By Eric Huang.    Photo：Amiel Joseph Labrador

Due to severe global inflation, weak demand in the global supply chain, coupled with production interruptions caused by the lockdown policy adopted by the epidemic and the downturn in the domestic real estate market, the world's second largest economy - China's import and export trade has shrunk much faster than expected.

China's exports fell nearly 9% in value terms in November, sharper than the 0.3% decline in October and the worst performance since February 2020, according to a report from China's General Administration of Customs last week. The magnitude is roughly two to four times what economists had expected. The decline reflects weakening global demand for Chinese goods, as inflation and rising interest rates dent consumers' ability to spend on discretionary purchases. Meanwhile, China's imports fell nearly 11%. Stock markets reacted to clear signs of a slowing economy: The Nasdaq and S&P 500 both fell on Wednesday, while Hong Kong's Hang Seng lost more than 3%.

The recession has been much deeper than markets had predicted, with economists forecasting a further drop in exports, pointing to a sharp decline in international trade as consumers and businesses cut spending in response to aggressive central bank moves to curb inflation. The Chinese government is moving to ease some of the strict restrictions imposed during the pandemic amid lockdowns, but cross-border shipments have been slow since August as soaring inflation, interest rate hikes across the board in many countries and the crisis in Ukraine pushed the global economy to the brink of recession. in a powerless state. Data from the Shanghai Shipping Exchange showed that freight indices from Chinese ports to Europe and the U.S. West Coast fell 21.2% and 21.0% in November from October, respectively, underscoring the weak export trend due to poor external demand.

The trade data mirrored what container vessels watchers saw on the water and in ports: stalled, underfilled vessels and docks with ample storage space. According to Drewry's report, shipping lines canceled about 13% of the scheduled voyages in December, and there were reports that many container vessels left China with a lot of space on board. Freight rates have also plummeted, with the cost of shipping a container from Shanghai to the West Coast of the United States down 90% year-on-year. Falling global demand for Chinese goods will have bigger consequences due to a reversal in demand during the pandemic and a looming full-blown global recession.

The dismal data also underscored the impact of new COVID restrictions imposed in many Chinese cities, including manufacturing hubs Zhengzhou and Guangzhou, as infections surged last month. Apple supplier Foxconn said revenue fell 11.4% year-on-year in November due to production issues related to COVID-19 containment at Foxconn's Zhengzhou plant, the world's largest iPhone contract factory. The strict zeroing policy has also seriously hurt importers. Import volumes fell sharply by 10.6% from October's 0.7% decline, below expectations for a 6.0% decline. The recession, the worst since May 2020, partly reflects a higher base from a year earlier. That pushed the trade surplus down to $69.84 billion in November from a surplus of $85.15 billion in October, the lowest level since Shanghai was locked down in April.

China's stringent COVID-19 lockdown has further hurt the sluggish economy by slashing domestic demand and disrupting supply chains from factory floors to port terminals. A rare round of protests in November has seen the Chinese government begin to relax its strict "zeroing out policy". Last week, several manufacturing metropolises began easing testing rules and movement restrictions. Locked-down neighborhoods in Shanghai and Guangzhou have been lifted, and city officials have begun dismantling permanently installed COVID-testing stations in the central plaza.

Julian Evans-Pritchard, senior China economist at Capital Economics, said the easing of zeroing out restrictions will have a limited boost to cross-border shipments, which are no longer the main factor limiting manufacturers' ability to meet orders. A shift away from the zeroing out policy and increased injection into the real estate sector will eventually drive a recovery in China's domestic demand, but it may not happen until the second half of next year. With the RMB already depreciating sharply this year, policymakers also have limited wiggle room as a massive domestic monetary policy stimulus could spark massive capital outflows at a time when global interest rates are rising rapidly.

The war in Ukraine has sparked a continued surge in already high global inflation, fueling geopolitical tensions and further dampening prospects for international trade. In the first three quarters of this year, China's economy grew by only 3%, far below the annual target of around 5.5%. Analysts generally expect full-year growth to be just above 3%. As global demand weakens in 2023, China will have to turn to rely on domestic demand mostly.

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