China Trade Growth Tumbles Amid Weakened Demand

An analysis by Michael Lelyveld
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Australia's Prime Minister Tony Abbott (top C) looks on as Chinese Commerce Minister Gao Hucheng (2nd L) and Australia's Trade Minister Andrew Robb (2nd R) sign a free trade agreement between the two countries in Canberra, June 17, 2015.
Australia's Prime Minister Tony Abbott (top C) looks on as Chinese Commerce Minister Gao Hucheng (2nd L) and Australia's Trade Minister Andrew Robb (2nd R) sign a free trade agreement between the two countries in Canberra, June 17, 2015.

China's foreign trade has sagged far below government targets as the country's traditional engine of growth begins to drag on the economy.

The country is struggling to meet the government's goal of 6-percent trade growth for 2015 after total imports and exports fell 7.8 percent in the first five months, according to General Administration of Customs (GAC) figures.

The problems for trade are an underlying concern for China's once-booming economy as growth rates fade and investors struggle to digest a 12-percent loss in the country's key stock market last week.

On Friday, the Shanghai Composite Index dropped 5.7 percent, contributing to a slide of over 28 percent from a high recorded just three weeks before. On Monday, the index rebounded slightly with a 2.4-percent gain after a series of supportive measures over the weekend.

But the negative turn in trade suggests longer-term trouble for the economy following a trend of weakening growth over several years.

In 2014, total trade rose 3.4 percent in U.S. dollar terms, less than half the government target of 7.5 percent. In 2013, trade increased 7.6 percent, falling short of an 8-percent growth goal, GAC data showed.

In 2012, trade gained 6.2 percent against a 10-percent target. The last year of double-digit growth was 2011, when trade soared 22.5 percent as both imports and exports surged by over 20 percent.

The downturn deepened in May, when exports declined 2.8 percent and imports dropped 18.1 percent from the year-earlier period in yuan terms.

While exports have posted a string of monthly losses, the import slide has been particularly steep.

"The data shows the Chinese economy is still in the process of seeking a bottom," said Liu Yaxin, macro strategist at China Merchants Securities in Shenzhen, as cited by Reuters.

Gary Hufbauer, senior fellow at the Peterson Institute of International Economics, said the slippage in imports is a sign of slower expansion and consumer demand at a time when China has promoted a shift to a consumption-led economy.

Although official first-quarter gross domestic product (GDP) growth of 7 percent was the lowest since 1999, the 17.2-percent dip in five-month imports suggests that real growth may be worse.

"The economy is underperforming," said Hufbauer. "The government is probably topping up the statistics to portray a better picture than in fact exists. I think Chinese consumers as well as industries are pulling back."

Export issues

On the export side, several factors have contributed to the tough times for trade.

China's key foreign markets have recovered only slowly from the global financial crisis, creating less demand for its products abroad.

"The lethargic world economy is the main reason," said Hufbauer. "The markets are not growing for the kinds of things that China typically sells."

Through April, for example, the value of exported garments and clothing accessories fell 4.6 percent. Rare earth exports, used in cellphones and electronics, lost over 30 percent. In the broad category of high-tech products, exports rose a scant 0.5 percent.

Higher labor costs have also made China less competitive with lower-cost or closer suppliers like Vietnam and Mexico.

In a sense, weaker export growth has been a sign of transition in China, although change has come at a cost.

In its current Five-Year Plan through 2015, the central government targeted annual minimum wage increases of 13 percent, and while wages are set locally, the gains have been largely achieved.

In the manufacturing center of coastal Guangdong province, average minimum wages rose 19 percent in May after a previous hike two years earlier, Xinhua reported.

Monthly pay in the capital Guangzhou increased 22.2 percent to 1,895 yuan (U.S. $305), the official news agency said.

But higher wages have added to China's manufacturing costs.

As of last year, costs of labor and social insurance in Vietnam were less than half of those in China. In India, the costs were 22 percent of China's, consultants Dezan Shira & Associates in Hong Kong said.

Exchange rates and regional tension

While cost comparisons are pushing low-wage exporting to other countries, exchange rates have also been playing a part.

China's yuan has been virtually pegged to the U.S. currency all year, trading in a narrow range of around 6.2 to the dollar. But as the greenback has strengthened, so has the yuan against other currencies, making China's goods less competitive in many markets.

Through April, China's exports to the United States were up 9 percent in dollar value, but exports to the European Union were down 1 percent.

Regional tensions with Japan have also hurt China's trade. Imports from and exports to Japan have been falling since 2013.

In the first four months of this year, imports and exports were both down by over 12 percent, the Japan External Trade Organization (JETRO) said.

Ironically, China's trade growth was stronger when the world economy was weaker during the global downturn of 2008-2010.

Hufbauer said that may have been due to longer-term supply contracts and investments that kept exports flowing. Lower wage costs and weaker currency may also have played a part.

But clearer readings of China's trade data may be clouded by past inflows of "hot money." The illicit moves by currency speculators, disguised as payments for phantom exports with fake invoices, have skewed official growth rates for years.

Interpretations of the import slide are also complicated by commodities like crude oil and iron ore that have risen in volume but fallen in value as prices have plunged.

As of April, oil imports have climbed 7.8 percent by volume this year, but the U.S. dollar value has dropped by over 43 percent, driving trade totals down.

Government response

China's government has promoted several remedies for the declining trade trends, including its "belt and road" initiatives to establish modern versions of historic Silk Road trade routes.

Premier Li Keqiang has pushed innovation, high-tech exports and services to reduce reliance on traditional manufacturing and assembly operations, where China has lost competitive ground.

"Previously known as the low-cost factory of the world, China is no longer satisfied with low-value manufacturing," Xinhua said in May.

Li has sought a solution in "international industrial capacity cooperation," a plan to transplant the surplus manufacturing of entire industries like steel overseas.

What this will do for China's economy in the long term remains to be seen, but the trade benefits appear doubtful.

In recent weeks, China has also reached significant free trade agreements with South Korea and Australia, which are more likely to spur trade growth over time.

Free trade agreements have the potential to boost bilateral trade by 50 percent or more after phase-in periods that can last years, but near-term effects are usually "quite small," Hufbauer said.

In the case of China's agreement with South Korea, tariffs on over 90 percent of products on both sides will be abolished within 20 years, Xinhua reported.

In the deal with Australia, tariffs will drop to zero "immediately" on 85.4 percent of traded goods, while full implementation will take 11 years, state media said.





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