China's Trade Slump Heightens Recovery Concerns; Calls for Fresh Stimulus Rise

Weaker Demand Pushes China's Imports and Exports Downward, Raising Calls for Fresh Stimulus

China's trade sector is facing a significant setback, raising concerns about the prospects for economic recovery. In an unexpected turn, both imports and exports experienced substantial declines during July, deepening worries about the resilience of the world's second-largest economy. The grim trade figures have intensified calls for authorities to implement new stimulus measures to stabilize growth.

The latest customs data revealed a worrying trend. Imports plummeted by 12.4% year-on-year in July, a much sharper drop than the 5% forecasted by experts in a Reuters poll. This decline follows a 6.8% contraction in June. Meanwhile, exports contracted by a staggering 14.5%, exceeding the predicted 12.5% decline and surpassing the previous month's 12.4% fall.

Notably, the pace of export decline marked the fastest since the onset of the COVID-19 pandemic in early 2020. Similarly, the import tumble was the most significant since January of the same year when pandemic-induced infections led to widespread shop and factory closures.

Analysts are attributing these declines to a combination of factors. While the weakened demand plays a pivotal role, the drop in commodities prices has also exacerbated the overall downturn. Notably, measures of export orders suggest an even greater foreign demand decline than what has been reflected in the customs data so far, according to Julian Evans-Pritchard, the head of China economics at Capital Economics.

The ongoing challenges in developed economies further cloud the near-term outlook for consumer spending, potentially leading to mild recessions later this year. Consequently, the Chinese yuan experienced a dip, and Asian stocks along with currencies such as the Australian and New Zealand dollars—considered proxies for Chinese growth—registered a weakening trend following the release of this data.

China's economy had already displayed sluggish growth during the second quarter, primarily due to weakened demand both domestically and internationally. This prompted top leaders to pledge additional policy support, while analysts revised down their growth projections for the year.

Despite a 10% annual increase in total cargo throughput during the second quarter and 8% during the first, the value of China's exports declined by 5% year-on-year in the first half of the year, as noted by Fitch.

An underlying factor contributing to the worse-than-forecast import figures involves misunderstandings about commodity prices. Xu Tianchen, senior economist at the Economist Intelligence Unit, explains that economists might be overlooking price dynamics influencing Chinese imports. For instance, the volume of crude oil imports accelerated in July, but lower prices resulted in a slower import value. Similar trends were seen in grains and soybeans.

While China's crude oil shipments surged by 17% year-on-year in July, they fell 18.8% from the previous month to the lowest daily rate since January. Meanwhile, soybean imports spiked by 23.5% year-on-year in July due to robust production in Brazil.

China's diplomatic tensions and a shift in technological preferences are also affecting trade dynamics. Exports to the United States dropped by 23.1% year-on-year, and shipments to the European Union contracted by 20.6%. Additionally, South Korean exports to China—a significant indicator of global goods demand—plunged by 25.1% in July compared to the previous year.

As Beijing seeks strategies to boost domestic consumption without triggering significant capital outflows, the state planner has announced plans for forthcoming stimulus. However, the proposed measures to expand consumption across sectors such as automobiles, real estate, and services have yet to impress investors.

In conclusion, China's trade woes are casting shadows over the nation's economic recovery prospects. The substantial declines in imports and exports are raising concerns about the economy's stability, prompting discussions of potential stimulus packages to counter the downward trend.