China's Trade Activities Show Slower Decline; Deflationary Pressure Remains

A container ship docked at Mawan Smart Port of the Qianhai Shekou Free Trade Zone in Shenzhen, Guangdong Province, China. Source: David Kirton/Reuters

On Friday, Oct. 13, the State Council of China released the national trade report for September 2023, which signaled a slowdown in the previous export slump. But concerns for policymakers remain as lingering deflationary pressure still challenges economic recovery. 

A mix of official economic data from Friday's trade report shows that China's year-to-date trade outlook improved in September. According to the data from the General Administration of Customs (GAC), China made 521 billion US dollars in its foreign trade volume in September, reaching this year's monthly high. Although the country has been suffering from a trade slump, the year-to-year decline has finally shown signs of easing in September. Y2Y export decline from the same date last year is 6.2%, dropping from the 8.8% decline in August and below the forecasted 7.6% from Reuters. 

The housing crisis following the fall of real estate giants domestically has hindered China’s efforts in making a comeback in its post-COVID economy. However, the data shows that China received its much-needed relief as peak trade season began, and the global supply chain readied for Christmas . "There's increasing evidence that the cyclical upturn in the global electronics sector is driving a bottoming-out of global trade, and China's trade data is the latest sign," said senior economist Xu Tianchen from the Economist Intelligence Unit. 

While the trade report gives an optimistic outlook, the fundamental commodities data gives a mixed signal. China's imports fell at a slower pace in September, as demonstrated by South Korea's exports to China, which has been a prominent indicator in the past. The import from Korea largely consists of semiconductor parts, correlating with the increased electronics manufacturing rate in China around the holiday season, and Apple's new product releases in September. 
Although China's exports to ASEAN countries contracted further from September, its activities with Russia showed growth in the last few months. The commodities data in crude oil import grew by nearly 14%, while the copper import declined by 5.8%, which might be the result of lower demand in the construction and real estate industry following the Evergrande crisis.

A pickle vendor at a morning market in Beijing, China, August 9, 2023. Source: Tingshu Wang/Reuters

However, economists and China's policymakers are mostly concerned with deflationary pressure. Prices in China have largely stalled as the consumer price index (CPI) remained unchanged in September. However, the economic output and production were collapsing at an alarming rate as the factory-gate price fell at a pace that was faster than expected. The year-to-year producer price index (PPI) dropped 2.5%, marking one full year of consecutive PPI decline in China. 

The International Monetary Fund (IMF) shares a similar pessimistic forecast. The IMF corrected China's annual growth rate forecast from 5.2% to 5% while the global growth rate held at 3%. Even then, some economists still cast doubt on whether China can hit its 5% growth rate target by the end of this year. 

China is set to announce its third-quarter GDP figure and retail sales on October 18th, which will be yet another glimpse at the outlook of the world’s second largest economy. State officials remain optimistic and continue to push for initiatives, such as infrastructure projects and railways to improve its trade activities. Overall, it's unclear at this stage if the slower economic decline truly means China has made a full recovery.