The danger of a false dawn in China’s trade data after the strong rebound in exports at the beginning of the year

China trade data started the year with a relatively encouraging note, since both exports and imports exceeded market expectations. This small ray of light redoubles the hopes that the recent stimuli announced by the Chinese Government are beginning to be noticed and the Asian giant manages to wake up from its economic lethargy after the difficult exit from the pandemic. However, experts warn that these data are affected by the base effect (the comparison is with the weak figures from a year ago) and that the prospects are not the most promising. As they say in the economic world, these indicators can represent a false dawn: a phenomenon in which the sun seems to have risen, but in reality it is still some distance below the horizon.

The General Administration of Customs of China published this Thursday the trade data for January-February, which has provided a first look at the trade dynamics at the beginning of the year. Trade experienced a recovery in the early stages of 2024 with a year-on-year increase in exports of 7.1% in dollars (the highest since last May, in December it was 2.3%) and 10.3% in yuan, and a year-on-year increase in imports of 3.5% in dollars and 6.7% in yuan, leading to a trade surplus of $125.2 billion in the first two months of the year, about 8% more than in the comparable period of 2023.

The rebound in exports has not only exceeded analysts’ forecasts (the consensus of Bloomberg was +1.5% and our forecast was -6.0%), but, according to independent economists, after taking into account variations in export prices and seasonality, it is estimated that export volumes increased significantly in January and February, reaching a new high.

By export destination, positive signs include exports to ASEAN (Southeast Asia), which showed the highest growth in early 2024, rising 9.2% to 588 billion yuan. The Exports to the US also recovered, with a year-on-year increase of 8.1% to 708 billion yuan, although this may be more of a base effect. On the opposite side, the Exports to the EU remained weakwith a year-on-year growth of 1.6% to 556 billion yuan, and exports to South Korea fell -6.8% year-on-year to 150 billion yuan.

In the first two months of the year, the automobile exports continued surpassing the main ones, with a year-on-year growth of 15.8%. The basis for this percentage is the strong performance of Chinese automakers in the global market. BYD has recently ousted the American Tesla by becoming the new number one in electric vehicles after record deliveries in the December quarter. The company, which has made build giant specific ships to export your carsseeks to expand its reach: it has just launched its third electric car in India.

Clothing (16.3% year-on-year), textiles (18.9% year-on-year) and plastics (26.5% year-on-year) also recorded good results. Regarding imports, those of some raw materials were the most notable, such as natural gas (23.6% year-on-year) and iron ore (8.1% year-on-year). Imports of mechanical and electrical products also increased by 11% year-on-year, which was hinted at by some of the earlier trade data from neighboring economies. On the other hand, soybean imports fell -8.8% year-on-year, another indication that the pork cycle will reverse at the end of the year.

The commercial data arrives shortly after the Government’s work report in the famous Two Sessions and officials’ statements stated that priorities for the year included supporting trade finance, improving cross-border settlement and currency risk management mechanisms, increasing collaboration with trading partners across supply chains, and the organization of trade fairs would be an objective for the year. New areas of growth in intermediate goods and organic trade would also expand throughout the year.

China look for green shoots in 2024, as authorities aim for economic growth of around 5%. But some economists have expressed skepticism about that ambitious goal without additional political support, given the current challenges of the housing crisis and deflation. The numbers known this Thursday and Beijing’s commitment do not seem to sufficiently compensate for the weak situation, according to these experts.

China’s trade has been affected in the last year due to the weak demand from its main partners economic problems and the increasing sanctions and restrictions on their products. This has turned what was once a key pillar of the economy into a problem, a problem that was highlighted this Thursday when Foreign Minister Wang Yi criticized USA for imposing a ‘disconcerting’ level of trade restrictions to the Asian nation. A threat that can get worse if the already de facto Republican candidate, Donald Trump, returns to the White House after the US presidential elections in November. “If the US is obsessed with suppressing China, it will eventually harm itself,” Wang said at a news conference in Beijing. These words have contributed to pessimism in the Chinese stock markets despite the positive reading published by the General Administration of Customs of China

Skepticism spreads

“Data from the beginning of the year showed some encouraging signs, and the weak base effect in 2023 should lead to a slight recovery in year-on-year trade figures in 2024. We expect low to mid-single digit growth for both exports and imports in 2024, which will be an improvement in year-on-year terms compared to last year, but it will be insufficient to contribute significantly to growth,” warns Lynn Song of ING.

“We foresee a relatively difficult trading environment in the future, as global growth is expected to moderate this year, which will negatively affect Chinese exports. In addition to a generally unfavorable global environment, there is also the additional risk that we see barriers specific trade agreements in China later in the year,” the Dutch bank said.

“The value of Chinese exports increased year-on-year at the fastest pace since May and their volume reached an all-time high. However, we doubt the sustainability of this strength, as exporters now have more limited scope to reduce prices with the to secure market share. Import volumes rebounded, but are likely to increase more gradually in the coming months, given the limited potential for a rebound in fuel imports,” analyzes Zichun Huang of Capital Economics.

“Are skeptical about the persistence of this strength. Although the Chinese export sector managed to withstand the global slowdown in demand for goods by expanding its market share, price cuts by exporters and a weak currency contributed to this. The price cut has reduced profit margins, which are already low compared to historical levels, leaving more limited room for further price reductions. And we hope the yuan will appreciate this year,” explains Huang.

On the import side, Capital Economics expects a more gradual increase in the future. “A third of imports are intermediate goods used in the export sector. And fuel imports, which have increased significantly in recent times, are already high compared to economic fundamentals and are unlikely to increase much further. No However, with the new fiscal support plans indicated by the National People’s Congress of China, we foresee an increase in infrastructure spending to continue supporting the demand for metals,” concludes Huang.

“China’s stronger-than-expected exports in the first two months of 2024 point to some support for the economy. But external demand is unlikely to be a reliable support for growth, given the slowdown in the global economy and the high geopolitical risks. Base effects will also become less favorable in the coming months, which will reduce export growth,” summarizes Eric Zhu of Bloomberg Economics.