China’s economy could beggar its neighbours

Given weak consumption and cooling global demand, it makes sense for the country’s producers of everything from cargo ships to lava lamps to try to seize overseas market share from neighbours. It will sting if they do.

It is hard to believe that an economy under roving lockdowns during the three months ending in June really outperformed the same period in 2021, when life was normal. Property, an industry that drives up to a third of activity, is approaching a state of near-collapse; angry home buyers are defaulting on mortgages en masse. Officials also have to worry about a looming unemployment crisis. They have opened the credit taps and front-loaded infrastructure spending, but falling returns on investment means that stores up trouble for later. Thus the central bank has remained conservative on interest rates.

Fortunately, there’s the export sector. China managed to boost its share of world exports by two percentage points during the pandemic to control a whopping 15 percent share in March. However, growth rates have been cooling as Western economies flirt with recession. If this long-standing pillar of performance starts wobbling, it would offset recoveries in other segments.

In June, China’s trade surplus touched a record $98 billion. That’s discouraging for foreign companies that had hoped to sell to the country’s vast consumer class. It also reflects how China has kept the key parts of its supply chain for itself. Despite chatter about outsourcing some manufacturing to ASEAN countries, that region’s monthly trade deficit with China has risen to $17 billion. Japan and South Korea are watching their surpluses slowly evaporate as Chinese firms challenge their champions in sectors like shipping, robotics and automobiles.

In a world where absolute demand is falling, salespeople fight harder over remaining customers. As Chinese companies try to enlarge their share of a shrinking pie, they will launch brutal price wars, which Beijing could support with cheap credit and policy preferences. In April the central government rolled out fresh export tax rebates.

Victory might sour quickly. Putting rival exporters out of business could drive nearby economies into recession, which would in turn deduct from demand for Chinese goods and services. That will rebalance trade, but at that point, neighbours are unlikely to appreciate it.

Context news

China’s gross domestic product grew 0.4 percent year-on-year in the quarter to the end of June and 2.5% in the first half of the year, the National Bureau of Statistics reported on July 15. Economists polled by Reuters had expected 1.0 percent. Compared to the prior quarter, output contracted 2.6 percent.

The property sector, which drives between a quarter and a third of GDP, showed signs of continued stress. New home prices fell 0.5 percent in June from the prior year. Property sales by floor area contracted 22.2% in the first six months of 2022, new construction starts fell 34.4 percent and investment is down 5.4 percent.

Factors supporting growth include infrastructure investment, which grew 7.1 percent in the first half, recovering credit growth and robust exports. China’s trade surplus hit a record high of $98 billion in June. Retail sales posted a surprise 3.1 percent rise in June.