Daily Management Review

China's Economy Is On Unstable Ground As It Enters 2024 With Rising Exports But Continued Deflation


China's Economy Is On Unstable Ground As It Enters 2024 With Rising Exports But Continued Deflation
Deflationary pressures and faster-than-expected growth in China's exports in December maintained expectations for additional policy loosening measures to support an economy that is expected to carry substantial pockets of weakness into 2024.
With the possibility of lower borrowing costs looming, Chinese policymakers may be relieved that global trade is gradually improving. However, a protracted property crisis, wary consumers, and geopolitical challenges suggest that the second-biggest economy in the world is in for another challenging year.
Customs statistics released on Friday revealed that exports increased 2.3% in December over the same month last year, exceeding the 1.7% gain predicted in a Reuters poll and a 0.5% increase in November. Although imports fell by 0.6% a month earlier, they increased by 0.2% year over year, beating estimates of a 0.3% decline.
"The better export data is first and foremost driven by semiconductors and electronics, and the recovery on that side comes from a cyclical rebound in consumer demand overseas," said Xu Tianchen, senior economist at the Economist Intelligence Unit.
According to Xu, the figure was further supported by a low data basis because "last December, there was a significant disruption to exports due to China's abrupt reopening."
Notwithstanding, the better Chinese export data from last month joins those from Taiwan, South Korea, Germany, and the United States in indicating that international trade is beginning to rebound after demand was restrained by higher interest rates in the US and Europe throughout 2023.
China's exports decreased in 2017 for the first time since 2016.
The UN has issued a warning, estimating that the goods trade will likely decline by $2 trillion, or 8%, by 2023.
December saw a third month of growth in South Korea's exports, a frequently monitored measure of global trade, while the most recent German export figures for November surprised to the upside.
Additionally, analysts predict that interest rates in Europe and the US will fall by at least 1.5 percentage points this year, which should increase demand for imports.
Separate statistics from the National Bureau of Statistics revealed that, despite this, factory-gate prices continued to decrease in December, extending a decline that has been going on for more than a year. This indicates that deflationary tendencies are still present in the economy of the massive Asian nation.
In 2023, the producer price index declined 3.0% for the entire year, the greatest decline since 2015, and the consumer price index increased by 0.2%, the slowest rate since 2009.
"The deflationary pressure in China's economy remains as domestic demand is still weak. The property sector continues to weigh on the economy," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
In the near future, analysts anticipate additional policy support measures to boost demand.
"Consumption will likely pick up into the Lunar New Year, but more stimulus is needed to boost household spending and eliminate deflationary pressure," UBS analysts said in a note.
In addition, weak foreign economies will be a challenge for Chinese authorities, as the World Bank warned on Tuesday that the world's economy would drop for a third consecutive year.
According to Dan Wang, chief economist at Hang Seng Bank China, "new foreign orders for Chinese producers increased significantly last month, but it's not a long-term trend."
The data received little response from the market. China's blue chip CSI300 stock index lost 0.17%, while Hong Kong's Hang Seng Index maintained constant, as did the yuan against the dollar.
Despite economic challenges, the largest energy consumer in the world purchased unprecedented amounts of coal and crude oil in 2023 as demand bounced back from a decline caused by the pandemic. Imports of iron ore also had a record-breaking year.
In addition, Chinese traders increased their purchases of soybeans for the first time in three years, especially from Brazil, where a bountiful harvest of cheaper beans was available.
However, the CPI and PPI statistics, which indicated weak demand forecasts and soured investor sentiment, caused iron ore futures to fall on Friday.
Head of Capital Economics' China Economics Julian Evans-Pritchard said that more policy assistance would raise demand for commodities, which would lead to an improvement in import volumes in the near future.
"The ongoing cyclical recovery in economic activity will underpin a slight rise in core inflation," he said in a note.
"That said, weak global growth and continued overinvestment in China means that deflation risks will continue to hang over its economy for some time."
The majority of analysts predict that the increase in exports will only slightly increase domestic demand.
Zhang of Pinpoint Asset Management stated, "Exports improved on the margin... but exports as a pillar for growth in China are not strong enough to boost overall domestic demand."