China exports slumped 12.4% in June as global demand weakened

Chinese officials battled to prevent a post-COVID recovery from stalling as demand declined as a result of central banks raising interest rates to fight inflation, which caused a 12.4% decline in exports from a year earlier in June.

Thursday's release of customs data revealed that imports fell 6.8% to $214.7 billion. Exports came to $285.3 billion, slightly more than the previous month. From $65.8 billion in May, the trade surplus increased to $70.6 billion in June.

The second-largest economy in the world is under more downward pressure due to trade weakness. After the Federal Reserve and central banks in Europe and Asia boosted interest rates to tame inflation from near multi-decade highs by stifling industry and consumer activity, global consumer demand deteriorated.

Why did China's exports fall 12.4% in June?

1. Weak demand weighs on exports

China’s exports in June fell by 12.4% from a year earlier to US$285.32 billion, compared with a fall of 7.5% in May.

The June figure was below expectations for a fall of 10.2%, according to Wind, a leading provider of financial information services in China, and represented the biggest year-on-year contraction since dropping by 17.7% in combined figures for January and February 2020.

“With the global downturn in goods demand continuing to weigh on exports, we think exports will decline further for now before bottoming out towards the end of the year,” said analysts at Capital Economics.

In the first half of the year, China’s exports declined by 3.2% compared with the same period in 2022.

2. Commodity prices drive down imports

China’s imports fell by 6.8% in June from a year earlier to US$214.7 billion, down from a fall of 4.5% in May, and were below Wind’s expectations for a fall of 3.8%.

“This decline was largely driven by falling commodity prices as global supply shocks fade away. Indeed, in seasonally adjusted terms, we estimate that import volumes rose 4%, month on month, in June, up from 0.3% growth in May,” said Lloyd Chan, senior economist at Oxford Economics.

But Chan added that given the weak reading in April, along with growing deflation risk, a struggling real estate sector and external headwinds, imports are expected to remain weak in the coming months.

Import volumes were little changed in June after reaching a 23-month high in May, and analysts expect they will pick up in the coming months.

3. A broad-based slowdown across main trading partners

Shipments to China’s largest trade partner, the Association of Southeast Asian Nations, fell by 16.86% compared with a year earlier.

Exports to the European Union, meanwhile, declined by 12.92%, year on year, while shipments to the United States dropped for the 11th consecutive month, with the 23.73% decline in June being the sharpest fall since November.

In contrast, exports to Russia in June increased by 90.93%, compared with the same month last year.

The export decline was, according to Chan at Oxford Economics, broad-based across main trading partners.

4. Surplus narrows from a year earlier

With the fall in exports outpacing that of imports, China’s total trade surplus narrowed to US$70.62 billion in June from US$97.4 billion a year ago. The trade surplus had stood at US$65.8 billion in May.

But according to Chan at Oxford Economics, the goods trade balance in the second quarter still expanded to US$226.6 billion from US$203.4 billion in the first three months of the year.

The impact of exports on a country's economy

1. Effect on Gross Domestic Product

When a country's exports exceed its imports, the net exports figure becomes positive, signifying a trade surplus. Conversely, when exports are less than imports, the net exports figure turns negative, indicating a trade deficit.

A trade surplus plays a vital role in promoting economic growth within a nation. The higher level of exports reflects increased output from the country's factories and industrial facilities, leading to more job opportunities for people involved in sustaining these operations. Additionally, the surge in exported goods brings in foreign funds, stimulating consumer spending and further bolstering the country's economic growth.

2. Impact on Exchange Rates

3. Impact on Inflation and Interest Rates

Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates.

A stronger domestic currency can have an adverse effect on exports and on the trade balance. Higher inflation can also impact exports by having a direct impact on input costs such as materials and labor. These higher costs can have a substantial impact on the competitiveness of exports in the international trade environment.

Benefits of exports

1. Extending to a global scale

One of the primary benefits of exporting is access to a global market of buyers.

In other words, by exporting your products and going global, you open your business to more than 95% of the world’s population - and by not exporting, you limit your sales to less than 5% of potential buyers.

The International Trade Association (ITA) reported that exports accounted for 20% of annual earnings for a whopping 60% of small businesses, and for 44% of medium-sized businesses.

2. Increased profits

Another advantage of exporting is profitability. Access to a global market of buyers means sales will increase, translating to increased profits. This is all the more so when direct exporting is utilized.

With the growth of e-commerce, marketing and selling your product online across the globe has never been easier.

With sophisticated e-commerce solutions that translate payment gateways into multiple languages, among many other crucial functions, reaching potential buyers has also never been easier.

3. Risk mitigation

Another one of the advantages of exporting is risk mitigation.

Introducing your products to foreign markets and buyers diversifies your customer base, making your business less reliant on and susceptible to changes in a single domestic economy.

Exporting protects your business against fluctuations in the domestic business cycle, thereby protecting your revenue and employees.

4. Increased competitiveness and market share

Entering a global market means that your number of competitors increases.

This, however, comes with the benefit of forcing your company to become more efficient and thereby more competitive.

Exposure to price and marketing competition, differing management systems, and innovations, among other factors, will force your business to adapt accordingly in order to remain competitive.

This will not only give you an advantage on the international stage but will in turn make you more competitive in your domestic market, leading to a potentially greater share of the market.

5. Government support

When exporters receive international payments, they deposit foreign currencies into domestic banks.

This allows governments to build foreign currency reserves, which is one of the reasons government support exists for businesses exporting products.

The US Department of Commerce offers businesses export counseling from trade professionals, as well as customized export solutions.

Conclusion

China's export slump is a sign of the challenges facing the country's economy. The decline in exports will have a negative impact on the country's economy, leading to job losses, lower tax revenues, and a decline in economic growth. The export slump will also have implications for the global economy, leading to a slowdown in global trade, lower commodity prices, and slower economic growth.

The export slump is a serious challenge for China's economy. The government needs to take urgent action to address the issue. If the government is successful in boosting exports, it will help to mitigate the negative impact of the slump on the economy and society.