The growth rate of China's exports fell significantly in April. Chinese customs data showed that China's exports were only 3.9% year-over-year in U.S. dollar (USD) terms for the month, a significant drop from 14.7% in March and the slowest growth rate since July 2020.
China has maintained strong exports for a long time after the pandemic with a stable supply chain and industrial chain, but since this year, there have been drastic changes in the macro-environment both domestically and internationally. Modern Monetary Theory (MMT) policy practices in Europe and the U.S. triggered damaging high inflation. Besides, a stagflationary situation is now developing; The Federal Reserve (Fed) continues to accelerate the pace of tightening, and the extremely loose monetary policy is shifting sharply; The Russian-Ukrainian conflict brought a significant impact on the global political and economic situation, leading to the European economy towards recession and rising inflationary pressure; At the same time, the repeated domestic pandemic outbreak in China also caused an impact on the industrial chain and supply chain again. Therefore, in my opinion, with multiple unfavorable factors, China's exports this year will face at least four pressures, including declining international demand, deteriorating terms of trade, supply shock due to the pandemic, and intensifying international competition.
Pressure One: Overseas Economic Stagflation Led to a Decline in International Demand
On the one hand, under the tightening of the Fed, the U.S. economy is showing stagflationary characteristics. The U.S. CPI in March was 8.5% year-over-year, continuing to hit a 40-year high. Residential, services, and other endogenous factors could further increase price pressure. Meanwhile, the U.S. recorded negative growth in the first quarter. The GDP for the quarter was only -1.4% year-on-year, and a stagflationary situation is forming.
From the latest data, with the collective withdrawal of stimulus policies, it is difficult to sustain the consumer boom in the U.S. So far this year, the University of Michigan Consumer Confidence Index has continued to be at a low level. Besides, the recovery of supply is still slow. The New York Fed manufacturing index fell sharply in the first quarter of this year, and the index of new orders and shipments fell in parallel; the shortage of domestic production led to a sharp increase in U.S. imports in the first quarter; the shortage of truck drivers and port workers led to the still high pressure on inland logistics. Investment support also remains inadequate, with fixed-asset investment slipping to 3.5% year-over-year in the first quarter. In particular, the growth rates of construction and residential are still negative.
On the other hand, the escalation of the Russia-Ukraine conflict could lead Europe into recession. Europe's energy, inflation, economic and trade, industry, and finance were hit in all aspects, with the recent stagflation situation even worse than the U.S. The latest data from Eurostat showed that the economic growth in the eurozone slowed in the first quarter, with GDP growth of 0.2% year-on-year, lower than 0.3% in the fourth quarter of last year; at the same time, inflation in the eurozone hit a record high again, with CPI reaching 7.8% year-over-year in April. The concern about the economic outlook has triggered international investors to short hedge to Europe. Then, the EURUSD depreciated sharply recently.
Considering the current Russia-Ukraine conflict and the possibility of the continued escalation of sanctions against Russia in Europe and the U.S., it is becoming probable that a recession in Europe is on the horizon. In Germany, for example, soaring energy prices and bottlenecks in the supply of key raw materials and primary products are exacerbating its difficulties in growth. The latest economic forecast released jointly by five top German think tanks shows that GDP growth will slow to 1.9 percent in 2022 if the European Union (E.U.) imposes a complete embargo on Russian energy, followed by a severe recession in 2023.
Under the above circumstances, the challenge of declining international demand faced by China should not be underestimated. According to China Customs data, the growth rate of China's exports to major economies in April was significantly decreasing. In USD terms, the export growth rate of the U.S., E.U., ASEAN, and Japan for the month was 9.4%, 7.9%, 7.6%, -9.4%, a large decline from March.
Pressure Two: The Deterioration of the Terms of Trade Raises the Cost of Exporters
The Russia-Ukraine conflict has boosted energy and raw material prices. Russia is an all-around commodity power, and Ukraine is a significant exporter of agricultural products. In terms of market share, the global share of Russia and Ukraine's exports of natural gas, crude oil, corn, and wheat are about 16%, 11%, 16%, and 29%, respectively. In terms of industrial raw materials, Russia and Ukraine have a high share of global exports of industrial metals (palladium, nickel, aluminum, copper, etc.). Ukraine is also a significant producer of rare gases related to the semiconductor industry chain. The share of the global supply of neon, krypton, and xenon in Ukraine reached 70%, 40%, and 30%, respectively, in 2020.
The terms of trade in China under the rising prices of energy and raw materials are deteriorating. Since the beginning of the year, there have been some signs of easing supply bottlenecks, a global shortage of cores, and other issues. However, the outbreak of the Russia-Ukraine crisis then exacerbated the shortage of raw materials in some critical aspects of energy and manufacturing, pushing up prices. I made a simple calculation, if the price of crude oil in 2022 rose to $ 100 per barrel, the number of imports will remain at an 8% growth rate in 2021. This alone would increase the cost of Chinese imports by $150 billion.
Increasing prices will raise the production costs of export manufacturing enterprises significantly. In particular, midstream and downstream export enterprises will face greater operating pressure. China's cost and quality separation data of key imports in April show that imports of coal, crude oil, and other energy commodities increased significantly. They are mainly driven by price factors, with very limited quantity increases; imports of intermediate goods and raw materials such as soybeans, pulp, copper, integrated circuits, etc., are also mainly driven by the rising price.
Pressure Three: The Repeated Outbreak of the Pandemic Hit the Industrial Chain and Supply Chain
The decline in exports in April has already reflected the impact of the pandemic to some extent. On the one hand, the disruption of China's domestic logistics has imposed constraints on enterprises' production. The closure of cities and roads blocked the flow of goods for a relatively long time, making it difficult to transport raw materials in and finished goods out. As a result, China's national freight index fell sharply in April. On the other hand, the enterprises' resumption of work and production was hampered by the closure management. According to a survey conducted by Shanghai Securities News (mainly listed companies in the Yangtze River Delta region), by May 7, the resumption rate of more than half of the surveyed enterprises was less than 90%; among them, the conditions of the Shanghai enterprises were the most serious, with nearly half of them feeding back their resumption rate of less than 30%.
In addition, unsatisfying international logistics is also a major constraint. As China's most important international trade shipping center, the Yangtze River Delta region is most obviously affected. The total exports of the Yangtze River Delta region accounted for nearly 38% of the country's share in 2021, and the port cargo throughput accounted for more than a quarter of the country's share. Under the impact of the pandemic, freight prices continue to be at a high level. Therefore, some enterprises' shipping plans are still obstructed.
So far, the impact of the current round of the pandemic is still ongoing, and the uncertainty remains high. If China's industrial production suffers a prolonged impact, the likelihood of a decline in exports due to local supply chain disruptions will rise significantly.
Pressure Four: New Economies Replace China's Export Share
On the one hand, economies such as Southeast Asia and Mexico are partially replacing China's share of exports. With the gradual recovery of the supply side, manufacturing PMI rallied, and the recent international exports of the above countries increased significantly. Taking exports to the U.S. as an example, according to the U.S. International Trade Commission (USITC) data, U.S. imports from ASEAN and Mexico in March this year grew at a year-over-year rate of 27% and 21%, respectively, both higher than China's 17.8%. In terms of categories, the share of U.S. imports of textiles, steel, plastic products, toy products, and other goods from China in the first quarter of this year have all declined compared to the 2021 data, while the shares from ASEAN and Mexico have both increased in the same period.
On the other hand, the global industrial chain's "nearshore" trend is also worth noting. Taking the U.S. and Mexico "nearshore outsourcing" as an example, the U.S. Kearney Management Consulting Firm issued an indicator of "near to far trade ratio" (NTFR), specifically tracking the transfer of U.S. manufactured goods imports to Mexico. The results show that the NTFR rose sharply to 42% in 2019 on the basis of 38% in 2018 due to the U.S.-China trade war and other factors, and once climbed to 56% before the pandemic. The Kearney report concluded that the contraction in NTFR values during the COVID-19 pandemic was a transient anomaly. The index could well rise again as the global and U.S. economies recover. According to CB Richard Ellis' survey data, the U.S.-Mexico "nearshore outsourcing" is fully reflected at the industry level. In 2020, the " nearshore outsourcing" of enterprises in the furniture, home appliances and electronics, medical equipment, machinery and tools, and automotive parts industries accounted for 23%, 20%, 15%, 14%, and 12%, respectively, and most of them came from the U.S.
International Trade Support Policies Improve the Resilience of China's Exports
In the face of the fourfold pressure of declining international demand, deteriorating terms of trade, supply shock due to the pandemic, and external share substitution, China will undoubtedly face greater challenges in stabilizing international trade this year, which has been clearly understood by China's top management. On May 9, at China's national television and telephone conference to promote the stable development of foreign trade and foreign investment, the Chinese Vice Premier Hu Chunhua clearly pointed out that the current "pressure to stabilize foreign trade has increased significantly" and asked for "all-out efforts to stabilize the fundamentals of foreign trade and foreign investment."
In my opinion, despite more risks, foreign trade fundamentals are still highly resilient. For example, China's complete industrial chain, supply chain, and superior infrastructure are incomparable to Southeast Asia and Mexico. Factors such as soaring global inflation and supply shocks have determined that countries such as the U.S. will still rely on Chinese manufacturing, as Chinese export prices are still low in global comparisons, which is helpful to Europe and the U.S. in controlling inflation. The recent depreciation of the RMB is also positive for Chinese exporters. Under the above circumstances, if the window period can be seized to refine the relevant policies as soon as possible around stabilizing the production and operation of foreign trade enterprises, protecting orders and markets, and ensuring the regular flow of foreign trade logistics, etc., it is expected that China's exports will still maintain in growth. It will provide essential support for the completion of the annual economic targets.
Source: FTChinese.com