With robust export data, why does China’s export industry still feel the chill?

The answer lies in structural changes in product categories

Today's newsletter is from Weixizhibei 卫夕指北, a WeChat account featuring presenting the underlying logic of the Internet, advertising, and marketing. In an article titled "With robust export data, why does China’s export industry still feel the chill?" published on Aug 28, the author noticed a disparity between China's recent brisk export data and consumer goods exporters' disappointment.

In the first part of the article, the author laid out two reasons for the robust export data. Although many central banks in the world raised interest rates, leading to a decline in demand, the decline is delayed due to economic mechanisms. Moreover, high inflation may give foreign trade a more prosperous outlook than the reality is, as the value of exports surged while the growth of volume is not that promising.

In the second part, the author gave two explanations for consumer goods exporters' dismal conditions. First, China's exports expand mainly through high-value-added products rather than final goods. Second, the "spillover" effect of Chinese manufacturing is squeezing the room for consumer goods exportation.

In addition, the author suggested that consumer goods exporters take advantage of the opportunities provided by short videos to establish direct connections with overseas consumers to compensate for weak domestic demand.

Here's the detailed reasoning.

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China’s exports have been booming recently, but people in the foreign trade business are going through a rough patch.

Exports in July rose 18 percent year on year to 564.66 billion U.S. dollars. The growth rate stayed above 15 percent for three consecutive months, showing strong momentum.

At the same time, China's trade surplus stood at 101.26 billion U.S. dollars in July, a record high since the figure was first recorded in 1994. The container throughput in Shanghai Port also reached an all-time high.

The data showed a gratifying picture of China’s exports.

However, people in the foreign trade business didn't feel as well.

One of my old classmates has been working in the foreign trade business in Longhua District, Shenzhen for almost ten years. He told me that the mid-range furniture they sold had a good performance last year. The price was even higher than pre-pandemic times.

However, sales began to slip in the second quarter this year. Especially orders from North America dropped by one-third.

His boss ordered a Taycan from Porsche at the end of 2021, but cancelled the order in March due to concern about the tight cash flow.

On social media, many trade practitioners also complained of the downturn.

Therefore, this post will discuss two important issues.

1. At the backdrop of a sluggish global economy, why are China’s exports still so robust in terms of the data?

2. Why are most Chinese exporters still feel the chill with the stunning export data?

I. Reasons for China’s recent strong export data

We all know that major developed countries were on a money-printing spree to secure their economies in the first two years of Covid-19, and this year they finally decided to raise the interest rate due to the pressure of high inflation.

Theoretically, during an economic slowdown, overseas demand would also cool down, which is the law of economics.

However, China's outstanding export data refuted the conclusion.

How to explain this phenomenon? After doing some research, I found that the main reasons are twofold.

1. The delay of decline in demand after central banks raised interest rates.

That's right, expectations of world economies are gloomy this year. Europe and the United States are highly likely to slide into a recession this year, as shown in their PMI (Purchasing Managers' Index). The monetary policy of raising interest rates will dent already depressed economies further.

However, it takes time for the contraction caused by the interest rate rise to have full effect. In other words, there is a time lag between tightening the policy and the decline in demand. As a result, export data of recent months don't show the hit foreign trade of goods will take.

However, the strike will come eventually.

In this sense, when the time lag is over, it is difficult for exports to keep the current high growth rate of over 15 percent in months to come.

Therefore, exports and foreign trade of goods will be under strain in the second half of 2022. Despite a decreasing share in China’s GDP, exports remain to be one of the three drivers of China's economy, thus the possible downturn in exports will bring new uncertainties to the domestic economic landscape.

2. Price surge caused by high inflation pushed up the export value

The global supply disorder caused by the Russia-Ukraine conflict has been felt in the world’s major economies through inflation. Inflation means surges in price, both in consumption and supply.

In terms of exports, the actual foreign trade volume may not increase much, but the total value of exports will be enhanced as a result of the price rise.

For example, China’s export volume of rare earths decreased by 8 percent year on year, but the export value jumped 44 percent. Exports of steel grew 18 percent in volume, while up 44 percent in value.

The year-on-year growth rate of the Export Price Index (EPI) also shows the export price is rising faster than ever.

That's right, the commodities remain unchanged. Too much currency in circulation makes money worth less than before.

Furthermore, improved logistics in China have also boosted China’s supply capacity. Meanwhile, the production of European companies is afflicted with rising prices of raw materials and energy. And strikes in places like Germany and South Korea also cast a shadow over the global supply.

Therefore, China gets an opportunity to fill in the gaps in the global foreign trade business.

II. The logic behind the huge contrast between promising export data and trembling exporters.

How come most Chinese exporters feel desperate with the robust export performance?

The answer lies in structural changes in product categories — the structure of China’s exports has changed significantly.

1. Products "made in China" saw an increase in added value.

The stereotype of China "selling socks in exchange for airplanes” is no longer the reality as its foreign trade structure keeps improving.

Today, China is seeing an increase in exporting high value-added goods, and a drop in labor-intensive low value-added products.

For example, mechanical and electrical products contributed 7.5 percentage points to the growth rate of exports in July, up 0.2 percentage compared with June. They also accounted for 56 percent of China's total exports, according to data from the General Administration of Customs.

Under subcategories of mechanical and electrical products, exports of automobile-related products reached 12.65 billion U.S. dollars, up 39.2 percent year on year, and it jumped 54.4 percent from January to July compared with the same period last year.

The figure reflects that China has a bigger say in global competition in terms of the automobile industry, especially the new energy automobile industry.

From January to June, exports of lithium-ion batteries reached 130.2 billion yuan (about 18.76 billion U.S. dollars), a year-on-year growth of 75.3 percent, that of solar cells reached 153.2 billion yuan, up 95.4 percent year on year, and that of diodes and other semiconductor devices stood at 209.7 billion yuan, up 53.7 percent year on year.

These are categories rapidly growing in China's exports. In other words, high value-added products are powering growth.

Because these categories largely belong to tech-intensive and capital-intensive industries, which are more concentrated than consumer goods, and these industries are generally dominated by domestic tech giants.

Since exports of high value-added products are far away from general consumer goods, ordinary people in the foreign trade business cannot feel the boom.

In comparison, exports of consumer goods slid to a certain extent.

In July, the growth rate for exports of toys, lamps and furniture fell by 10 percent, 8 percent and 2 percent, respectively, compared with the previous month, showing a sluggish demand for low value-added products.

But most ordinary foreign trade practitioners are engaged in the export of these ordinary consumer goods. Therefore, exports are expanding, but the prosperity is in technology-intensive and capital-intensive high-tech categories. while the growth rate of consumer goods exportation is in fact decreasing.

In this sense, we can see the hard time experienced by foreign trade practitioners of consumer goods.

2. The “spillover” effect of Chinese manufacturing also ate away the share of consumer goods exportation.

In addition to tech added value eclipsing consumer goods exportation as mentioned above, there is actually another easily overlooked factor —— the “spillover” effect of Chinese manufacturing.

How to understand this?

Let’s take a look at the data ——

China's exports include capital, primary products, intermediate goods and consumer goods.

From the pandemic onwards, intermediate goods have been playing a bigger role in driving the overall growth of China's exports.

In other words, most of our exports are sold overseas in the form of intermediate goods rather than final goods. Therefore, the boom in exports does not indicate a boom in the export of consumer goods.

The question is, where do those intermediate goods go?

Association of Southeast Asian Nations (ASEAN) is the destination.

The data below shows that in July, ASEAN contributed to 4.7 percent of China's exportation growth, 0.5 percentage points higher than last month, which is significantly higher than other major economies such as the US and the European Union (EU).

Since 2022, China's exports to ASEAN have ticked up to 16.0 percent of the total from 14.6 percent at the end of last year. Therefore, ASEAN members are becoming increasingly important in China's exports.

As Southeast Asia shows its advantages in labor costs, China’s manufacturing has transferred part of the low-value-added manual manufacturing to Vietnam and other Southeast Asian countries.

This is what Professor Shi Zhan [a scholar from China Foreign Affairs University] called the “spillover” of Chinese manufacturing.

In Spillover: Future of Chinese Manufacturing, he concludes that the so-called “shift of Chinese manufacturing industry to Southeast Asia” is actually a “spillover” of China’s economy to the region.

Specifically, China is transferring some parts instead of the whole process to Vietnam, mainly those with high labor costs.

In the manufacturing process, the intermediate goods are still provided by China, which means the core of the industrial chain is still in China. Meanwhile, China and Southeast Asia are bonding in deep collaboration, which is the essence of “spillover”.

In this sense, the relationship between China and Vietnam is more cooperative than competitive in global trade. [See a previous GRR post diving deeps into this topic: Vietnam or India: which one will be the new "world's factory"?

For a remote-control toy car, China provides the core design, motor, remote control components, transmission shafts, etc. The components are then assembled in an industrial zone in Ho Chi Minh City, Vietnam, before being exported to the United States and Europe.

Exporting intermediate goods doesn't need cross-border e-commerce practitioners who are engaged in consumer goods. Instead, factory owners and people in the supply chain are needed.

Therefore, lots of exporters of consumer goods cannot directly benefit from the boom of intermediate goods exportation.

This is why China’s exports remain robust in the sluggish global economy and why people in foreign trade business do not benefit from robust exports.

For foreign trade practitioners, doing cross-border e-commerce on short-video platforms may be a good opportunity.

The reasoning is that we were at the middle of the “smiling curve” in the industrial chain. We couldn't get the value-added from R&D nor from marketing. The cost advantage of China's manufacturing is mostly in the pockets of European and American merchants. However, China gets to sell products directly to consumers all over the world in the era of short-video.

After all, making profits from the U.S. and European markets through direct marketing and advantages of the supply chain might be a new strategy to make up for weak domestic demand.

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