Smart policy package key relief for exports under pressure

2023-3-13 10:38:07

In the period between the second half of 2020 and the first half of 2022, China's exports experienced rapid expansion, with a growth rate surpassing expectations, while global trade also saw expansion over the same period, which was rarely seen in the past.

We attribute such a growth rate to two major factors. The first is due to the fact that after the COVID-19 pandemic broke out, there were benefits brought by changes in both the supply and demand sides in the European and US economies. On the supply side, there was a need to replenish inventories, while on the demand side, there was impetus driven by the release of excess household savings. The second factor is due to the phenomenon of consumers spending more for goods instead of services globally.

Taking the United States as an example. From 2020 to 2021, the compound growth rate of goods consumption in the market was as high as 8 percent, but services consumption fell 1.4 percent. In the first phase after the COVID-19 outbreak, many US consumers preferred to stay at home, shortened their life radius due to social distancing requirements and reduced overall consumption. This is also why China saw many of its gaming-related exports heat up rapidly during the pandemic.

As for 2022, global commodity inventories started to shift from seeking replenishment to dealing with inventory peaks or destocking. There were also continuous interest rate hikes in Europe and the US that suppressed consumer demand and investment demand, thus weighing on China's exports. By the fourth quarter, China's exports even showed a fall of 7 percent. Therefore, expectations were dampened over export pressure this year.

Within such a context, we prefer to give a full-year forecast slightly better than those given at the year-end.

Since the beginning of this year, the economic performances of both Europe and the US have outperformed forecasts given in 2022. In Europe, indexes of the manufacturing and services sectors went down and reached a short-term nadir in October, but experienced rebounds in November and December. This may be related to improvements in microeconomic sectors after the natural gas supply constraint was moderated.

The situation in the US is more or less the same, with the US economy logging an annualized growth rate of 2.9 percent in the fourth quarter, exceeding most expectations. In January and February, from employment to retail sales, and from inflation data to PMI data, we can see an obvious economic resilience.

The reason for such resilience may be due to two important factors. The first is that the US managed to maintain a low unemployment rate over a certain period. The second is that balance sheets among US households are relatively healthy, which may be related to recent rounds of fiscal monetization bailouts. As long as the unemployment rate is low, the income side will not see a big loss, and as long as household balance sheets are healthy, the fall in spending will also be moderated. These two results together demonstrated the resiliency of the US economy. Therefore, we think economic resilience in Europe and the US markets is likely to lead to revisions in export expectations.

The latest official figures released last Tuesday have also confirmed our estimates. China recorded a better-than-expected export performance during the first two months of the year. The nation saw its total imports and exports decline 0.8 percent year-on-year to 6.18 trillion yuan ($887.88 billion).Exports increased 0.9 percent from a year earlier to 3.5 trillion yuan while imports declined 2.9 percent to 2.68 trillion yuan during the period, resulting in a trade surplus of 810.32 billion yuan, which expanded 16.2 percent on a yearly basis, the General Administration of Customs said.

All in all, no matter how exports perform this year, a stable growth is a must. China should roll out its policy package targeting not only exports, but also the real estate industry.

China has had several rounds of major negative export growth in the past, which basically was mitigated by the government's large-scale measures to expand domestic demand and stabilize growth.

The first round was due to the Southeast Asian financial crisis between 1998 and 1999, when special government bonds were issued to boost infrastructure. The second round was triggered by the global financial crisis between 2008 and 2009, when mortgage interest rates were discounted by 30 percent in October 2008 and a large-scale investment plan of 4 trillion yuan was promoted in November. The third round was rolled out between 2015 and 2016, when deep deflation of global commodities appeared, and crude oil fell by more than 60 percent. China then promoted a round of real estate destocking to boost real estate sales.

This year, we are also facing negative growth — a steep downward line of 6 percent to 7 percent recorded in the fourth quarter — for which corresponding moves to expand domestic demand and stabilize growth will also be likely. We expect a decline in exports this year of around 6 percent, creating a negative pull of 2.5 percentage points on the nominal GDP, which we think, however, will be hedged by the recovery of domestic consumption. Real estate, which is still a factor that needs to be addressed by policies this year, will therefore directly determine the direction of this round of economic policy as well as expectations in microeconomic sectors. In conclusion, unlike the above-mentioned three rounds of support stabilizing growth and expanding domestic demand, the year's package should closely address not only exports, but also real estate.

In the long run, we still see a competitive China in terms of exports. It is natural that the compound growth rate of China's exports over the past decade was around 6 percent. After all, China's exports correspond to the imports of developed countries, and when overseas economic growth rates are not that high, a medium growth rate is reasonable for exports. We think it will not be a big problem to maintain such a medium growth rate in the future, especially if China still utilizes its comparative advantages.

First, China still enjoys demographic dividends and scale advantages. Although the population growth rate is declining, the total population remains very large, which corresponds to the obvious existing scale advantages of the manufacturing sector.

Second, China has efficiency advantages due to its infrastructure and a relatively complete supply chain. Better-performing infrastructure and the advantages brought by a relatively complete supply chain are the most obvious advantages of China compared with Vietnam and other markets in Southeast Asia. Although the Vietnamese market is making rapid progress, many industries in this area may not be able to attain certain thresholds, and it will take some time to form competitive advantages over China.

Third, China boasts advantages in terms of its sheer number of skilled workers. It is expected that by 2030, more than 200 million people in China will have received tertiary education, a relatively rare advantage worldwide.

If these factors can be effectively utilized, we believe exports are still likely to maintain a medium compound growth rate in the future.

(Source: China Daily)

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