China’s relevance in international trade has been steadily increasing. In addition to its major import position in commodities, the increase in disposable income, especially of the urban middle class, has positioned China as an important market for exporters of consumer and industrial goods. On the other hand, China’s export sector has also grown significantly, employing circa 180 million people – one quarter of the labor force of urban China.
In 2022, China’s exports rose by 7% to a new high of $3.59 trillion, beating the 2021 record of $3.36 trillion, according to data released recently by China’s General Administration of Customs. Imports increased by 1.1% in 2022. That translated into an annual trade surplus of $877.6 billion, surpassing the previous high of $676.43 billion in 2021. With China benefiting from a record trade balance surplus, net exports are expected to have contributed one third (+1%) to China’s GDP growth in 2022.
This record surplus in China’s trade balance is due to strong exports that have propelled the country’s economy for most of the year. But last quarter, the situation was inverted; exports shrank by 9.9% in December, following an 8.7% drop in November, according to recent customs data. This drop (accompanied by a similar decline in imports) was the worst since February 2020. This trend is expected to continue into 2023. Not only is external demand likely to remain weak, but problems in exporting sectors arising from successive waves of covid infections are also likely to have a major impact on the output of many exporting companies. The perceived risks of a recession or a major global slowdown, especially in the EU and the US, exacerbate the trend. Therefore, it is unlikely that China will be able to maintain a trade balance surplus as high as 2022. Admittedly, there are very uncertain exogenous variables (e.g. the price of oil). But most likely, China’s export growth will continue to slow and net exports will contribute to Chinese GDP growth by a mere +0.5-1%.
In short, the export sector cannot be expected to be the main growth factor for the Chinese economy this year. Maintaining the existing penetration or having a small reduction in the main destination markets of Chinese products would still be a good result. And a reduced demand for Chinese products in the main destination markets may also have repercussions on (un)employment in the companies in this sector.
Nevertheless, both the central and provincial governments in China seem committed to prioritizing GDP growth above 5% in 2023. For this to happen, the Chinese government is likely to adopt measures to increase domestic demand – including more public spending – and suspend restrictive policies on real estate, technology, and income redistribution. Given the international relevance of the Chinese economy, such policies are especially important for other economic blocs, such as the EU, to also achieve higher growth.