China’s big drop in trade affects us all

Global demand for Chinese goods fell at its fastest pace in over three years last month, further dashing recovery prospects in the world’s second largest economy as it totters on the brink of deflation.

New figures show that the value of China’s exports, measured in US dollars, fell for a third consecutive month in July, sliding 14.5 per cent compared to a year ago, and steeper than the 12.5 per cent fall predicted. 

China’s imports also fell 12.4 per cent in July, far exceeding the forecast 5 per cent drop. 

The dramatic fall in Chinese exports is down to the sluggish nature of overseas economies. As rising interest rates threaten to tip countries into recession, they are buying up fewer goods from Chinese factories. 

As for the cause of slowing imports, this is partly due to falls in the price of commodities. For instance, China imported large volumes of crude oil last month but at much lower prices, meaning the import value slowed. 

Commodity prices aside, the drop in imports is undoubtedly also down to a domestic slowdown. 

The rapid recovery in consumer spending, anticipated when China finally lifted lockdown restrictions earlier this year, has not materialised. On the contrary, anxiety about the country’s slumping property sector and record high youth unemployment – at 21.3% – means businesses and consumers have emerged from lockdown reluctant to spend. 

As Ian Stewart wrote in Reaction yesterday, China is suffering from the opposite problem to most of the Western world: falling prices. In June, the People’s Bank of China actually cut interest rates in a bid to encourage consumption, amid fears that the country is entering a Japan-style period of prolonged stagnation. 

Last year, exports accounted for over 17 per cent of China’s GDP, meaning today’s trade figures deal a fresh blow to the Chinese economy. Drying up Western demand will hinder its attempts to reignite economic growth.

But how do China’s dwindling exports – and general economic woes – impact the rest of the world?

It’s complicated. Notably, much of the Western world is already attempting to reduce its reliance on Beijing as a trading partner. 

“De-risking” is fast becoming a buzzword as leaders in Europe and the US reassess their economic ties with Beijing in the face of growing hostilities. The US has already attempted to cut China off from vital supplies of advanced semiconductors and China has retaliated by, for instance, imposing sweeping export restrictions on its gallium and germanium products – metals which, as Iain Martin points out in his newsletter this week, are vital for any transition to greener energy sources and net zero. 

But it’s a fine balancing act. Even the US, despite being the most vocal nation of all on the “derisking” front, remains China’s single biggest trading partner. 

And, as Anthony Blinken, US Secretary of State, stressed during his trip to Beijing back in June, the reality is that “China’s broad economic success is also in our interest.”

Indeed, the IMF forecasts that Beijing will be the top contributor to global growth over the next five years, with a share expected to represent 22.6 per cent of total growth — double that of the US.

If China instead entered a Japan-like “lost decade”, we would all pay a price.

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