China’s exports growth slows to 7% in July as manufacturing headwinds persist

SINGAPORE (ICIS)–China’s exports rose 7.0% year on year to $300.6 billion in July, a slowdown from the previous month, adding to signs that the country’s economic growth is losing momentum amid the persistent weakness in manufacturing sector.

• Trade surplus narrowed to $85 billion in July
• Further monetary policy easing expected
• Weakening domestic demand and trade tensions persist

The country’s imports, meanwhile, grew by 7.2% year on year in July, reversing the 2.3% decline in the previous month, according to data from China Customs.

The latest July figures resulted in a trade surplus of close to $85 billion, down from June’s $99.05 billion.

“The year-on-year numbers will benefit from a favorable base effect, but overall momentum looks to be weakening with new export orders in contraction the last few months even before new tariffs on Chinese EVs [electric vehicles] take effect,” Dutch banking and financial information services provider ING said in a note on Wednesday.

China’s total goods imports and exports grew 6.2% year on year in the first seven months, with exports increasing 6.7% and imports rising 5.4%, separate China Customs data released on Wednesday showed.

China’s foreign trade in goods reached $3.5 trillion from January to July, with exports totaling $2.01 trillion and imports amounting to $1.49 trillion.

The country’s trade surplus expanded by 7.9% year on year to $518 billion during the same period.

TRADE TRACKING WEAKER MANUFACTURING
The July trade figures align with earlier data showing that both official manufacturing and non-manufacturing purchasing managers’ indexes (PMIs) continued to soften in July, pointing to a slowdown in China’s economic momentum.

China’s official manufacturing PMI remained in contraction territory for the third month in a row in July, slipping 0.1 point to a five-month low of 49.4.

“Weaker external demand and excess capacity in some sectors could continue to weigh on manufacturing prices and contribute to the domestic deflationary pressure,” said Ho Woei Chen, an economist at Singapore-based UOB Global Economics & Markets Research.

Meanwhile, the China Federation of Logistics & Purchasing (CFLP) non-manufacturing PMI unexpectedly fell to a nine-month low of 50.2 in July, despite still marking its 19th consecutive month of expansion since January 2023.

Following China’s July Politburo meeting’s commitment to introduce new economic support measures and boost consumption to drive domestic demand, details remain scarce, Ho said.

The People’s Bank of China (PBOC) took concrete steps in July, cutting interest rates and spurring commercial banks to lower loan prime rates.

The PBOC reduced the seven-day reverse repo rate by 10 basis points (bps) and the one-year Medium-term Lending Facility (MLF) rate by 20 bps.

Consequently, the 1-year and 5-year loan prime rates (LPR) decreased to 3.35% and 3.85%, respectively.

The PBOC’s adjustments to MLF and LPR impact borrowing costs in China, influencing bank lending rates and the overall cost of credit.

With the US Federal Reserve poised to cut interest rates in September, further monetary policy easing is anticipated in China, UOB’s Ho said.

“We predict an additional 15 bps rate cut by the end of 2024, bringing the 1-year LPR down to 3.20%. Moreover, a near-term cut of 50 bps to the reserve requirement ratio (RRR) is also possible,” she added.

GROWTH OUTLOOK REMAINS WEAK
Manufacturers’ sentiment remains bleak as China’s economy faces twin challenges: weakening domestic demand and escalating external trade tensions, which contributed to a slower-than-expected growth in the second quarter.

China’s GDP growth slowed to 4.7% year-on-year in the second quarter, pulling the year-to-date growth down to 5.0% for the first half.

“The two big drags on GDP growth continued to be the property sector and consumption,” said Lynn Song, ING’s chief economist for Greater China.

“Despite GDP growth remaining on pace to achieve the 5% growth target for now, there will be less supportive base effects in H2 2024, making the road to 5% challenging,” Song said.

“We will likely need to see further policy support in the coming months if this goal is to be reached.”

Although some easing measures were introduced in mid-May, the property sector remains under pressure, weighing on domestic consumption and investment, and increasing deflation risks, analysts at Japan’s Nomura Global Markets Research said.

However, exports are expected to stay strong, supported by low inflation, a weak yuan, and a rebound in the global goods cycle, Nomura said.

“We still hold the view that the policy pivot in the property sector is real, although its planning and execution was slowed by policymakers at the third plenum,” it added.

Focus article by Nurluqman Suratman