The economy neither wants nor needs

A rebound in exports in the first quarter of this year provides the only bright spot in China’s economic picture these days. This improvement may stave off the worst economic disappointments of 2024, but this kind of support certainly does not provide a long-term answer. Basically, this source of strength is bad for China. Indeed, it risks distracting policymakers from the economic priorities they should be fostering.

On the surface, the data looks encouraging. After months of declines, China’s overall export volumes rose 1.5% in the first three months of the year, the latest period for which complete data is available. Growth in value terms was 4.4%. However, this quarterly gain masks the fact that the entire improvement occurred in January. In February and March, March exports were 9 percent below January levels as the trend eased from January highs. This monthly pattern raises doubts about how much the quarterly pattern indicates an improved export picture.

Purchase patterns announced by China’s major trading partners raise questions about the sustainability of this improvement. The US Department of Commerce, for example, US imports of Chinese goods in March, the most recent month for which data are available, were 26% lower than six months earlier. The European Commission European Union (EU) imports from China for 2023 were reported to be 18% lower than in 2022, the latest period for which complete data is available. For Japan, the figure for the same period was 11% lower than the previous year. . These types of data comparisons are rarely consistent without one being more accurate than the other, but the picture strongly suggests that export growth in China is neither as robust nor secure as it appears on the surface.

Possible reasons for any improvement in exports further dampen any enthusiasm they might cause. If indeed the surge occurred, it may have come from a price edge created by a combination of yuan depreciation in foreign exchange markets and China’s trend toward deflation. According to recent calculations The Wall Street Journal, the combined effect of these two trends is that the price of Chinese goods on world markets is down 14% from two years ago. According to a report accompanying these calculations, this price advantage acted as a kind of „rocket fuel” for Chinese exports. But for all this, it is clear from the data cited above that the price advantage has yet to drive away US, European and Japanese businesses from their continued efforts to differentiate themselves from China.

Aside from a reason to doubt that this latest price advantage provides „rocket fuel,” there is good reason to doubt that China wants or needs this kind of assistance. After all, China aims to move its economy towards higher-value products, whereas China is more sensitive to pricing simple goods that it wants to leave behind. The latest price hike, if it works, will push Chinese manufacturing away from where China wants to go and return the country to its underdeveloped past, when it specialized in simple products like clothing, shoes and toys. There is little doubt why China’s export gains have come at the expense of emerging Asian economies. This may make for good numbers, but interferes with the next step in Chinese economic growth, which the International Monetary Fund (IMF) has long advocated for China and which Beijing has long-term goals for the country.

Even if China were to adopt such a regressive „solution” to its economy, it is not clear that the current currency depreciation and deflation will continue indefinitely to sustain this kind of export growth. More significantly, it does not necessarily indicate the direction China should go or its efforts to restore prosperity to its economy. It is certainly not a solution to the country’s biggest economic problems.