Exports Are Lower and Internal Demand Has Also Dropped. What’s Happening to China?
Engaged in a painful transition to a growth model focusing on services and domestic consumption, China is weathering a lackluster economic climate. China faces the prospect of industrial overcapacity and worries of its debt soaring. This might force a change in ‘model’ sooner than expected.
Despite the devaluation of the yuan, China’s exports continue to fall. In October, China exported some 7.3% fewer goods compared to October 2015. Demand from the U.S., European Union, and Japan has diminished. Meanwhile, imports also fell, losing 1.4%. The reverse was supposed to happen. In October, the yuan lost around 1.5% of its value against the U.S. dollar. (Source: “China’s Exports Hurt by Weak Demand,” The Wall Street Journal, November 7, 2016.)
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However, the significant devaluation failed in its intent. China’s foreign exports fell 7.3% (in USD terms) compared to October last year. If there’s a silver lining, it’s that in September, China exported 10% less—and that was before the devaluation. But, it seems the problem owes more to the Western economies, because exports to Southeast Asia have suffered only a 0.9% decline.
Imports also fell by 1.4%. In any case, China continues to maintain a very high trade surplus, which reached $441.6 billion in the months from January to October 2016. October was the seventh consecutive month of declining exports, suggesting a weak international situation. It may also point to deteriorating competitiveness—an alarming signal for the world’s second-largest economy. The lower imports also show that domestic demand was also weak, making matters worse. (Source: Ibid.)
Foreign trade remains a pillar of China’s GDP and a traditional engine of growth. Has the engine ran out of fuel? Given that global economic growth will not accelerate further in the near future, the scope for significant improvement in global demand—and consequently Chinese exports—is probably very limited, suggested Julian Evans-Pritchard, an analyst at Capital Economics. (Source: “China October exports, imports fall more than expected,” Reuters, November 7, 2016.)
The weakening of the yuan to its lowest levels in six years was not enough to reverse the trend. But, China is experiencing a natural evolution of its economy. Salaries and the cost of living are increasing. This makes China less competitive than many of its neighbors in South East Asia. The results of the American election add an additional factor of stress. Based on Donald Trump’s rhetoric, it is expected that trade will suffer severely.
