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China trade surplus can cushion but not stop slowdown

November 8, 2021

BEIJING (BLOOMBERG) – China’s record trade surplus is cushioning the economy from weakening domestic demand and giving policymakers room to delay stimulus. But it will not be enough to keep growth from slowing further.

Export growth has exceeded analyst estimates for three straight months, and the trade surplus reached US$84.5 billion (S$114.5 billion) last month, data released on Sunday showed. The problem is, gross domestic product (GDP) is now so large that overseas demand cannot replace easing investment and consumer spending.

China’s economy has slowed sharply in recent months as efforts to rein in the property market ripple through industries from construction to commodities. A power crunch forced factories to slow output, while sporadic coronavirus outbreaks and stringent measures to curb them have damped consumption.

“The government can afford to wait till the year-end to loosen monetary and fiscal policies, now that exports provide a buffer to smooth the economic slowdown,” Mr Zhang Zhiwei, chief economist at Pinpoint Asset Management, said in a note. Premier Li Keqiang said last week the economy is facing “new downward pressures” and policies need to be fine-tuned to provide targeted support for businesses.

China’s role as the world’s largest exporter meant it benefited as demand for goods rose in the wake of the pandemic. The World Trade Organisation raised its projection for global trade growth this year to 10.8 per cent from 8 per cent, the biggest year-over-year jump since 2010. It estimates a 4.7 per cent increase next year.

The persistence of China’s export strength has surprised economists who predicted that global spending on made-in-China goods would ease as more countries reopen this year.

That proved premature as the more infectious Delta variant spread throughout the world. China’s virus controls meant its factories won orders this year as large-scale outbreaks in countries such as Vietnam, India and Malaysia caused business closures.

Partly as a result of labour-intensive production of textiles and plastic toys relocating back to China, the nation increased its share of global trade to record levels of 14 per cent to 15 per cent this year, according to the CBP World Trade Monitor, published on behalf of the European Commission.

“Supply chain problems have seemingly been a blessing for China,” said Mr Craig Botham, chief China economist at Pantheon Macroeconomics.

Chinese companies also exported higher-value products: The country sold almost no vaccines outside its borders pre-pandemic, but shipped shots worth US$11.7 billion in the first nine months of the year. Automobile exports have more than doubled so far this year as the country emerged as a production hub for electric vehicle manufacturers, including Tesla.

Strong demand means China’s exporters have gained the confidence to raise their prices by as much as 10 per cent to 20 per cent from a year ago, partly to offset rising commodity costs, multiple Chinese factory owners told Bloomberg News recently.

Almost all of the increase in the value of exports last month may be due to rising prices rather than increasing volume, Guosen Securities economists wrote in a report on Sunday.

Economists polled by Bloomberg now expect China’s full-year export growth to be more than 24 per cent. Still, trade has less of an impact now on China’s growth trajectory. While exports grew 23 per cent in the first three quarters of the year, net exports contributed just over 20 per cent of China’s GDP growth over the period, a fraction compared with government and household spending on goods and services, which accounted for 65 per cent of the expansion.

The surplus on China’s current account – a broad measure of trade – rose to its highest level since 2016 this year, but remained at just 2 per cent of GDP in the latest quarter, well below levels of around 10 per cent seen before the 2008 financial crisis.

While major global central banks are starting to roll back monetary stimulus, the People’s Bank of China (PBOC) began tightening last year and has more recently been under pressure to ease to support growth. But Beijing is in a difficult position, as many of the recent challenges in China’s economy are on the supply side, such as power shortages and Covid-19 curbs on travel as the country sticks with its Zero-Covid policy. Beijing has vowed not to use the property market as a short-term stimulus.

Fiscal policy will provide the main support to economic growth next year while significant monetary easing is unlikely, according to Ms Huang Yiping, a former central bank adviser. The PBOC has refrained from cutting banks’ reserve requirement ratio since a reduction in July, and has kept policy interest rates steady since early last year.

“The strong exports help to mitigate the weakening domestic economy, but we think it is unlikely to reverse the trend” of slower growth, said Pinpoint’s Mr Zhang.

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