China-US Trade Defies Decoupling For Now

TRADE WARS ARE easy to win. So said former US President Donald Trump when he launched his against China in 2018. However, when it comes to China-US trade, the big winner appears to be trade itself.

Despite all the talk of decoupling and the trade war transmuting into a technology war and now a new cold war (perhaps), merchandise trade between the two countries has never been more extensive, recovering even from its Covid-19 pandemic setback.

The industrial policy measures taken by the US Biden administration may take some of the bloom off the rose once they have kicked in more fully, especially if Washington successfully cajoles US supply chains to move out of China.

Yet that is a slow process. For now, the talk is way ahead of the trade.

US multinationals, in particular, have proved resilient to both tariff and political pressures to decouple from China. The larger ones have the experience and clout to work the system.

Their Chinese counterparts are politically more constrained, self-evidently state-owned enterprises most of all, but they, too, take care of their own interests.

China’s Export Growth Deceleration Points To More Support For Yuan

AUGUST’S SLOWER THAN expected growth in China’s exports is another sign that the economy’s recovery is losing what little traction it had.

More policy support is likely as a consequence.

Exports grew by 7.1% last month year-on-year in US dollar terms, according to the General Administration of Customs, the slowest since April and almost half the expectation of private economists.

As much as half the growth was accounted for by higher prices, on some estimates, implying the growth in the volume of exports was even weaker than the headline number.

Imports grew 0.3% in value, down from an increase of 2.3% in July, also well below expectations.

Domestic factory output in August also contracted for a second consecutive month due to power cuts and lockdowns in response to worsening Covid outbreaks.

At the same time, weakening global demand is lessening the demand for China’s exports in most of its major markets, except Russia (up 26.5% in August, year on year).

Weaker exports will weigh on the yuan, which is close to breaching seven to the dollar, despite intervention by the People’s Bank of China.

A depreciating currency would be a boon to struggling exporters but not to domestic consumer businesses such as food and retail companies that have to bear the cost of rising commodity imports.

President Xi Jinping will be well aware of the impact on Chinese citizens as he prepares for an unprecedented third term. That implies further currency intervention as well as other measures to stimulate the economy.

China’s Trade Picks Up As Lockdowns Ease

Daily throughput at Shanghai’s container port returned to 95.3% of normal levels in late May, even as China’s commercial capital remained under its two-month lockdown. That goes part of the way to explaining May’s rise in exports, up 16.9% year-on-year that the General Administration of Customs announced today, a marked improvement on April’s 3.9% growth.

Imports rose by 4.1% year-on-year in May, after being flat in March and April, but still a weak pace reflecting the broader second-quarter slowdown in China’s economy as lockdowns suppressed economic activity.

News that the Biden administration is looking to ‘reconfigure‘ tariffs on Chinese imports into the United States to help reduce inflation will boost Chinese exporters but insufficiently to offset the headwinds of slowing global GDP and trade entirely.

Import growth will also remain modest, even as lockdowns ease and authorities provide further fiscal and monetary stimulus to support the domestic economy.

However, lockdown easing is not the same as lifting. New measures were announced for one Shanghai district today and it looks, nationally, as if the country’s anti-virus infrastructure is continuing to be built out so that mass testing and quarantines can be sustained through 2023.

During his inspection tour of Sichuan, President Xi Jinping called for unwavering adherence to its zero Covid policy while at the same time striking a balance with the needs of the economy. His grouping of economic recovery, pandemic outbreak suppression and maintenance of social stability as co-objectives for officials particularly caught this Bystander’s ear.

China’s Export Slowdown Foreshadows Slower Second-Half Growth

EXPORTS REMAIN THE engine of China’s economic recovery, but July’s trade figures suggest their pulling power is easing off.

According to the Customs Administration, exports grew by 19.3% in dollar terms in July from a year earlier, while imports rose 28.1%, boosted in part by the purchase of 25 airliners.

Consensus forecasts had been for a 20% increase in exports and 33.3% in imports. The larger rise in import values reflected higher global commodity prices for iron ore, crude oil, and steel.

Gradual easing of Covid-19 related restrictions around the world and vaccination programmes in advanced economies had supported global demand for Chinese exports in the first half as economies reopened.

A resurgence of the pandemic through the Delta variant has put a brake on that and threatened new bottlenecks in Asian supply chains that were just getting cleared.

Three consecutive months of contraction in manufacturers’ export orders shown in purchasing managers surveys suggest that trade growth will continue to slow into the second half.

Slowing growth to the economy overall in the second half is likely to lead to more official support, albeit on a relatively small scale. Otherwise, the official full year GDP growth target of ‘above 6%’ may be at risk.

Exports Sustain China’s Economic Recovery

CHINA’S EXTERNAL TRADE account continues to thrive even as there are signs of authorities’ concerns that the domestic recovery is losing steam.

Exports rose by 32.2% year-on-year in June, the ninth successive month of double-digit growth and the sixth month of growth of more than 25%, the General Administration of Customs announced today. 

That reflects in part a rise in producer prices, working through to the value of exports, but also the continuing demand in importing economies as they, too, start to recover.

Loosening of supply chain bottlenecks, particularly for semiconductors, is working through to sales of semi-manufactures and finished goods. Goods imports rose by 36.8% year-on-year, the fourth month in which that sort of pace has been sustained.

The imports number was bolstered by a 37.6% increase in imports from the United States as China continues to chase down its obligations under the Phase One US-China Trade Agreement, now entering its final six months. The Petersen Institute for International Economics tracker shows imports from the United States as of the end of May running at 69% of where they should be to be on track with the two-year target.

However, China’s trade surplus with the United States has risen during the pandemic to $361 billion in the year to end-June, from $296 billion in the twelve months to end-2019.

China’s trade will likely slow but remain robust in the second half of the year as global recovery gains pace, assuming no disruptive resurgence of the pandemic. However, it is still running ahead of the recovery of the economy as a whole. The People’s Bank of China’s recent tempering of its easy monetary stance, via 50 basis points cuts in the requirements for reserve capital to be held by banks, reflects rising concerns about slowing domestic activity.

Strong Monthly Trade Figures Herald Full-Year Growth

CHINA’S IMPORTS IN September hit their highest levels since the trade war with the United States started in 2018. At $203 billion, imports were up 13.2% year-on-year last month, the General Administration of Customs announced.

Part of that was soya bean imports to help meet the targets of the US-China trade deal signed in January. Imports from the United States overall rose by 24.7% in the month year-on-year. Part of it was also semiconductor stockpiling ahead of Washington imposing further restrictions on the sale of US chips to Chinese companies. Taiwanese, South Korean and Japanese chipmakers were also beneficiaries.

However, part of it was demand for industrial commodities, helped by an appreciating yuan, but also confirming the recent improving industrial activity data and anecdotal reports of the recovery of domestic consumption gaining traction, as evidenced by rising car sales.

Exports, too, were brisk, up 9.9% in dollar terms (8.7% in yuan terms), with demand from abroad for consumer electronics joining that for personal protective equipment and other healthcare products.

As always, this Bystander cautions against reading too much into a single month’s figures. Another turn for the worse in US-China trade relations or the resurgence of Covid-19 in Europe remain potential pitfalls. The slight moderation in the pace of export growth in September from August is a reminder of that. Similarly, China’s share of world trade hitting a new high is because export production elsewhere remains depressed by the pandemic.

However, there does feel to be momentum to the recovery. Third-quarter GDP data due to be released on October 19 should point to China being on track to be the only G20 economy to grow this year.

China’s Trade Gets Ahead Of The Economy

THE LATEST MONTHLY trade figures are a bit of a mixed bag when it comes to drawing broader lessons from them. As our chart above shows, the import and export numbers have different tales to tell.

China’s exports jumped a larger-than-expected 9.5% year-on-year in dollar terms in August, the third successive month of increase and the highest rise this year to date.

Given that most of Chinese exporters’ markets are still in Covid-19-induced recession, it is highly unlikely that global demand rose by anything like the same amount so that pace would be unsustainable until world trade normalises. Backlogs and suppressed demand are more likely the cause of the current uplift. Exports of medical supplies, including personal protective equipment, and electronics goods needed for working at home were also notably up.

China’s trade surplus with the United States rose to $34.2 billion in August, its highest level since November 2018, despite the US-China Phase One trade deal signed in January intended to reduce the surplus. The agreement calls for China to buy $200 billion of US goods and services in 2020-21 over and above 2017’s levels.

The Petersen Institute for International Economics tracker shows imports from the United States running well below the levels needed to be on track with the commitment. It counted, as of July, US exports to China of the products covered by the agreement worth $48.5 billion this year, compared with a prorated year-to-date target of $100.7 billion.

The 1.8% rise in US imports in August will not take much of a bite out of that gap. The target, however, is not annual but covers two years, so there is time for Beijing to catch-up — or perhaps change the terms of the deal with a new US administration, should November’s US presidential elections produce one.

Imports overall in August, fell by 2.1% in dollar terms, confirming earlier data that domestic demand remains weak. State-supported industry benefitting from stimulus measures is driving the recovery. That has yet to work through to retail consumption.

Risks Abound In Reversing China’s First-Quarter GDP Contraction

IT IS NO surprise to learn that China’s economy contracted in the first quarter as a result of the coronavirus outbreak. The officially announced GDP figure for January to March of a 6.8% year-on-year contraction is slightly worse than the consensus forecasts of 6.5%. but by no means as bad as some of the darkest forecasts.

It is the first contraction since the National Bureau of Statistics adopted quarterly reporting in 1992, and it negates the 6% expansion reported in the previous set of GDP figures at the end of last year. But so exceptional have been recent circumstances that there is little store to be put in such comparisons.

Retail sales and fixed asset investment both fell 16% in the first quarter as the lockdown took hold. Industrial production and exports all but came to a halt.

The questions for authorities now are what pace of recovery can be generated, what measures are needed to bring that about, and what are the risks in getting it wrong.

There are signs that the country is getting back to work. Factory output in March was down just 1.1% as manufacturing restarted, but, as that figure suggests, it is still well below full capacity. Goods exports fell by 6.6% year-on-year in March in dollar terms, having lost 17.2% year-on-year in January and February together. With the rest of the world still confronting the pandemic, global demand will be weak for some time, offering dull prospects for Chinese exports, although there is also opportunity to grab market share while rivals are incapacitated.

There is political risk in that for Beijing if Chinese companies are seen to be dumping their excess production capacity abroad at rock-bottom prices and taking advantage of still ailing economies elsewhere. The Trump administration in the United States is already on high alert for that, especially in the strategic sectors identified in Made in China 2025. More broadly a resumption of the US-China trade war remains a persistent and unpredictable risk.

Authorities have already put in place fiscal stimulus and kept monetary conditions loose to ensure ample liquidity in the economy so banks can help private businesses stay afloat. The unemployment rate of 5.9% in March, although slightly better than February’s all-time high of 6.2%, shows the need for that.

The risk to social stability in the face of joblessness is a perennial concern for the leadership. The China Labour Bulletin, a non-governmental organisation, has reported protests over wage arrears in various parts of the country this month. Earlier this month, Wuhan market stallholders staged a protest to demand rent relief for the time the lockdown left them unable to operate. Similar demonstrations took place in Hunan province at the end of March.

More are likely. Targetted relief to defuse such pent-up discontent is expected.

Large-scale infrastructure investment is not. Government and corporate debt have increased alarmingly as the pandemic has put on hold the deleveraging campaign that authorities have conducted since 2016. Now many more companies are struggling to refinance their debt. Corporate bond defaults seem sure to increase, especially in retail and leisure, travel and tourism.

Beijing may well have to reinstate the implicit state guarantee temporarily for non-systemically-important firms as it cannot risk a mass of defaults by smaller firms threatening the financial system. China has the capacity, economically and politically, to contain systemic risk, and its semi-isolation from the international financial system limits the spillover possibility.

However, the People’s Bank of China has already said that it will tolerate a small rise in bad loans. ‘Small’ might turn out to be much larger than initially intended.

If there is a silver lining to all this, it is that it may make it easier to achieve the government’s goal of slowing the economy to a sustainable long-term growth rate. The National Bureau of Statistics’ spokesman announcing the first-quarter contraction also said that average annual growth over the next two years was forecast to be about 5%.

That is in line with the Asian Development Bank’s forecast of 2.3% GDP growth for this year as a whole and 7.3% growth in 2021 and probably close to where planners would have liked the economy to be by the end of next year. The trick will be to get there smoothly. 

Coronavirus Hits China Trade

ANOTHER ECONOMIC INDICATOR has landed underlying the impact of the coronavirus SARS-CoV-2 on the economy, and why limiting the damage is becoming such a priority for Beijing.

Exports in the first two months of the year fell by 17.2%. Imports were down by 4%, implying that while raw materials were still coming in, the interruption to factory production and transport had prevented much being done with them.

Trade data for January and February should always be interpreted carefully as the Lunar New Year brings seasonal distortions. This year, the holiday was extended because of the outbreak. Nonetheless, the direction of travel for the economy seems clear and reinforces the grim message of the manufacturing purchasing managers’ index for February.

Imports from the United States rose, by 2.5% in the two months, suggesting some effort to fulfil the stipulation of the Phase One trade deal with Washington that China will buy $200 billion more US goods and services than it did in 2017. The public health emergency has made meeting that target even more of a stretch than it already was.

The question now is the pace at which demand will recover, both domestically and internationally. For China generally, if not necessarily Wuhan, the epicentre of the outbreak, and surrounding Hubei, there is a glimmer of optimism that the worst is past, with reported new cases of Covid-19 slowing. That is less so for the rest of the world as the virus continues to spread internationally.

Last week, the Ministry of Industry and Information Technology said that less than one-third of Chinas’s small and medium-sized businesses, which employ four out of five workers, had returned to normal operation.

A raft of measures to support such businesses, from the big state banks making available emergency working capital to pushing back tax deadlines, has already been introduced. Policymakers will be preparing to announce further stimulus, with employment a focus. The first-quarter GDP figures are due to be published in mid-April, so more measures are likely before then to ensure that number does not dent confidence in the Party’s economic management.

Trade Figures Bring No Cheer To Trade War

THERE IS NOT much comfort to be drawn from the latest monthly trade statistics. The 4.4% year-on-year fall in exports for December to $221.25 billion, and 7.6% decline in imports to $164.2 billion were the opposite of the increases on both sides of the ledger that had been expected. The increase in the trade balance, to $57.1 billion from $44.7 billion last month, is just the result of the arithmetic.

The trade dispute with the United States appears to be starting to bite after several months of front-loading of orders to get ahead of tariffs, but there have been plenty of straws in the wind suggesting the economy is slowing, from the first fall in annual car sales in two decades to Apple’s warnings about slumping iPhone sales.

The question is whether this will make the need to strike a trade deal with the United States by the March 1 deadline self-imposed by Presidents Xi Jinping and Donald Trump  more pressing on Beijing’s part. Or will it stiffen the resolve of the leadership to tough it out, knowing that it can only make superficial concessions unless it is willing to make structural changes that it will not?

It may also judge that a slowing global economy and jittery equity markets worldwide impose pressures of their own on the US administration, which has plenty of domestic distrctions of its own right now.

Vice Premier Liu He, Xi’s point man on the trade talks with the United States, is due in Washington before the end of the month. He might arrive with a willingness to make some big-ticket purchases to cut the headline number for the trade surplus with the United States (2018’s was the largest in a decade) and some token concessions on greater market access for US firms. Last week, the sherpas preceding his visit made some if unspecified progress on both fronts.

However, he is unlike to bring significant concessions in the contentious areas such as intellectual property and Beijing’s support for state-owned enterprises. The slowdown in China’s economy may more likely encourage Washington’s China trade hawks to believe that they need to continue to until he does.