China’s exports saw faster growth in December, with a 2.3% increase year-on-year, according to customs data. This surpasses the 0.5% growth reported in November and exceeds the 1.7% expected in a Reuters poll. Despite this positive development in global trade, China’s economy faces challenges such as a lingering property crisis, cautious consumers, and geopolitical issues. Policymakers may consider additional easing measures to address weaknesses in the economy. Imports in December grew by 0.2% year-on-year, missing forecasts for a 0.3% increase but still reversing a 0.6% drop in the previous month.

1. Exports growth picks up pace, signals turn in global trade
2. Analysts say trade impulse not enough to boost domestic demand
3. Consumer, producer prices highlight stubborn deflationary pressure
4. More policy support seen as economy still fragile heading into 2024

“The better export data is first and foremost driven by semiconductors and electronics, and the recovery on that side comes from a cyclical rebound in consumer demand overseas,” said Xu Tianchen, senior economist at the Economist Intelligence Unit. Xu mentioned that the improved Chinese export data is also influenced by a low statistical base due to severe disruptions in exports the previous December following China’s abrupt reopening.

While the recent positive Chinese export data aligns with similar trends in South Korea, Germany, and Taiwan, indicating a global trade recovery, challenges persist in China’s economy, including a protracted property crisis and deflationary pressures. Last year, China experienced a decline in exports for the first time since 2016. The United Nations has warned of a potential contraction in global goods trade by $2 trillion or 8% in 2023.

Despite expectations of interest rate reductions in the United States and Europe, aiming to boost demand for imported goods, China’s economic indicators reveal ongoing deflationary forces. Consumer prices in China fell for a third consecutive month in December, and factory-gate prices continued a more-than-year-long decline. The consumer price index for 2023 showed a 0.2% increase, the slowest pace since 2009, while the full-year producer price index fell 3.0%, marking the steepest downturn since 2015.

“The deflationary pressure in China’s economy remains as domestic demand is still weak. The property sector continues to weigh on the economy,” noted Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Analysts anticipate the need for additional policy support measures in the short term to stimulate demand. While consumption is expected to increase during the Lunar New Year, sustained efforts, including stimulus, are considered essential to boost household spending and alleviate deflationary pressures, according to UBS analysts.

Chinese policymakers face challenges not only from domestic factors such as weak demand and the lingering impact of the property sector but also from global headwinds. The World Bank has warned of a third consecutive year of slowing global growth.

Despite the positive trend in China’s export data, there are concerns about the sustainability of the increase in new foreign orders for Chinese producers. Market reactions to the data were relatively muted, with China’s CSI300 stock index showing a modest decline and Hong Kong’s Hang Seng Index remaining steady. The yuan against the dollar also showed no significant changes.

FRAGILE DEMAND PROSPECTS

China, the world’s largest energy consumer, recorded record-high imports of coal and crude oil in 2023, signaling a recovery in demand after the pandemic-induced economic downturn. Additionally, iron ore imports reached unprecedented levels, contributing to a year of substantial commodity imports. Notably, soybean imports saw a significant increase for the first time in three years, driven by heightened purchases, especially from Brazil.

Despite these positive trends, iron ore futures experienced a decline, influenced by data indicating soft demand prospects in China. Analysts, such as Julian Evans-Pritchard from Capital Economics, expect import volumes to improve in the near term due to further policy support stimulating demand for commodities. However, concerns persist over deflation risks in China’s economy amid weak global growth and continued overinvestment.

While the uptick in exports is seen as providing only a modest boost to domestic demand, China remains focused on addressing economic challenges and supporting key sectors. The ongoing cyclical recovery in economic activity is expected to contribute to a slight rise in core inflation. However, the overall deflation risks are anticipated to persist for some time.