Will China continue to dominate global trade in 2023?
Containers stacked high at a port in Qingdao in China’s eastern Shandong province. Photo: AFP China’s export performance is clearly important for the world, and certainly Europe. To start, global inflation not only depends on commodity prices but also on China’s export prices and its own cost dynamics. Second, the European Union is the other major export machine, together with China, so developments in China’s export capacity and competitiveness are bound to affect the European economy. China’s global export share had been on the rise for years until it first plateaued in 2015 and even came down with the US-led trade war against China. However, the trend changed radically after the first months of the Covid pandemic, as China suffered lockdowns in the first quarter of 2020 but reopened much faster than the rest of the world. During 2020-21, until Omicron came to haunt China with renewed lockdowns, Chinese exports experienced annualized growth of 7%, and its export share in the world increased further to an astounding 15%. At the same time, China’s increasingly central role in the global supply chain is another important point to take into account to understand China’s stellar export performance since the pandemic started. In fact, China’s even larger export share for intermediate goods points to the rising dependence of other countries’ supply chains on Chinese imports. This is clearly also the case in the European Union. A very clear example is solar panels, where China already has more than 80% of the global export share, but also batteries for electric vehicles and even more so for their components and critical materials. China has eased ‘zero-Covid’ rules in what was seen as a first step toward reopening but cases are spreading as restrictions are loosened. Photo: Screengrab / BBC Having said that, Omicron and, thereafter, the global slowdown has brought shockwaves to the Chinese economy. First, the extremely contagious nature of Omicron, coupled with the Chinese government’s decision to maintain “zero-Covid” policies until very recently, has resulted in a number of supply-chain disruptions during the most aggressive lockdowns, such as that of Shanghai. One of the consequences of the production and logistics problems linked to zero-Covid policies was that prices of imported goods from China shot up, contributing to the boost in inflation globally and certainly in Europe. The other consequence was delays in the delivery of goods imported from China, with obvious negative consequences on the functioning of supply chains. Since then, the rapid increase in interest rates by the US Federal Reserve, but also in most other countries in the world, coupled with the war in Ukraine and the related surge in energy prices have brought the US and European economies much closer to a recession. The cyclical downturn pushed Chinese exports down to -9.9% growth in December. Such negative export growth can be considered mostly cyclical, but not only so. Global supply chains are in the midst of a reshuffling as companies are moving out of China, first for cost reasons but also geopolitical factors and, until recently, mobility restrictions related to zero-Covid policies. Finally, the new year has started on a positive tone thanks to China’s rapid reopening from zero-Covid policies, but that has not changed the trend of Chinese exports, which remain very negative. The question is whether it will change the mood of investors, not only domestic but also international. So far portfolio flows are clearly returning to China, but there are still big doubts about foreign direct investment. Most surveys from European chambers do not really capture the reopening yet, so it is very hard to gauge the mood from foreign companies either already present in China or thinking of investing there for the first time. In fact, across Asia, ASEAN and India surpassed China by a wide margin in the value of mergers and acquisition deals in the first half of 2022, with China’s share of total completed Asian deals collapsing to 13%, the smallest in Asia. Unleashed pent-up Chinese demand could drive the global economy in 2023. Image: Screengrab / NDTV All in all, 2023 will certainly be a better year for China than 2022 thanks to the reopening, but that does not mean that export performance will continue the current momentum. On the contrary, one could imagine that China will step up imports, as domestic consumption returns, but not exports, as global demand is waning. In addition, host countries – certainly in the European Union – are becoming increasingly uncomfortable with what is perceived […]
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