The recent surge in Chinese exports gives the wrong signal
Chinese exports surged last spring. According to the Beijing Customs General Administration, exports rose 12.7% in May. The Administration notes that if this pace continues, it will erase the poor performance of the first four months of the year and 2022 will see growth of 15% for the full year. This kind of numbers game is grossly misleading, however. The May surge was a one-time response to the reopening of the Port of Shanghai. It won’t be repeated. In the months, if not years to come, a range of forces will restrain China’s export growth.
Changing consumer habits in Europe and America play the most immediate role in export growth. During the Covid emergency and even into the 2021 recovery, American and European households have been spending heavily on home entertainment equipment and ways to facilitate remote working. These trends have greatly benefited China’s apparent power in electronic equipment assembly. But now that the West has started to travel again and seek entertainment outside the home, spending has shifted from those products to services. Chinese producers have suffered.
Take for example Shenzhan Teanabuds Electronics, a maker of wireless earphones, headphones and speakers. This company reports that its sales in Europe, America and the Middle East have fallen by 50% compared to last year’s levels. Similarly, Guangzhou GL Supply Chain, a maker of garden supplies and simple household items, saw its overseas orders drop by half. These are just two examples and certainly extreme, but they are no less indicative.
Even more frightening for Chinese exports is the growing need for the West to implement anti-inflationary policies. The West’s post-Covid recovery in 2021, from which Chinese exports have greatly benefited, has been largely supported by accommodative monetary and fiscal policies in Europe and America. But now inflationary pressure has demanded a change in these policy postures.
In the United States, the Federal Reserve (Fed) has begun withdrawing liquidity from the financial system and raising interest rates, by 1.5 percentage points only since March. The Fed promises to intensify these restrictions in the future. Such changes will limit economic growth and, therefore, the appetite for Chinese products. So far, Washington has changed its fiscal policy little, but it is clear that it will not prolong the economic stimulus as it has. Europe is lagging behind the United States in these anti-inflationary measures, but it is clearly thinking in this direction. Indeed, policy changes have already raised concerns about recession in Europe and America, which is hardly a good prospect for Chinese exports.
Trends that stem directly from China’s development gains are perhaps the most worrisome. Much of China’s remarkable export boom in the past has reflected the appeal of cheap, disciplined Chinese labor to overseas buyers and producers. But as China’s economy grew and the population became more affluent, these cost advantages began to disappear.
Shanghai’s containerized freight index remains high enough to discourage shipping. Although down about 17% so far this year, it is still four times pre-pandemic levels. This cost difference alone convinces some foreign buyers to bring production sources closer to the point of sale in Europe and America. At the same time, Chinese wages have grown by 9.5% per year over the past five years, much faster than wages in the developed world and certainly faster than comparable costs elsewhere in Asia. Western operations can’t help but consider shifting their sourcing from China to places like Vietnam, Indonesia, the Philippines and similar places. Already, Vietnam has won large percentages of orders for products that were once made almost exclusively in China. In summary, Shenzhen Teanabuds Electronics Global Marketing Manager Zhang Wanli complained, “We are losing our edge.”
In time, some of the most immediate adversity will dissipate. But a shift to wiser economic policies in the West will have lasting effects, possibly for years to come, and the continued erosion of China’s cost advantages will keep pressures limiting exports even longer. It is precisely this developing reality that prompted the International Monetary Fund (IMF) to recommend that China reorient its economy from a reliance on exports to a greater reliance on demand. domestic consumers. It’s a step that Beijing has considered essential for some time. To date, however, authorities have done little to facilitate it. Perhaps limited export growth will induce a change Beijing has yet to make, but it could be a step too far for planners who have relied on exports as the engine of growth for decades.