Double-Digit Drop in China's July exports adds to urgency for economic support

China experienced a sharp decline in its exports, plummeting by 14.5 per cent in July compared to the previous year. This economic setback has intensified pressure on the ruling Communist Party to take actions aimed at reversing the ongoing economic downturn. The recorded figures show that exports reached a value of USD 281.8 billion, reflecting a broader decrease than the 12.4 percent drop observed in June, as per customs data reported on Tuesday. Concurrently, imports also suffered, declining by 12.4 percent from the previous year to USD 201.2 billion, signaling subdued domestic demand. This decline was a significant widening from the 6.8 percent contraction seen in the previous month.

Furthermore, China's trade surplus on a global scale shrunk by 20.4 percent from the previous year's record high, now standing at USD 80.6 billion. In an effort to combat this downturn, Chinese leaders have been working to stimulate business and consumer activity. However, the rebound that followed the relaxation of anti-virus measures in December faltered earlier than anticipated. Economic growth saw a decline to 0.8 percent in the three months leading up to June, compared to the 2.2 percent growth witnessed in the January-March period. This translates to an annual growth rate of 3.2 percent, which would be one of China's weakest rates in three decades.

Despite these challenges, the ruling party has not yet announced significant stimulus spending or tax cuts, though promises have been made to support entrepreneurs, encourage consumer spending, and boost home purchases. The demand for Chinese exports cooled down due to the actions of central banks, including the Federal Reserve, raising interest rates to counteract inflation that had reached multi-decade highs.

This export contraction marks the most substantial decline since the start of the COVID-19 pandemic in 2020, according to analysts at Capital Economics. They attribute the decline primarily to lower prices, even though the volume of goods remains higher than pre-pandemic levels. Capital Economics predicts that exports will continue to decrease over the coming months before stabilizing towards the end of the year. The outlook for consumer spending in developed economies remains challenging, the report states.

When examining specific trade partners, exports to the United States fell by 23 percent from the previous year to USD 42.3 billion, while imports of American goods decreased by 11.1 percent to USD 12 billion. China's politically sensitive trade surplus with the United States also shrank by 27 percent, reaching USD 30.3 billion. Importantly, China's imports from Russia, mainly consisting of oil and gas, experienced a marginal decrease of 0.1 percent from the previous year, totaling USD 9.2 billion. Chinese acquisitions of Russian energy have been instrumental in compensating for revenue losses due to Western sanctions imposed as a response to Russia's actions in Ukraine.

China's trade interactions with the 27-nation European Union also reflected significant declines, with exports plummeting by 39.5 per cent and imports of European goods decreasing by 44.1 percent. This led to a contraction of China's trade surplus with the EU by 32.7 percent, settling at USD 19.1 billion. Over the first seven months of the year, Chinese exports fell by 5 percent compared to the same period in 2022, totaling slightly over USD 1 trillion.