China’s exports were much stronger than anticipated in April but are likely to drop back sharply this month. In contrast, the recent resilience of imports faltered in April as inbound shipments began to play catch-up with the weakness in activity.
Exports can’t defy the global downturn for long
- China’s exports were much stronger than anticipated in April but are likely to drop back sharply this month. In contrast, the recent resilience of imports faltered in April as inbound shipments began to play catch-up with the weakness in activity.
- After declining sharply during the first two months of the year, exports rebounded for a second straight month in April, with year-on-year growth rising from -6.6% to +3.5% in US dollar terms. (See Chart 1.) In seasonally adjusted terms, outbound shipments are now back to their level at the end of last year, prior to the COVID-19 disruption. (See Chart 2.)
- It seems likely that a backlog of orders from when factories were closed in Q1 propped up exports last month. But this prop should soon fade, with exporters unlikely to be immune from the sharp slowdown in global activity for long. Korean exports, a timely proxy of global demand that usually follows a similar trajectory to Chinese exports, plunged 24% in April, the sharpest contraction in 11 years. (See Chart 3.)
- Global demand is likely to remain unusually weak for months. Even in China, where most measures to contain COVID-19 were relaxed in March, the recovery has been slow and most indicators suggest the economy is still contracting year-on-year. This ongoing weakness is evident in the data on imports, which fell 14.2% y/y in April. Inbound shipments had initially held up well in Q1, declining just 2.9% y/y despite a 6.8% drop in GDP. But this led to a sharp and unsustainable rise in inventories of imported materials and so it is not surprising that importers are now cutting back orders.
- The upshot is that the worse is still to come for Chinese trade. The sharp deterioration in activity among China’s key trade partners last month will probably feed through to much weaker exports in May. Meanwhile, the threat of additional US tariffs on Chinese goods shouldn’t be ignored given the likelihood that the “phase one” trade deal soon falls apart – imports from the US remained near multi-year lows last month. (See Chart 4.) There is further downside for imports too given the slow domestic recovery, already elevated inventory levels, and the fact that over a quarter of imports feed into China’s export sector.
Chart 1: Goods Trade ($, % y/y)
Chart 2: Goods Trade ($bn, seas. adj.)
Chart 3: Korean & Chinese Exports ($, % y/y)
Chart 4: Imports by Origin ($bn, seas. adj.)
Sources: CEIC, Capital Economics
Julian Evans-Pritchard, Senior China Economist, email@example.com