China’s economy hit afresh as exports dip 14%

In July, China experienced the most substantial decline in its exports in over three years due to a slowdown in global demand, intensifying the pressure on Beijing to reinvigorate its economy, the world’s second-largest.

Measured in US dollars, the value of exports plummeted by 14.5% last month compared to the previous year, marking the most significant drop since February 2020 when the initial Covid-19 outbreak severely impacted trade and production. These statistics were released by Chinese customs on Tuesday. This decline also marks the third consecutive month of decreasing exports.

Analysts noted in a research note that the steep drop is partly attributed to a high base effect from last July and lower prices. After accounting for seasonal factors and changes in export prices, they estimated that export volumes only slightly decreased by 0.9% in July compared to June.

However, the analysts predicted that exports are likely to decline further in the coming months due to “wider evidence” of declining global demand for goods as the distortions caused by the pandemic subside and monetary tightening curtails consumer spending.

They stated, “The near-term outlook for consumer spending in developed economies remains challenging, with many still at risk of recessions later this year, albeit mild ones.”

Over the first seven months of the year, China’s exports have declined by 5% compared to the same period in the previous year. Particularly noteworthy is the 13% drop in shipments to the United States, China’s largest trading partner.

While exports had been a positive aspect for China’s economy during the pandemic, supporting it during periods of strict Covid lockdowns and a sluggish housing market, they have been contracting since October. Rising inflation and interest rates have dampened global demand.

This decline in exports is an additional setback for the Chinese economy, which has lost momentum following a strong start to the year. Signs of deflation are emerging, raising concerns of a potential prolonged period of stagnation.

The latest data also revealed a 12.4% decline in China’s imports in July compared to the previous year, significantly missing a forecasted 5% drop. This contributes to the evidence of softening domestic demand in the country, with import volumes reaching their lowest point since the beginning of the year.

Analysts are now urging Beijing to implement more robust and impactful plans to stimulate the economy, including significant measures to boost demand. One potential strategy is currency depreciation, which could enhance the competitiveness of China’s exports.

On Tuesday, the People’s Bank of China, responsible for setting the daily trading range for the yuan, established a midpoint of 7.1565 to the US dollar, indicating a weaker currency compared to the previous day’s 7.138. This, in turn, triggered a decline in the Chinese currency in foreign exchange markets, with the offshore yuan weakening by 0.3% against the US dollar on Tuesday.

However, Beijing’s policy measures aimed at boosting the economy thus far have failed to impress investors, leading to suggestions that yuan depreciation could serve as a tool to support exports and facilitate economic recovery.