Since the outbreak of the COVID-19 pandemic in late 2019 until the second half of this year, China had been looked up to by many politicians and business leaders around the world.
China’s success was manifested by its tally of total cases and deaths caused by COVID-19, which had been extremely low compared with the rest of the world.
However, what made China shine was that it had managed to keep its enormous economy expanding while the rest of the world stalled or contracted. The star player in China’s extraordinary economic performance was its export sector, which recorded a fairly good 3.6 percent year-on-year growth in 2020, and an astonishing 30.3 percent jump last year.
However, China’s export momentum, the engine driving China’s economy for the past four decades and particularly when the pandemic hit, seemed to start losing steam in the second half of this year.
The pace of year-on-year export growth began to fluctuate, and finally registered a 0.3 percent contraction in October.
China’s October export data caught many trade analysts off guard. The shock was not only because the figure came in much lower than the widely predicted 4.3 percent increase, it also reversed China’s export growth trajectory.
When examining China’s export performance and accounting for major determinants, a reversal of growth would be inevitable.
In the early phase of the pandemic, when a sudden panic set in worldwide, there was a deep but brief year-on-year contraction in the first quarter of 2020. China’s export sector quickly made a solid rebound from June 2020 through the first quarter of this year.
This early and robust export recovery was propelled by global demand for pandemic-related fabric products, diagnostic devices, electronics and expensive intensive care equipment.
The panic-driven, insatiable demand helped to spare China the complete loss of export capacity that dragged on for years in most countries after the outbreak of the pandemic. China scored its biggest export earnings (US$2.7 trillion) in history, and 3.6 percent annual growth by the end of 2020.
Last year, China’s export activity was even more robust, as the world started easing restrictive measures due to the availability of COVID-19 vaccines and a sharp decline in COVID-19 mortality rates.
During that time, with travel restrictions still in place in most countries, consumer spending in developed countries was diverted from the service sector — restaurants, hospitality and travel — to home-centered products — consumer electronics, household appliances and home-office equipment.
China benefited from being the major supplier of these items, while other supply-end countries were still struggling to balance pandemic containment and economic recovery.
China’s sluggish domestic consumer activity, which began before the pandemic started, was more than fully compensated by the sudden explosion of international demand for consumer goods, of which China had been the main manufacturer over the past decade.
By the end of last year, China’s exports scored a new record of US$3.55 trillion, and saw a 30.1 percent year-on-year expansion. The combination of China’s export volume and annual growth rate set a world record, with the only other contender being the largest OPEC member state, Saudi Arabia, which in June this year recorded the largest monthly crude oil export levels ever — US$31 billion, with an annual increase of 94 percent — amid a global supply squeeze and price jump triggered by Russia’s invasion of Ukraine.
It is unlikely that China would see another boom in its export activity, as international and domestic conditions are no longer supportive.
First, China’s export performance during the pandemic, especially last year, reached its pinnacle under extraordinarily favorable conditions. Even if those conditions remained in place, it would be hard to maintain the same momentum for an extended period.
Second, the world has largely moved on from the initial pandemic panic, and developed markets have returned to pre-pandemic service-centered consumer spending. The volume and growth rates that China’s goods-based export sector enjoyed in 2020 and last year would inevitably experience a significant setback.
Third, China’s deteriorating business environment — rising labor costs, bureaucratic burdens, increased risk of being targeted by China’s nationalistic turmoil and supply chain interruptions stemming from the country’s rigorous “zero COVID” policy — has prompted an exodus of manufacturers, mainly foreign or joint ventures that are a driving force behind its export sector.
Finally, the tariffs that former US president Donald Trump levied on China’s imports are still in place. Merchants in the US, the largest buyer of China’s export goods, ignored those tariffs during the pandemic due to overwhelming demand.
With the pandemic fading away and the establishment of new supply sources, the old Trump tariffs could start to deliver real pain to China’s export sector.
The EU and other developed economies are following the US in demanding balanced and fair trade from China.
With the end of the pandemic, China is likely see its exports shrink at a pace faster than it would reluctantly accept, although this should not be a surprise.
China’s likely loss of export momentum could cripple its economy, as exports have in recent years contributed at least one-fifth of China’s overall economy.
The IMF marked down China’s economic growth for this year to 3.2 percent in October, a 1.2 point markdown from its April forecast. It represents China’s second-slowest growth rate since economic reforms started in 1977, and is the slowest among developing economies in Asia for this year.
Given that the Chinese Communist Party set the “zero COVID” policy as an unwavering, long-term political instrument at its 20th National Congress, economically, the worst has yet to come for China.
Daniel Jia is the founder of consulting firm DJ LLC Integral Services in Spain.
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