China’s exports are projected to suffer another blow in July as the nation’s manufacturers grapple with reduced demand from international markets, where inflation and rising interest rates have created challenging conditions. A recent Reuters poll conducted with 28 economists reveals that outbound shipments are expected to plummet by 12.5% from the previous year. This follows a similar decline of 12.4% in June, signifying the worst performance since the early days of the pandemic in February 2020 when exports fell by a staggering 17.2%. During that period, strict COVID-19 restrictions and nationwide lockdowns forced workers to halt production, severely impacting China’s export capabilities.

The downturn in Factory Activity Poses a Threat to Growth

In addition to the export slump, Chinese factory activity has faced a troubling trend, declining for four consecutive months up until July. This worrying development poses a significant threat to growth prospects in the third quarter. As a result, authorities are under increasing pressure to deliver promised policy measures aimed at boosting domestic demand. The services and construction sectors are particularly vulnerable and are on the brink of contraction, necessitating urgent action from policymakers.

Stimulus Hints Offer Limited Relief

China’s state planner has hinted at potential stimulus measures during three press conferences convened last week. However, these proposals have left investors underwhelmed. The suggestions primarily focused on expanding consumption in sectors such as the automobile, real estate, and services industries. Additionally, plans were discussed to extend loan support tools for small and medium-sized enterprises until the end of 2024. Despite these measures, investor sentiment remains cautious, and there are concerns that they may not be sufficient to revive the economy.

Monetary Policy Balancing Act

Chinese authorities are currently navigating a delicate balancing act. As many of China’s major markets contend with higher borrowing costs in their attempts to combat soaring inflation, Beijing is under pressure to boost domestic consumption without resorting to excessive monetary policy easing. If done imprudently, such a move could trigger substantial capital outflows, further destabilizing the economy. Striking the right balance is critical to ensure economic stability and growth.

Imports Reflect Slightly Improved Domestic Demand

Amid the challenging economic landscape, imports are expected to have contracted by 5.0% in July. This reflects a marginal improvement in domestic demand compared to the sharp fall of 6.8% in June. However, the decline in South Korean exports to China, a leading indicator for imports to the Asian giant, is a concerning sign. South Korean exports experienced a substantial drop of 25.1% in July from the previous year, indicating that the recovery in import demand remains uncertain.

Trade Surplus Maintains Stability

Despite the gloomy outlook for exports and imports, the median estimate in the poll suggests only a marginal change in China’s trade surplus. Analysts predict that the trade surplus will be around $70.60 billion in July, compared to $70.62 billion in June. This relatively stable surplus may provide some reassurance amidst the economic challenges faced by China.

Conclusion

In summary, China’s exports are projected to face further declines in July, reflecting the struggles of manufacturers amid global economic challenges, including high inflation and rising interest rates. The downturn in factory activity and potential contraction in the services and construction sectors have heightened concerns about growth prospects in the third quarter. Authorities are under pressure to implement effective policy measures to boost domestic demand while avoiding excessive monetary easing. Although imports have shown a slight improvement in domestic demand, uncertainties persist, exemplified by the sharp decline in South Korean exports to China. As China’s economy navigates through these turbulent times, maintaining a stable trade surplus offers some hope for stability and recovery.