Chinese exports shrank 0.3% in October for the first time since May 2020, as softening demand in key U.S. and European markets finally took their toll on a sector that had done much to offset weak domestic demand and tanking property. Officials in Beijing now have the choice between easing up on harsh Covid-19 controls or risking an accelerating downward spiral.
The outperformance of China’s export sector throughout the Covid-19 pandemic is a testimonial to the strength of its supply chain. Despite U.S. tariffs and darkening relations with Western trading partners, foreign consumers kept buying Chinese goods. Mainland manufacturers took market share from discombobulated overseas rivals, while companies like autos-to-battery maker BYD (002594.SZ), (1211.HK) reaped windfall profits churning out surgical masks on the side. In March 2021 China’s share of world exports touched nearly 16%, a level not enjoyed by any country since the United States in the 1970s.
Before Covid-19 emerged, some economists had argued the government should redirect policy support away from exports toward domestic consumption and services. Overseas sales’ contribution to growth was flat or negative in the years before the outbreak. But the pandemic showed how handy offshore markets can be. Exports’ contribution to annual growth rose to 1.7% in 2021, and its share of national output rebounded to 20%. In July the People’s Republic recorded its highest surplus on record at $100 billion.
Last month, however, this imbalance began to right; shipments to the United States and Europe fell 13% and 9% year-on-year, respectively, and imports fell too.
The timing is poor. The government has yet to revive domestic consumption, as the import data shows, mostly because ambitious officials, eager to impress President Xi Jinping, continue to implement rolling Covid-19 lockdowns that paralyse commerce. This has kept retail spending weak, as services and manufacturing activity slump. At the same time officials have lost their grip on the sliding real estate market, which directly and indirectly comprises about a quarter of the economy.
Beaten down local stock markets have been rallying on rumours that Beijing is preparing to relax its zero-Covid policy. Yet even if officials were to abandon the campaign tomorrow, any ensuing shopping saturnalia would struggle to offset the impact of more factory layoffs among exporters, and might not revive business investment appetite either.
With consumption and investment weak, and exports flagging, government spending, the remaining GDP component, becomes even more important. Yet this option is constrained by fiscal stress and Beijing’s reflexive stinginess. Hastily abandoning zero-Covid would be effective, but could prove politically embarrassing for the Communist Party. And if relaxation doesn’t produce quick returns, government credibility will take another hit. Yet someone or something, somewhere, is going to have to give.