Germany and South Korea have posted unusual trade deficits with the world's second-largest economy as a result of falling demand for manufactured goods stemming from China's economic slowdown
China's official import growth of 1% in June from a year earlier concealed a worse result for manufactured goods due to increased global commodity prices. According to newly released data from Chinese customs, imports of high-tech products and mechanical and electrical goods dropped by around 8 percent last month. No improvement appears to have occurred this month, as the first 20 days of July saw a 2.5% decrease in South Korean exports to China.
According to Trinh Nguyen, an Asian emerging markets economist at Natixis SA, the drop was caused by the lingering impact of lockdowns to prevent Covid-19 infections, which knocked consumer and business confidence. This is because the countries most at risk are those "that are directly exposed to Chinese domestic demand, especially [for] manufactured goods," she explained.
It is often forgotten that China imports a vast array of manufactured goods, both for its domestic market and for assembly into products that are then exported, despite its prominent role as a driver of global commodity demand. According to Chinese and Korean data, Germany and South Korea, which have both maintained trade surpluses with China for the better part of the past decade, both experienced unusual deficits last month.
Because of China's slowdown, "these economies also have a widening import bill while export demand has fallen sharply for their key customer," Nguyen said.
Even worse for those nations is the structural nature of some of China's slowdown in imports. According to John Gong, a professor at the University of International Business and Economics in Beijing, this year has seen a dramatic increase in China's exports of electric vehicles, and the EV supply chain has become more China-centered, reducing demand for auto parts from countries like South Korea.
According to Rory Green, head of Asia research at TS Lombard, "I expect the pandemic winners Korea and Taiwan to have a really rough time as China, semiconductors, and the global goods cycle all turn negative."
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According to Craig Botham, chief China economist at Pantheon Macroeconomics, Japan's exports to China increased in June after declining year over year in April and May. However, Botham warns that this increase may be temporary. Given the plight of Chinese consumers, he argued that "ordinary exports aimed at final demand have no hope," while "intermediate goods are only useful as long as global export demand is strong" (which, from what I can tell, is fading).
Rising Excess
A record trade surplus for China is expected to be recorded this year.
Inexplicable trade deficits with China are being reported by Germany and South Korea.
As the number of coronavirus cases in China continues to rise, leading experts to fear further restrictions, pessimism has spread throughout the country's economic community. The problem has been made worse by the country's real estate market slump. The latest Bloomberg survey found that the median estimate for China's GDP growth in 2022 had dropped to 3.9%.
This quarter, exports are expected to grow by 7.8 percent, while imports will grow by 5.4 percent, according to economist projections.
The continued strength of demand from Europe and the United States, combined with a revival in port activity after Shanghai lifted its lockdown, led to China's largest monthly trade surplus of $98 billion in June. "odds are good that we get a record surplus for the full year," Botham said, referring to the likelihood of a surplus in light of the dismal forecast for Chinese demand.
According to Le Xia, the chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong, imports could recover to see annual growth of 7 percent to 8 percent if China can avoid more strict lockdowns in the second half of the year.
However, that would be a significant slowdown from the over 30% expansion seen last year. For the rest of the world to feel the effects of China's slowdown, "weak imports will be the most important channel," he said.
