China’s Recent Exports Surge Gives A False Signal

Chinese exports surged this past spring. According to Beijing’s General Administration of Customs, exports grew a whopping 12.7% in May. The Administration notes that if this pace holds, it will wipe out the poor performance of the year’s first four months and 2022 will see a 15% growth for the year as a whole. This sort of numbers game is, however, grossly misleading. May’s surge was a one-time response to the re-opening of the Port of Shanghai. It will not repeat. In coming months, indeed years, an array of forces will hold back exports growth in China.

Counting most immediately against export growth are shifting consumer patterns in Europe and America. During the Covid emergency and even in the 2021 recovery, American and European households spent heavily on home entertainment equipment and on ways to facilitate remote work. Those trends greatly benefitted China’s clear strength in the assembly of electronic equipment. But now that the west has begun travel again and seek entertainment outside the home, spending has shifted away from such products toward services. Chinese producers have suffered.

Take for example Shenzhan Teanabuds Electronics, a maker of wireless earbuds, headsets, and speakers. That firm reports that its sales to Europe, America, and the Middle East have fallen 50 percent from last year’s levels. Similarly, Guangzhou GL Supply Chain, a maker of garden supplies and simple household items, has seen its overseas orders fall by half. These are only two examples and admittedly extreme ones, but they are nonetheless indicative.

Still more frightening for Chinese exports is the west’s growing need to implement counter-inflationary policies. The west’s 2021 post-Covid recovery from which Chinese exports greatly benefitted received huge support from Europe’s and America’s easy monetary and fiscal policies. But now inflationary pressure has demanded a change in such policy postures.

In the United States, the Federal Reserve (Fed) has begun to withdraw liquidity from the financial system and raise interest rates, 1.5 percentage points just since March. The Fed promises to intensify such restraint going forward. Such changes will constrain economic growth and accordingly appetites for Chinese products. So far, Washington has made little change in its fiscal policy, but it clearly will not extend economic stimulus as it had. Europe is behind the United States in taking such counter-inflationary steps, but it is clearly thinking along these lines. Indeed, policy shifts have already raised concerns about recession in Europe and America, hardly a good prospect for Chinese exports.

Perhaps most ominous are trends growing directly from China’s development gains. A large part of China’s past remarkable export boom reflected the attractions of China disciplined and inexpensive workforce to foreign buyers and producers. But as China’s economy has developed and the population has become more affluent, those cost advantages have begun to disappear.

The Shanghai containerized freight index remains high enough to discourage shipping. Though down some 17 percent so far this year, it nonetheless stands four times pre-pandemic levels. Alone this cost difference is convincing some overseas buyers to bring the production sources closer to the point of sale in Europe and America. At the same time, Chinese wages have risen at 9.5% a year for the last five years, far faster than wages in the developed world and certainly faster than comparable costs elsewhere in Asia. Western operations cannot help but consider a shift in their sourcing from China to places like Vietnam, Indonesia, the Philippines, and like venues. Already, Vietnam has won large percentages of orders for products that were once made all but exclusively in China. Summarizing, Shenzhen Teanabuds Electronics’ global marketing director, Zhang Wanli, complained, “we are losing our advantage.”

In time some of the more immediate adversity will dissipate. But a turn to more judicious economic policies in the west will have lasting effects, perhaps for years, and the continued erosion of China’s cost advantages will keep up export-constraining pressures for even longer. It is just this developing reality that impelled the International Monetary Fund (IMF) to recommend that China re-orient its economy away from a dependence on exports toward a greater reliance on domestic consumer demands. It is a step that Beijing has for some time considered essential. To date, however, the authorities have done little to facilitate it. Perhaps constrained exports growth will induce a change that Beijing has yet to make, but that might be a step too far for planners that have for decades now counted on exports as the engine of growth.