Chinese exports and imports both dropped more significantly than expected in July, according to new trade data released today (8 August).

Exports slumped by 14.5%, the biggest decline since early 2020 and the onset of Covid-19, while imports dropped by 12.4%.

The fall in exports continues a trend set over recent months (the fall is the third in consecutive months) but was worse than economists and analysts had been expecting.

Reuters reports that its poll of economists had anticipated a drop of 12.5% for exports and only 5% for imports.

Diplomatic tensions taking a toll?

Falling global demand is responsible for the slump in export activity, with the FT highlighting that a continuing boom in Chinese car exports has failed to offset drops in most other categories, with computers, steel and clothing particularly badly affected. 

Reuters also points out that exports to the US – the number one destination for Chinese goods – and the EU dropped by far more than the overall total, highlighting that ongoing diplomatic tensions including fallouts over chip technology and a desire to move away from supply chain reliance on China, are beginning to have an impact on trade.

As reported yesterday by the IOE&IT Daily Update, South Korea is also seeking to shift trade away from China.

Exports to the US dropped by 23.1% year-on-year, while exports to the EU fell 20.6%.

The trade data is released as various reports emerge of trade officials calling for a rebalancing of relations and lowering of trade barriers.

EU trade commissioner, Valdis Dombrovskis, told the FT yesterday (7 August) that he felt the relationship was “very unbalanced”, while Australian trade minister Don Farrell told CNBC that his government wanted “impediments removed”.

Domestic economic dip

The dip in imports may force the Chinese government to act to boost the economy, although most experts suggest it will wait until inflation numbers are delivered tomorrow before acting. The expectation from economists is that those numbers may point to mild deflation.

Deflation occurs when the inflation rate falls below 0%, and can signal a downturn in a nation’s economy.

The poor trade data comes on the back of successive drops in the manufacturing sector's Purchasing Managers’ Index, as well as long-standing troubles in the property sector.

Speaking to the FT, Julian Evans-Pritchard, head of China economics at Capital Economics, explained the imports data was bad news for China:

“On our estimates, pretty much all the recovery in import volumes since the start of the year was unwound in July, which is concerning, to say the least, and suggests the domestic picture was weakening quite rapidly in the last month or two.”

However, Xu Tianchen, senior economist at the Economist Intelligence Unit, told Reuters that some analysts were making more of the drop in imports, forgetting to factor in the big drops in global commodity prices.

“Economists may be misunderstanding the price factors underlying commodities, which dominate Chinese imports," he explained.

“For example, China is importing more oil but lower prices, as a result the volume of crude oil accelerated in July, but its import value slowed. Similar logic holds for grains and soybeans.”

Pressure for action

Eric Zhu, economist at Bloomberg explained that the deeper than expected contractions in China’s exports and imports in July show the economy is under “intensifying pressure” both internationally and domestically.

“The government’s pro-growth pledges are encouraging. But without powerful follow-through that turns plans into action, weakness in the second half could sink prospects for achieving this year’s 5% growth target.”