China's trade unexpectedly drops in October as demand slows amid recession fears

Exports and imports decline for the first time in more than two years

Qinzhou Port in China. The country's trade shrank in October as global demand weakened and anti-virus controls affected domestic consumer spending. AP

China’s exports and imports fell unexpectedly in October for the first time in more than two years, with rising risks of a recession causing overseas consumers to cut purchases and domestic problems such as the country's Covid-zero policy and a housing slump hitting demand at home.

Exports in dollar terms declined by 0.3 per cent last month from a year earlier, the customs authority said on Monday, well below the 4.5 per cent gain projected by economists.

Imports also fell 0.7 per cent, the first drop since August 2020. That left a trade surplus of $85.15 billion.

The weakness in exports adds to the domestic pressures on an economy already struggling due to the property market slump, persistent disruptions from Covid controls and weak consumer spending.

Resilient exports had been a major support to China’s recovery over the past two years due to strong international buying, but that looks to have reversed, with demand after the coronavirus-induced slowdown disappearing as the war in Europe boosted global inflation and uncertainty.

“The weak export growth likely reflects both poor external demand, as well as the supply disruptions due to Covid outbreaks,” said Zhang Zhiwei, president and chief economist of Pinpoint Asset Management.

“I expect export growth to remain weak in the next few months as the global economy slows.”

The data reinforces the message from South Korea’s trade figures last week, which also showed the first decline in shipments in two years as demand for electronics drops.

Almost all the nations in the euro area reported a further contraction in manufacturing in October while US business activity dropped for a fourth-straight month.

Exports to the US and Europe both fell, the data showed, as did shipments to Taiwan and Hong Kong. However demand from South-East Asia continued to be strong, with exports to Association of South-East Asian Nations rising by double digits for a sixth month.

The value of home appliance exports fell the most for any product group in the first 10 months of the year, down 11.5 per cent from a year earlier, according to a breakdown provided by customs. Exports of furniture, lighting equipment and medical devices also dropped during the period.

The decline in imports was widespread, with Chinese purchases from Australia, the US, Japan, South Korea and Taiwan all down.

Iron ore imports in the first 10 months of 2022 were down on last year as a drop in housing construction continues to destroy demand for steel and other construction materials.

“The surprise drop in China’s October exports — the first year-on-year fall since May 2020 — provides stark evidence that global demand is falling,” said Eric Zhu, a Bloomberg economist.

“With the property slump and Covid-zero restraints undercutting growth, policy stimulus will be critical to keeping the recovery going.”

The weak export growth likely reflects both poor external demand, as well as the supply disruptions due to Covid outbreaks. I expect export growth to remain weak in the next few months as the global economy slows.

Zhang Zhiwei,
president and chief economist, Pinpoint Asset Management

Authorities had previously warned the momentum was expected to weaken further.

“The risk of external demand growth slowing is increasing” in the fourth quarter, commerce ministry spokeswoman Shu Jueting said at a briefing last month.

The environment for trade is becoming increasingly complex for China and uncertainties are still increasing, she said, citing the slowdown in world economic and trade growth.

Aggressive policy tightening by major developed nations is raising fears of a global recession that would further hurt demand for China-made products.

The US Federal Reserve last week increased benchmark interest rates for the sixth time this year. European nations are expected to follow suit.

Covid outbreaks and stringent control measures at home are another major source of concern. Mobility restrictions aside, the nation’s unswerving commitment to the Covid Zero strategy is dashing hopes of any quick improvement in the economic situation, pushing Chinese households to save at a record pace and cut back on spending.

China’s authorities offered little hint of plans to rescue the ailing economy at the party congress last month, which triggered a historic rout on the stock market.

Investors should be able to have a clearer idea on whether China will ease up on its zero-tolerance approach to combatting Covid and whether it will step up support for the property market in coming weeks, with a string of key economic meetings planned.