Can China's Export Surge Save The Day?

As Louis Gave, analyst at Gavekal Dragonomics, observes,“it's hard to find evidence in the
Chinese
data that domestic energy demand has taken a marked turn for the worse.” China's crude oil imports were up in August, he noted.

“And talk that China's fuel consumption is down because construction is cratering doesn't stand up well, either,” Gave said.“Even at its height, the construction sector accounted for less than 4% of
China's diesel – or gasoline – consumption.”

Still, the softness of Chinese imports suggests household demand remains lethargic. The 0.5% increase year on year in August pales in comparison to the 2% pace last year. Lethargic imports, noted economist Raymond Yeung at Australia & New Zealand Banking Group,“mirrors its weak domestic demand.”

China's“strong” trade surplus, Yeung added, may exacerbate“concerns” about mainland“overcapacity”, intensifying the blowback already fomenting among lawmakers in the US, Europe and elsewhere.

All this poses a unique challenge for PBOC Governor Pan Gongsheng. A top Communist Party priority during the Xi era has been internationalizing the yuan.

More aggressive rate cuts might send the yuan exchange rate lower against the dollar, unnerving global markets and making Beijing an even bigger election issue in the US, where both presidential candidates have taken hard aim at China's trade policies. It also might increase default risks among Chinese property developers struggling to repay offshore debt.

Appearing at last week's Bund Summit in Shanghai, Pan's PBOC predecessor, Yi Gang, urged Beijing to act with greater policy urgency to stabilize consumer prices.“I think right now they should focus on fighting the deflationary pressure,” he said.

Yi stressed that“the keyword is: how to improve domestic demand, how they can successfully deal with the situation of the real estate market as well as the local government debt problem, and influence the confidence of society.”

The former PBOC head noted that“at this point, proactive fiscal policy and accommodative monetary policy are important.”

One option is for Pan's team to further lower reserve requirement ratios for banks further, said Zou Lan, director of the PBoC's monetary policy department.

At the same time, said economist Jeffrey Schott at the Peterson Institute for International Economics, a Washington-based think tank,“the challenge for Chinese policymakers is to manage the housing crisis, and to ensure that there is enough domestic demand to maintain the high level of economic growth.”

Schott said,“that is so important for the Chinese economy and for moving more and more people up to higher standards of living.”

Weak consumption remains an Achilles' heel of China's performance so far in 2024. In July, for example, retail sales in Beijing dropped 3.8% year on year. In Shanghai, sales fell 6.1%.

Xi's economy“continues to show diverging trends with weak domestic demand and strong export competitiveness, both reflecting the domestic deflationary pressure,” said economist Zhang Zhiwei at Pinpoint Asset Management.“The question is how long exports can stay strong given the weakening US economy and the rising trade tension.”

Strategist Yeap Jun Rong at IG International added that“the lack of conviction around China's economic recovery continues to leave investors shunning.”

Case in point: the $6.5 trillion of market value that's been wiped out from Chinese and Hong Kong stocks since a 2021 peak, a loss comparable to the size of the entire Japanese market.

As strategist Ron Temple at Lazard Asset Management told Bloomberg:“it's been an amazingly bad period for markets - the problem is the economy is in a worse place than I thought six months ago. The longer the government refuses to create any major demand stimulus, the longer the consumer confidence damage will persist and the harder it will be to resolve.”

Count Carlos
Casanova, economist at Union Bancaire Privée, among those who worry China's“export momentum in August remains unsustainable.” He noted that“while net exports will positively contribute to GDP in August, we do not anticipate this to be a sustainable trend. Weaker imports also point to softening domestic demand.”

For now, the export part of the equation is a bright spot. So are trends in foreign direct investment (FDI) vis-à-vis top economies like Germany. FDI from Germany into China rose to a record in the first half of 2024, reaching 2.48 billion euros ($2.72 billion) in the first three months of the year and 4.8 billion euros ($5.28 billion) in the April-June period.

This dynamic is at odds with German Chancellor Olaf Scholz's warnings about“growing geopolitical risks” between China and the European Union. EU President Ursula von der Leyen has been encouraging businesses on the continent to“de-risk” from Xi's economy.

“The trend is particularly notable for big German corporations , which have ramped up their investments in the Chinese market, which has long been their largest, most profitable single market,” Zheng Chunrong, director of the German Studies Centre at Tongji University, told the Chinese Communist Party-run Global Times.

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Maximilian Butek, executive director of the German Chamber of Commerce in China, added that“our data show that more than half of German companies plan to increase their investments in the country and the vast majority don't plan to leave. This is especially the case for big corporates and the automotive or electronic sectors.”

front-loading response” to the EU's impending tariffs on Chinese electric vehicles.“These provisional tariffs,” he said,“will last for a maximum of four months, during which a final decision on definitive duties must be made.”

If adopted, Casanova said,“these duties would be in effect for five years. Additionally, exports of aluminum (24.1% vs. prior 20.5%), chemical fertilizers (31.6% vs. prior 15.2%) and steel products (6.8% vs. prior -2.4%) also saw significant increases.”

To Casanova,“this trend is understandable in the context of upcoming EV tariffs and a rise in demand for chemical fertilizers following sanctions on Russia. Demand from ASEAN countries also showed slight recovery, while exports to the United States slowed to 4.8%” versus 7.6% in the prior month.

The problem, he concluded, is that“a slowdown in major economies, particularly the US and Europe, may diminish demand for Chinese exports in the coming months. Additionally, heightened geopolitical tensions leading up to the US election in November could create uncertainties that impact trade relationships and market access.”

Thanks to geopolitical currents – including the November 5 US election –“China's latest export push is backfiring,” claims economist Jeemin Bang at Moody's Analytics.“Its policy-led ramp-up in manufacturing has sparked protectionism abroad, potentially leaving China with few viable export markets.”

The upshot is that improved export growth is a boon for now, but perhaps not a reliable engine heading into 2025. That will require bolder steps to repair China's underlying challenges to boost domestic demand and a stubborn property crisis that just won't fade away.

Follow William Pesek on X at @WilliamPesek

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