China Exports Rise, Imports Fall

China saw exports rise in a sign of improving global economic conditions, but imports fell just as China hopes to pivot towards a domestic demand-driven economy.

China saw exports rise in a sign of improving global economic conditions, but imports fell just as China hopes to pivot towards a domestic demand-driven economy.

Exports from Asia’s largest economy to the rest of the world rose 2.8% year-over-year in June, far above expectations of a small drop. The increase is partly attributable to a pickup in aggregate demand in both the United States and the European Union, the country’s two largest markets. Improvements in spending have already been observed in the EU, where growth has picked up as the European Central Bank continues to inject liquidity through the Eurozone with its version of quantitative easing.

The rise in exports is a sharp contrast from May, when year-over-year exports fell by 2.8%. That tempered expectations, as did declines in manufacturing.

Weak Demand

While China’s exports rose, imports fell at a relatively rapid rate, down 6.1% year-over-year in June. That follows an even steeper decline of 18.1% year-over-year in May. The continued fall in imports is an indirect indicator of weakening domestic demand, particularly for high quality and luxury goods that saw a rapid growth in popularity throughout the 2000’s as China’s middle class, and its purchasing power emerged.

Many American and European companies invested aggressively in Chinese operations to capitalize on that growing consumer market, but those investments are failing to bear fruit sustainably in this decade as well as in the last. This fall in demand for upscale goods also gives credence to the theory that China will fail to reach its 7% GDP growth target for this year, which a growing number of analysts believe is unreachable.

Stock Sale Ban

Part of the slump in Chinese consumption may reflect the downside of the “wealth effect,” as a bear market in Chinese stocks pressures Chinese consumers and makes them less likely to splurge on luxury goods. After a sharp correction and reversal in May, the Shanghai Composite Index lost 24.9% from its June and all-time high to the present.

The Chinese stock market began to recover earlier in July after the government announced a ban on insiders and institutional investors from selling shares over a six-month period. The government has also said that it will consider criminal charges against what it sees as “malicious” short sellers. Since the announcement, the market has rallied 18% in the last three days.

Some analysts warn that another fall in the Shanghai Composite is likely to come in the coming months, particularly after the sales ban expires. However, others say that the ban is likely to give Chinese retail investors, who make up the majority of the equity market, time to lower equity exposure.