China manufacturing imports down sharply on weak economy, trade war impact
- Increase in liquefied natural gas imports masks extent of drop in manufacturing imports, including components for export goods
- Bad news for Asian exporters like Japan, South Korea, Taiwan that depend on Chinese demand
Chinese imports of components for its manufacturing industry have dropped even more sharply than the overall data suggests, producing an increasingly negative impact on the Asian economies which supply those components.
In August alone, imports were down 5.6 per cent – the eighth fall in the past nine months – in a year which has so far seen overall Chinese imports fall by 4.6 per cent, according to China’s General Administration of Customs. In the first eight months of this year, Chinese imports of manufactured products – including electronics, instruments and other devices – fell 8 per cent from a year earlier to US$581 billion.
Despite its economy being two-thirds the size of the US, China’s imports last year were worth US$2.1 trillion – almost as large as US imports at US$2.6 trillion over the same period – making any slowdown in demand a serious matter for its major suppliers in the region.
A closer look at the Chinese data shows liquefied natural gas (LNG) was the biggest positive factor for imports in the January-July period, rising 19 per cent from the previous year against a sharp drop in inbound manufacturing shipments, according to Trinh Nguyen, a Hong Kong-based economist for French bank Natixis.
Demand for imports of natural gas, particularly in rural China, will keep rising over the coming winter as Beijing tries to limit the use of coal for home heating and cooking to reduce air pollution, she said.
“In other words, the headline number is masking the weakness of manufacturing demand in China, as it would be much weaker without the disproportionate contribution from LNG. Given Asia’s dependence on manufacturing exports, this is not good news for the region, as shown by the sharp decline [in exports] by major manufacturers such as South Korea, Japan and Taiwan.”
China’s weak imports reflect the increasing difficulties facing Chinese manufacturers, hurt by softening demand at home and abroad due to the impact of the trade war with the US, as well as the slowing Chinese domestic economy. Many of them need imported semi-finished components, machinery and raw commodities to produce goods for export. Nearly 60 per cent of China’s imports are manufactured goods and the rest are commodities such as minerals and metal ores.
In August, there was a rebound in industrial commodity imports by volume. Imports of iron ore increased by 6.2 per cent from a year earlier, speeding up from 1.2 per cent in July, while copper imports also increased. But this was largely due to the gradual pick up in government infrastructure investment, a major stimulus measure that Beijing has implemented to boost the economy.
Looking at the breakdown, ‘normal’ imports used in the domestic economy continued to fall on an annual basis in August, but the pace of decline has decelerated. On the other hand, ‘processing’ imports, which are used as inputs for manufacturing goods that are primarily exported, continued to contract in August
Last week, the central government directed local governments to use next year’s quota of bond issuance to ensure the continuation of this infrastructure spending process, but that is not expected to be sufficient to arrest the overall slowing of inbound shipments or economic activity.
“Looking at the breakdown, ‘normal’ imports used in the domestic economy continued to fall on an annual basis in August, but the pace of decline has decelerated. On the other hand, ‘processing’ imports, which are used as inputs for manufacturing goods that are primarily exported, continued to contract in August,” said Louis Kuijs, head of Asia Economics at Oxford Economics.
“More significant steps are needed if policymakers want to stabilise growth next year at around 5.7 per cent, which we think they do. In this setting we expect more visible improvements in imports further down the road.
“The key downside risk to our outlook for growth and imports is policymakers not stepping up policy support sufficiently,” Kuijs said.
