China – imports more interesting than exports

Cycle

• Exports fell MoM in July for the first time since CNY. That could be monthly noise, though the Caixin PMI – often presumed to cover firms with a heavier export reliance – also fell last month.
• In the official PMI, exports have softened, but don't look so weak yet. Our other (pretty rough) leads for exports, if anything, look a bit stronger still, though aren't suggesting acceleration from the current 5-10% YoY run rate.
• All in all, it looks a bit early to be calling a downturn in the export cycle. But that will be more likely if US growth declines. And anyway, even without that, it doesn't feel likely that export growth accelerates much more from here.

Export structure

In terms of the structure, the data still isn't fitting with this popular narrative that over-capacity is driving a surge in low-cost exports from China.

• The prices of China's exports have been falling YoY, but judged in this way, shipments from other economies have been getting cheaper too. And, just as they are elsewhere, price falls in China are now lessening.
• China is gaining global market share in volume terms, but only at the same pace as recorded in the ten years before the pandemic.
• In value terms, there is still no clear turnaround in the downwards drift in China's global market share that has been evident since 2021.

Industry exports

Individual industries do fit the overcapacity narrative better, though not necessarily the most obvious ones.

• The surge in China's auto exports of 2022-23 has lost momentum this year, partly because the one-off rise in sales to Russia has peaked. Volume and value trends look similar.
• Steel exports fit the bill a bit better, with prices falling by 20% YoY, more than double the average for all exports. But that follows a bigger-than-average rise in steel prices in 2021.
• It isn't clear that China is losing market share in lower-end products. As an example, through end-2022, China's share of the global clothing market had stabilised.

Import structure

If there is a big change in the structure of China's foreign trade, it is much more evident in imports.

• Whereas export growth relative to the global total is similar to pre-pandemic, for imports, the upwards trend has been completely reversed.
• Domestic demand in property and construction has obviously been weak, but this can't directly explain the drop in imports. Imports of primary products – perhaps because of stockpiling – have been relatively strong.
• The weakness in imports is clearer in capital goods. Despite the apparent strength of domestic manufacturing capex, semi is the only type of machinery and equipment imports that is growing. This suggests import substitution.

Trade balance

Obviously, with exports growing but imports not, the trade surplus is widening.

• The widening trade surplus can be seen overall in the monthly trade data, as well as in the broadening of the surplus in terms of sectors and regions.
• As long as export growth in volume terms is outpacing imports, then net exports will be making a positive contribution to GDP growth.
• However, while this is the strong message from the monthly data, it isn't showing in the quarterly BOP. One consequence is China's current account surplus is likely under-stated.

What to watch

• Cyclically, the key issue is obviously the outlook for the world economy. If the US is about to fall into recession, China's export growth will have peaked. Without more effective policy, that will expose to weakness of domestic demand.
• Structurally, underlying market share gains are potentially more impressive than headline data suggest. That's because the more incremental gains being made now follow a real surge during the pandemic.
• Given the only area of import strength outside of commodities is semiconductors, the trade surplus can be expected to take another step-up if and when China's push to master chip manufacturing bears fruit.