Chinese Exports Pull Back Again, Hampering Post-Covid Recovery

Date: Wednesday, March 8, 2023
Source: Wall Street Journal

HONG KONG—The export engine that propelled China’s recovery through much of the pandemic sputtered to start the year, complicating Beijing’s efforts to juice an economy that is still reeling from three years of stringent “zero-Covid” restrictions.

Exports from the world’s second largest economy fell 6.8% during the first two months of 2023 from a year earlier, extending a string of year-over-year declines stretching back to October, data from China’s customs bureau showed Tuesday.

That trend is likely to continue as central bankers in the U.S. and other developed economies signal they may keep interest rates higher for longer to battle inflation, which could dampen Western demand for Chinese-made furniture, electronics and other goods, economists say.

For China, a softening export sector poses uncertainty for the broader economy.

On Sunday, Chinese leaders set their growth target for gross domestic product this year at around 5%, a relatively conservative goal after zero-Covid lockdowns and a government-induced property slump restricted growth to 3% last year. The cautious outlook for this year reflects deep concerns in Beijing about waning external demand, even after the scrapping of zero-Covid restrictions and with visible signs of life in the battered real-estate sector.

“While the global economy appears to be resilient so far this year, it won’t reverse the outlook that demand will likely soften and China will experience negative growth in exports this year,” said Robin Xing, chief China economist at Morgan Stanley, who predicts falling exports will be a drag on overall growth.

Mr. Xing also thinks a pullback in Chinese exports this year could start to erode some of the market share gains made during the pandemic. Chinese leaders prioritized factory production during the pandemic, allowing manufacturers to continue churning out goods—and taking business from competitors in places such as Southeast Asia.

After a nearly three-year-long run dating back to the early months of 2020, China suffered its first year-over-year drop in exports in October last year, kicking off a string of declines that has continued at least into February, the country’s first full month without pandemic restrictions.

The decline in exports for January and February, which China releases together to smooth out irregularities tied to the Lunar New Year holiday, was less than the 9.9% decline in December and better than the 9% pullback expected by economists surveyed by The Wall Street Journal.

The better-than-expected result likely reflects what appears to have been a one-off boost from the lifting of pandemic restrictions, according to economists from Capital Economics, who say that the outlook for exports could deteriorate again, with foreign demand still in the dumps.

Chinese imports, meanwhile, fell by a larger-than-expected 10.2% in the January to February period, worse than December’s 7.5% year-over-year decline and the 5.1% pullback forecast by surveyed economists. That indicates China’s reopening hasn’t translated into increased infrastructure investment, at least for now.

As a result, China’s trade surplus swelled to $116.88 billion, larger than the $78.01 billion surplus in December.

China faces extremely severe challenges on the foreign trade front amid global recession risks, slowing overseas demand growth and strained global supply chains, said Li Xiangqian, a senior official at China’s Ministry of Commerce, last month.

The data showed China becoming increasingly reliant on trade with its neighbors as demand from the wealthier West dried up.

During the first two months of the year, Chinese exports to Southeast Asia rose 9% from a year earlier, according to Chinese customs data, while shipments to the European Union and the U.S.—China’s second and third-largest trading partners—fell 12.2% and 21.8%, respectively.

Part of the problem, say exporters, is that Western clients have been slow to visit China following the lifting of Covid restrictions. Flights remain scarce and in some cases are prohibitively expensive, while visas have been difficult to secure.

“Despite lifting Covid-19 restrictions, foreign clients so far haven’t been flowing back to China to reconnect with exporters and manufacturers here,” said a salesperson at Fuzhou Heva Shoes Co., which sells footwear mainly to the American and European markets.

 “Hopefully we can go out later this year to explore new clients and reconnect with the rest of the world,” said the saleswoman, who only gave her surname, Yang.

In Shantou, a city in southern China known for making toys, Tony Chen, who runs a sourcing company there, said overseas demand remained rather lifeless in February, in part because of the difficulty of obtaining a visa to visit China.

Tuesday’s trade data also pointed to limited benefits to the rest of Asia from China’s improving domestic economy.

In South Korea, a bellwether for global trade, exports shrank for a fifth straight month in February, partly because demand from China remained weak. Outbound shipments from South Korea fell 7.5% last month from a year earlier, though the decline wasn’t as bad as January’s 16.6% drop. Exports of semiconductors plunged 42.5% as global demand for electronics continued to falter.

Economists at Oxford Economics argue that weak export data in Southeast Asia and among China’s other major trading partners suggest no large boost to import demand from China’s reopening. The research firm expects export volumes in the region to weaken further in the coming months as the U.S. and Europe flirt with recession in the first half of the year.

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