpected slowdown in China’s July exports suggests that foreign trade (a key support for third-quarter GDP recovery) may weaken.”
Kelvin Lam, senior economist at Pantheon Macroeconomics, was quoted as saying, “Against the backdrop of a slowing US economy, threats of additional tariffs, and ongoing technology disengagement, China’s export-driven growth strategy will be more challenging to achieve this year.”
As the world’s largest economy, the US is highly intertwined with other global economies – with massive imports and exports, any significant economic fluctuations could have far-reaching effects on global trade.
The soft US demand will not only directly impact China’s exports to the US but also indirectly affect China’s exports to emerging markets through its ripple effects.
Alicia Garcia Herrero, Chief Asia Pacific Economist at Natixis SA, stated to Bloomberg, “When the US sneezes, even if it doesn’t have pneumonia, emerging markets will catch a cold. At present, China is becoming increasingly reliant on emerging markets.”
According to analysis by the International Monetary Fund data reported by Bloomberg, approximately 40% of China’s exports go to emerging and developing economies, compared to 33% in 2017 before the trade war broke out with the US.