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China shows a record trade surplus, but still faces the risk of slowdown

It registered an increase in exports in July, but the decrease in world demand could force it to resort to domestic demand.

Surprisingly strong growth in China’s exports in July set a new record trade surplus, reaching 101,000 million dollars, according to the statistics of the General Administration of Customs of the People’s Republic of China. Exports in dollars grew by 18% compared to the same period of the previous year, continuing the trend of June, when the rise was 17.9%. These figures exceeded previous expectations of 14.1%.

However, amid the general slowdown in the world economy, it will be difficult for the Asian giant to maintain the recovery of its economy, reports Bloomberg. The good news appears to be temporary, as as global demand slows, Chinese exports are likely to suffer as well.

Therefore, experts believe that the state of the Chinese economy at the end of the year will be largely determined by its domestic demand.

What constitutes record sports?

This record growth in exports was mainly due to automobiles (a 64% year-on-year in July, from 21.2% in June), iron and steel products and textiles. Meanwhile, the increase in the shipment of steel products remained at the same level of 41.2%.

Larry Hu, head of the China economics department at Macquarie Group Ltd., told Bloomberg that such export figures could be the result of China’s covid-zero strategy, which “benefits production at the expense of consumption”. He also listed the yuan’s weakness and price effects as factors driving exports. According to him, about half of the growth in exports in July is due to inflation.

Among the export destinations, the countries of the Association of Southeast Asian Nations (ASEAN) and the European Union (EU) are the ones that have increased the most, with 33.5% and 23.2% respectively.

The Chinese exports to Russia increased by 22.2 %, after a drop of 17% in June. For example, the Russian automotive web portal Autostat has reported that in the previous month Chinese cars on the Russian market exceeded the 24%, which is the second largest installment.

Some experts believe that China is accumulating reserves through exports while the situation of the international markets allows it. Zhang Zhiwei, Chairman and Chief Economist of Pinpoint Asset Management, stated to the South China Morning Post (SCMP): “[FX reserves] help in a gray area situation, which is where we are now, [and] exports help in that direction.” Therefore, these reserves could help China to keep its economy more stable in the future.

The outlook for Chinese domestic demand  

Bloomberg points out that the covid zero strategies of China decrease its internal demand. This is reflected in imports of basic products, which are declining. Lockdowns keep people at home, where they consume less.

However, Beijing is taking action to reinforce demand, such as the reduction of taxes on the purchase of some types of vehicles and the exhortation to local governments to support demand in the housing market.

On the other hand, Alicia García Herrero, chief economist for Asia-Pacific at the French investment bank Natixis, explained to the SCMP that these data “confirm the China’s drive towards self-sufficiency on the import side”. According to the expert, the country tries to increase its world market share using exports but aspires to self-sufficiency.

The International Monetary Fund forecast that the Chinese economy c will grow 3.3% this year, below the target of 5.5% set in April by the ruling Communist Party.

In the end, the effectiveness of the actions of the Chinese authorities, together with the general epidemiological situation in the country will influence domestic demand and, therefore, the state of the entire economy of the Asian giant by the end of the year.

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