In August, China's exports grew 7.1 percent year-on-year in terms of US dollars, lower than expected. Does this mean the driving forces supporting China's better-than-expected export performance over the past two years have changed? As developed economies increase interest rates and overseas demand for Chinese products gradually declines, how will China's exports perform going forward?
There are two basic ways a nation expands its exports. One is the growth of demand, and the other is the increase of the competitiveness of its products and services.
The former is a "demand effect", that is, every country's exports will benefit from the expansion of global demand. The latter is a "share effect", that is, some products will gain more market share with the continuous improvement of their export competitiveness.
Those two types of effects will sometimes jointly boost each other, while other times they may not work in tandem.
Since the start of the COVID-19 pandemic, China's exports have demonstrated strong resilience by outperforming market expectations and becoming a key engine for the nation's economic growth.
Looking into the recent past, it is easy to see that behind the growth of China's exports, major driving forces have differed from time to time. A deeper look at the past driving forces will help us understand the dynamics behind export growth, as well as better assess the impact of declining global demand for China's exports going forward.
In 2020, the country enjoyed an increase in global export market share due to advantages in its domestic supply chain.
Global trade overall plunged after the pandemic broke out. In 2020, the value of global goods exports declined 7.2 percent from the year prior, while China's goods exports increased 3.4 percent year-on-year.
The World Trade Organization said China's share in global exports that year was 14.7 percent, up 1.5 percentage points from 2019.
Unlike traditional market share increases driven by technological upgrades, that year's share improvement was mainly due to China's more complete domestic supply chains.
According to our research, in 2020, China registered obvious growth in respective global export shares in nearly all the industries. Only agricultural product export market share decreased slightly while that of fuel and mineral products increased only marginally. As products from these two sectors usually take up minor shares in China's overall exports, such changes had little impact on overall exports that year.
Manufactured goods are the main products making up China's exports. In 2020, most manufactured goods experienced negative "demand effect" and positive "share effect", indicating that the export expansion of these products was mainly achieved by replacing exports from other economies.
More importantly, the positive "share effect" was not only seen in typically technology and capital-intensive industries, but also in labor-intensive industries. This was very different from traditional market share increases brought about by technological progress, with which high-tech-intensive products often experience more obvious market share increases compared with industries with low technology intensity.
We also learned that China had replaced exports from other economies mainly in sectors such as pharmaceuticals, transportation equipment and textiles in 2020.
Therefore, against the backdrop of the pandemic's serious damage to global supply systems, China took the lead in resuming production, giving full play to the manufacturing capability and competitive advantages it had formed over a long period of time, thus ultimately achieving positive growth in goods trade in 2020.
The year 2021 was characterized by a global synchronized economic recovery driving expansion of external demand for Chinese products, and the "share effect" performed differently from industry to industry.
Expansion of external demand in 2021 was a critical factor driving the rapid growth of China's exports, as the global economy began to recover from the early impact of the pandemic.
The value of global goods exports increased 26.3 percent year-on-year last year. Although there was a certain base effect, the main reason for such growth was that the global economy had bottomed out. Both emerging economies and developed economies achieved substantial growth in their exports of goods, and China was of course among them.
In 2021, the value of China's exports rose 29.9 percent from a year prior, and its share of exports in the global market reached 15.1 percent.
While expansion of external demand spurred the rapid growth of China's exports, the "share effect" was still positive in the export sector, although with significantly weakened influence.
With the gradual restoration of overseas production and macroeconomic stimulus in many economies taking effect, the gap between supply and demand faced by most countries began to narrow in 2021.
Even so, thanks to a resilient domestic production and supply system, China's share in global exports that year continued to increase, and the "share effect" contributed 2.8 percentage points to China's export growth rate.
However, the "share effect" started performing differently among various industries.
As we see, global export market shares for China's agricultural products, fuel and mineral products, and some manufactured goods all declined.
Yet the "share effect" of commodities such as transportation equipment and chemicals in 2021 was even stronger than that in 2020.In particular, exports of automobiles not only continued a growth momentum from the early stage of the pandemic, but also played a bigger role in the international market.
Exports of intermediate goods such as steel products became a new factor driving China's exports in 2021. Exports of other intermediate products such as copper, aluminum and chemicals also demonstrated similar trends last year.
To conclude, in 2021, China's great export performance was mainly driven by global recovery. The nation's export replacement of products from some economies due to domestic supply chain advantages still existed, although it was less obvious — market shares of some Chinese products even dropped to pre-pandemic levels.
However, China's exports of some intermediate goods like steel and end-consumer goods such as automobiles were still strong enough to lift their share in global markets.
This year has been characterized by overall external demand for Chinese products declining, but with demand from some countries and for some Chinese products remaining strong.
China's exports remained resilient in the first half. In July, export growth achieved a high level of 18.0 percent year-on-year, beating market expectations. However, export growth slumped to 7.1 percent in August.
Major developed economies have adopted interest-rate increases to curb severe inflation, thus posing great downward pressure on external demand for Chinese products.
"Share effect" remains strong, and exports of some intermediate and consumer goods are still resilient.
According to our calculations based on data from the Netherlands Bureau for Economic Policy Analysis, in the first half, the share of China's exports in the global market remained stable, with an average value of around 16 percent. In June, the ratio rose slightly to 16.3 percent.
Among China's exports, the proportion of raw materials and intermediate products has increased for eight consecutive months as of June, rising from 19.1 percent to 24.2 percent. Although the figure has dropped in the past two months, it was still higher than that of the same period last year.
While the overall growth rate of consumer goods exports has slowed down, exports of automobiles, especially of new energy vehicles, have become a bright spot among China's exports.
Growth in the nation's exports to the European Union in the first seven months was also higher than overall export growth, among which export growth of raw materials and intermediate products was higher than others.
Based on the above findings, it is easy to conclude that there is an ongoing decline in overseas demand, which places pressure on China's export growth. But due to specific resilient demand from some regions and for some products, China's export growth will remain strong in some sectors.
However, high prices of raw materials will also have an influence on product prices, profits and cash flows of China's enterprises, although such effects may differ from upstream to downstream industries.
The writers are Zhu He, deputy director of the research department of the China Finance 40 Forum, and a researcher of the CF40 research institute, and Sun Zihan, a researcher of the CF40 research institute.
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