China’s Drop In Exports May Be ‘Inertia’ – Analysis

With the Christmas and New Year shopping season approaching, global shipping lines are intensifying capacity management strategies and preparing for peak export shipments from China. However, unlike previous years, this year’s peak export season in China appears to be somewhat quiet.

“The unrelenting decline in container freight rates from Asia, caused by a collapse in demand, is compelling ocean carriers to blank more sailings than ever before as vessel utilization hits new lows,” said Joe Monaghan, CEO of Worldwide Logistics Group. This view is largely supported by statistics. According to CNBC’s latest Supply Chain Heat Map data, U.S. manufacturing orders in China fell by 40% this winter. At the same time, data from supply chain research company Project 44 shows that since the end of summer 2022, the vessel TEU (twenty-foot equivalent unit) from China to the U.S. has dropped sharply, with a decline of 21% in total vessel container volume between August and November. Affected by the continuous decrease in order demand, Worldwide Logistics Group revealed that a large number of Chinese factories for export trade may be closed two weeks earlier than usual for the Lunar New year in 2023.

In fact, there were already signs of a slowdown in China’s export demand before this. The country’s exports shrank in October, the worst performance since May 2020, as the domestic economy slowed and the threat of a global recession hit international trade, according to data released by China’s General Administration of Customs (GACC) on November 7. Its exports fell by 0.3% year-on-year in October, a sharp drop from the 5.7% increase in September and far below market expectations. Among them, the exports to the U.S. fell by 13% year-on-year, the third consecutive month of decline, which undoubtedly deserves China’s attention.

Researchers at ANBOUND are of the opinion that, the weakness in China’s exports actually stems from both internal and external reasons.

In terms of external markets, since the outbreak of the Russia-Ukraine conflict, rising food and energy prices have pushed up global inflationary pressures, and the tightening policy introduced by the U.S. government has further hit the country’s consumption and import capacity. From a global perspective, the latest barometer reading of goods trade released by the World Trade Organization (WTO) on November 28 was only 96.2, which was lower than the baseline value of the index and the previous reading (100.0), confirming the fact that there’s a slowdown in the growth of global goods trade activities. Overall, the WTO predicts that the total global trade in goods will grow by only 3.5% in 2022; with the growth rate in dropping further from 3.4% to 1.0%.

Looking at the U.S. market, in the third quarter, U.S. personal consumption expenditures increased by 1.4% year-on-year, which was lower than the previous value of 2%. The consumption of all kinds of durable and non-durable goods showed negative growth, and the consumption of services also weakened. Under this pressure, various importers faced a serious inventory backlog, so they were forced to reduce orders and as a result, the U.S. container imports tumble sharply. According to media reports like that of the Wall Street Journal, the ports of Los Angeles and Long Beach handled 630,231 loaded inbound containers in October, a year-on-year decrease of 26%. This is the lowest cargo throughput entering the port since May 2020. Meanwhile, research group Descartes Datamyne said in its latest trade report that U.S. container imports fell 13% in October from a year earlier, suggesting that U.S. retailers and manufacturers are slowing overseas ordering activity due to high inventories or collapsing demand.

In addition, with a new round of industrial transfer and supply chain adjustment, more and more manufacturing links have begun to transfer from Mainland China to emerging market countries such as some in Southeast Asia. Affected by this, the U.S. import regional focus has also changed. According to the Everbright Securities research report, since December 2021, the share of U.S. imports from China has gradually dropped, from 19.8% in December 2021 to 16.5% in March 2022. During the same period, the U.S. import share from ASEAN increased by 0.8 percentage points from 10.2% to 11%. Taking Vietnam as an example, it currently mainly undertakes the transfer of leather, textiles, shoes and hats, and household products among China’s export goods. Specifically, from December 2021 to March 2022, the share of the above four categories imported by the U.S. from China declined by 1.7, 4.7, 3.4, and 8.8 percentage points respectively, while the share of these categories imported by the U.S. from Vietnam increased by 2.6, 3.2, 4.3, 5.7 percentage points respectively during the same period. It can be seen that due to factors such as the COVID-19 pandemic and geopolitics, the transfer of orders from some industries in China to Southeast Asia has become a trend.

When it comes to China’s own internal market, since the beginning of this year, there are high uncertainties of the novel coronavirus outbreaks. The lockdowns have also caused a relatively large negative impact on business production. Previously, data released by the country’s National Bureau of Statistics (NBS) showed that China’s manufacturing purchasing managers index (PMI) continued to drop in November, falling to 48%, below the critical point of 50% for two consecutive months, even lower than economists’ forecasts of 49%, indicating that the downward pressure on the manufacturing industry continues to increase. Compared with October, the data dropped by 1.2 percentage points, hitting a new low in seven months. At the same time, the comprehensive PMI output index in November was 47.1%, which was also 1.9 percentage points lower than that in October. The overall situation in the first half of the year shows that China’s factory production activities are basically in a state of contraction. The impact of the pandemic has caused important industrial cities such as Shanghai, Shenzhen, and Chengdu to come into partial or complete shutdowns.

In October this year, with outbreaks of infection in Foxconn’s factory in Zhengzhou, a large number of workers left, and its production activities were almost suspended. According to the media, as one of Apple’s largest foundries in the world, the lockdown in the factory area may reduce global iPhone production by nearly 30%. Affected by this, the talks about Apple reducing its production scale in China have been all over the place. Some supply chain analysts say the latest turmoil means Apple is no longer willing to tie up so much of its business in one place after China’s status as a stable manufacturing center has been weakened over the past year. An executive at Luxshare Precision, one of Apple’s key suppliers in China, also said that some anonymous consumer electronics customers were concerned about supply chain disruptions in China due to the chaos because of the COVID-19 containment measures, power shortages, and other problems. As a result, these customers hope Luxshare could do more outside of China and get suppliers more proactive in planning to assemble Apple products elsewhere in Asia, particularly India and Vietnam.

What Foxconn is facing would not be an isolated case. With the repeated COVID-19 outbreaks and lockdowns, the confidence of foreign enterprises in China has seriously deteriorated. In early November, the American Chamber of Commerce in Shanghai released a report showing that 52% of respondents expressed that their headquarters’ confidence in China’s economic management had worsened in the past year. As a result, only 18% of companies list China as the first destination country for their global investment plans, down from 27% in 2021. At the same time, compared with 2021, 19% of the respondents indicated that they have reduced investment in China this year, and the main reason is related to the COVID-19 measures. At the same time, a survey by Nikkei News in mid-November also showed that Japanese companies have a clear willingness to reduce their reliance on China in their medium and long-term supply chains. 78% of the companies surveyed believe that compared with six months ago, the risks of purchasing parts and components from China have increased, and 53% of the companies said that they will cut down the proportion of global production purchased from the country. Therefore, the loss of external confidence in China’s supply chain may also be one of the important factors driving the slowdown in its export growth.

In general, the current slowdown in China’s exports is due to the weak demand caused by the economic downturn and policy tightening in external markets such as the U.S. and Europe, as well as the transfer of orders brought about by the restructuring of the global supply chain. On the other hand, it also stems from the impact of the COVID-19 pandemic within China. This not only limits the expansion of various domestic production activities in the country but also seriously hits the confidence of the international market in continuing to purchase Chinese goods.

On this basis, researchers at ANBOUND point out that the negative impact of the above factors on export slowdown is inertial. The current weak export trend will not stop immediately with the disappearance of various unfavorable factors. The shrinking and disappearing needs and confidence may take more time to be restored. Therefore, the slowdown in exports this Christmas and New Year shopping season is likely to continue for a period of time next year. As a country highly dependent on export trade to drive economic growth, China may need to pay more attention to this and make early preparations.

Final analysis conclusion:

Under the impact of weak external demand, economic downturn, and industrial transfer, as well as repeated COVID-19 outbreaks within the country, the growth momentum of China’s foreign trade exports has faced a setback in this year’s Christmas and New Year shopping season. However, lost demand and confidence cannot be rebuilt overnight. Therefore, the downward trend of related exports may continue next year.