China's exports experienced a sharp contraction in March, while imports unexpectedly shrank, falling short of forecasts by significant margins and underscoring the challenges faced by policymakers as they attempt to bolster a shaky economic recovery. The disappointing trade data comes as a setback for the world's second-largest economy, which has struggled to mount a sustainable post-COVID rebound, burdened by a protracted property crisis, mounting local government debts, and weak private-sector spending.
According to customs data released on Friday, exports from China slumped 7.5% year-on-year in March by value, marking the biggest decline since August last year and contrasting with economists' expectations of a 2.3% drop in a Reuters poll. This follows a 7.1% rise in exports during the January-February period. The data release came after mainland Chinese stock markets had closed, but major indexes in Hong Kong extended their losses to more than 2% in response to the news.
Analysts at Capital Economics noted that despite the larger-than-expected year-on-year fall in export values, export volumes edged up to record highs, suggesting that Chinese exporters are continuing to slash prices to maintain sales amid stubbornly weak domestic demand. Some economists also pointed to a higher base of comparison last year, as production had jumped in March 2023 when many workers recovered from a wave of COVID-19 infections.
In the first quarter, both exports and imports rose 1.5% year-on-year. However, Chinese exporters faced a challenging year in 2023 as soaring interest rates weighed on overseas demand. With the Federal Reserve and other developed nations showing no urgency to cut borrowing costs, manufacturers may face further strains as they try to shore up sales abroad.
Kris Lin, the owner of a lighting products factory, invested tens of thousands of yuan to rent a booth at China's biggest trade fair next week but expressed modest expectations. "Fewer and fewer buyers from Europe and the U.S. have been coming to check our products in recent years," Lin said, highlighting the difficulties faced by Chinese manufacturers.
Analysts warn that Western concerns over China's overcapacity in some industries may lead to more trade barriers for the world's manufacturing hub. While overall exports weakened in March, steel shipments reached their highest level since July 2016, jumping 30.7% in the first quarter. Customs data did not provide a breakdown of electric vehicle exports, which, along with cheap Chinese solar panels and other clean energy goods, are fueling increased frictions with the U.S. and Europe.
The impact of falling exports in March on real GDP growth is expected to be limited, as growth is more closely linked to export volumes rather than value, according to Tianchen Xu, an economist at the Economist Intelligence Unit. However, Xu noted that the data implies falling export prices, which will be a drag on nominal GDP.
China's economy likely grew 4.6% in the first quarter from a year earlier, the slowest pace in a year, according to a Reuters poll released on Thursday. This maintains pressure on policymakers to unveil more stimulus measures to support the economy.
Imports for March also disappointed, declining 1.9% year-on-year after growing 3.5% in the first two months, missing an expected 1.4% rise. The weak import figures underline sluggish domestic demand, which was also highlighted by Thursday's data showing cooler-than-expected consumer inflation and persistent factory-gate deflation.
As China's two traditional growth engines - property and trade - sputter, policymakers are trying to shift to new drivers such as hi-tech and clean energy. However, analysts note that this transition will take time. Rating agency Fitch recently cut its outlook on China's sovereign credit rating to negative, citing risks to public finances as growth slows and government debt rises.
China has set a full-year growth target of around 5%, which analysts have described as ambitious given the challenges faced by the economy. Policymakers have rolled out various support measures, including plans to issue 1 trillion yuan in special ultra-long term treasury bonds and raising the 2024 special bond issuance quota for local governments. The government has also approved a plan aimed at promoting large-scale equipment upgrades and sales of consumer goods, with the head of the country's economic planner estimating that the plan could generate market demand of over 5 trillion yuan annually.
