China’s weak exports in first half of 2019 are also bad news for its major trading partners

While the meagre 0.1 per cent rise in exports in the first six months of 2019 was bad news for China, it was even worse for many of its trading partners, with a flat performance by the world’s second large economy causing ripples through the tightly integrated supply chains created by globalisation.

A decline in Chinese exports automatically dampens its demand for imports of components used in finished exports and that, in turn, hurts every other economy that sells to China.

The biggest drop in first half exports was to the United States, with which China has been fighting a trade war for the past year. Exports to the US contracted by 8.1 per cent, a sharp reversal from the 13.5 per cent rise during the first half of 2018, according to the China’s General Administration of Customs.

But the decline in exports paled in comparison to the near 30 per cent drop in Chinese imports from the US, which range from raw materials to agriculture products, aircraft and semiconductors. The contraction was not only another indication of declining demand for American products, but more tellingly, a sign of weaker consumption worldwide.

Processing imports, where part of the production process is contracted out to a firm in a different country, are sinking as the trade war takes a toll on the global economy, with economists even warning of a recession if tensions escalate. China’s overall imports slid 4.3 per cent in first half of 2019, compared with a 19.9 per cent rise a year earlier.

Raymond Yeung, ANZ’s chief economist for Greater China, pointed out that supply chains are so intricately interwoven that it was no longer a zero-sum game where one market’s decline was another economy’s gain.

“When exports for one market drop, those for others also fall,” Yeung said.

For that reason, China’s first half exports to the European Union may have climbed 6 per cent, or US$11.12 billion, while those to the 10-nation Asean group increased 7.9 per cent, or US$11.84 billion. But both growth rates were well below the level in the first six months of 2018 after exports to the European Union grew 11 per cent, while those to Association of Southeast Asian Nations (Asean) states rose 16 per cent during the same period.

What is more, neither of the increases in exports to the two large economic blocs so far this year would have been sufficient to fill the gap of US$18.19 billion resulting from the lower Chinese exports to the US.

Chinese exports rose to most of the six Asean nations for which Beijing released detailed trade figures for, but the rate of increase was smaller in three of the countries than it was in the previous year. Only two – Malaysia and the Philippines – posted faster increases. Similarly, based on the customs data made available for five European Union countries, exports to four climbed, albeit at a pace that lagged behind last year’s. Exports to Britain, on the other hand, rose at a faster 12.7 per cent pace, against a 3.2 per cent slip in the first half of 2018.

Even though Vietnam, which has been the major beneficiary of the shift of manufacturing out of China to escape rising costs and US tariffs, posted a 36.4 per cent rise in exports to the US in the first five months of the year, the total value of US$25.84 billion was only 14 per cent of what China sold to America during the same period, according to US government data.

Asean member Singapore, which counts China as one of its top trading partners, posted a double-digit drop in exports in June for the fourth straight month. Non-oil exports, a benchmark indicator, slumped 17.3 per cent, mainly due to declines in goods shipped to Hong Kong, China and the European Union against the broader drop for most of its top markets. The export-reliant city state said it was reviewing its 2019 growth forecast range of 1.5 to 2.5 per cent.

The US and China are set to resume negotiations after US President Donald Trump agreed with Chinese counterpart Xi Jinping on a tariff ceasefire last month at the G20 summit in Osaka. US trade representative Robert Lighthizer and US Treasury secretary Steven Mnuchin will travel to Shanghai early next week to meet their Chinese counterparts, Vice-Premier Liu He and Commerce Minister Zhong Shan.

Still, reaching an agreement to end the year-long trade war will be difficult and could take significant time. A deal is only possible, according to Chinese state media commentary, if the US removes all tariffs imposed since the start of the trade war. The US has imposed 25 per cent tariffs on US$250 billion of Chinese goods, while China has retaliated with a similar levy on US$60 billion of American imports.

The dispute is also very much a tech war, as the US attempts to tame China’s ambition to be a technology superpower, laid out in its “Made in China 2025” industrial strategy to create national champions in 10 hi-tech industries, one of the catalysts for the trade war. And the complex nature of the hi-tech industry also means its supply chain is inherently global.

Take the example of a semiconductor, or chip, which is known as the brain that powers everything from electrical appliances and smartphones to the most sophisticated super computers and driverless cars. A typical production process starts in the US where the chip is designed, to Japan where silicon ingots are sliced into wafers. From there, they return to the US to be made into fabrication wafers, where they are also sorted, cut into dies, on which the circuits are fabricated. The die is then assembled, packaged and tested in Malaysia, and the final product shipped for inventory in Singapore. The product, or chip then heads to China where it is integrated into consumer products, before being exported to the rest of the world.

China is the leading maker of personal computers and smartphones globally, but it continues to rely heavily on imported components from the US and the rest of the world. For instance, Chinese smartphone manufacturers overall account for a significant 85 per cent share of the domestic market, but more than 50 per cent of components needed are sourced from multinational players, according to report released this month by global consultancy McKinsey.

The report examines the evolving economic relationship between China and the rest of the world, and explains one of China’s pain points – the reliance on semiconductors from the US and other foreign players.

The McKinsey research found that China, the world’s largest goods trading nation since 2013, has been increasingly relying on domestic demand and reducing its exposure to the world, which, in contrast, has become more economically exposed to the Asian giant.

It also found that domestic consumption contributed at least 60 per cent of China’s growth during 11 of the 16 quarters from January 2015 to December 2018.

“China knows well it needs to build up and stabilise domestic demand. It cannot rely on debt [to fuel growth], said ANZ’s Yeung, referring to expectations that a trade deal is unlikely in the short term.

China introduced a two-year plan last month to boost further consumption of goods including smart home appliances and new energy vehicles. Consumption is critical for the country’s growth, and already contributes more than 60 per cent of economic growth.

But Yeung said expanding domestic demand would be a long term undertaking, which is tied to issues like income growth and the broader economic structural reforms.

To shore up confidence, the Ministry of Commerce said this week that the government’s efforts to open up a diverse range of markets, despite the increasingly complicated international trade environment due to rising protectionism, were paying off.

It highlighted that the contribution from first half exports of goods and services to gross domestic product growth reached 20.7 per cent, a 1.5 percentage point rise from a year-earlier. The portion of exports to emerging markets, which excluded the US, European Union, Japan and Hong Kong, rose 1.4 percentage points, the ministry said.

Natixis’ Asia-Pacific chief economist Alicia Garcia Herrero said markets in which Chinese exports had an edge under the current circumstance would become captive markets. These countries could include, for example, countries being sanctioned, such as Iran and Russia, as well as others that depend on China’s financing of exports, as is the case of Venezuela and, to a lesser extent, Pakistan.

“For more relevant sectors, margins are larger for machinery than for consumer goods which is another reason why China wants to get more and more into capital goods,” she said.