More trouble for China’s export juggernaut

Weakness in China’s exports is concerning as the sector has been one of the country’s few bright spots this year. (Photo: AFP)
Weakness in China’s exports is concerning as the sector has been one of the country’s few bright spots this year. (Photo: AFP)

Summary

China is more dependent on exports for growth than it has been in years. But the export boom is starting to lose steam.

China’s export engine is running out of steam. For both the economy and China’s currency, that is bad news.

China’s September official purchasing managers indexes, released Friday, were a mixed bag. The manufacturing gauge ticked up unexpectedly to 50.1, edging above the 50 point mark separating expansion from contraction for the first time since June. But the service sector index dipped back into contraction for the first time since May, when Shanghai’s fierce lockdown was at its height.

Meanwhile Caixin’s privately compiled manufacturing PMI, which focuses more on private and export-oriented firms, weakened further. And perhaps most worrying from Beijing’s perspective, both the official and Caixin factory indexes showed declines in new export orders deepening.

The service sector weakness is unwelcome, but not unexpected—much of it has been driven by lockdowns to control China’s late-summer Omicron outbreak. New Covid-19 infections peaked around 3,000 a day in late August and have now declined to about one-third of that according to official data. Officials may ease up a bit after Beijing’s Communist Party Congress in mid-October, although colder weather could also bring a new round of infections.

More concerning is the weakness in exports, because that sector has been one of China’s few bright spots over the past year—and a critical source of jobs—as the housing market and service sector growth have shriveled. Employment in industry, as opposed to services, grew in 2020 and 2021 for the first time since 2012, in significant part due to the export boom. Net exports of goods and services accounted for 25% and 21% of China’s economic growth in 2020 and 2021 respectively—the highest totals since 1997. This year, things have gotten even more extreme: net exports accounted for 36% of growth in the first six months of the year.

What is more, with consumer confidence on a steep downtrend in both Europe and the U.S., the prospects for China’s exports don’t look bright. This will make delivering a sustainable rally in the yuan, which strengthened on Thursday and Friday after hitting its lowest level in over a decade on Wednesday, both more difficult and riskier for Beijing.

China’s export boom sustained the country through some very tough times over the past two years. But it also increased China’s dependence on the rest of the world—a fact that may not be welcome in a Beijing increasingly obsessed with self-reliance. For better or worse, self-reliance can only go so far for the world’s top manufacturer, especially when its domestic economy is still struggling to heal from deep, self-inflicted wounds.

 

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