Is China’s economy slumping? Is the trade war dousing Chinese business activity? Not according to the October trade data.
China’s exports climbed 15.6% in October, versus the same month a year ago, in US dollar terms—way higher than what analysts expected. The real surprise, though, was the eye-popping 21.4% year-over-year leap in Chinese imports. That’s odd given that China’s economy is slowing abruptly again, which should translate to sluggish demand for goods from consumers and businesses.
What explains the weirdness? Could it be… tariffs?
Maybe. America buys around a fifth of China’s total exports. In late September, another round of Donald Trump’s 10% tariffs on some $200 billion worth of Chinese goods went into effect. That could have dampened China’s exports to the US. But, nope: instead, they jumped 13% in October.
However, on Jan. 1, 2019, the tariff rates on those goods will jump from 10% to 25%. It could be that US importers are hurrying to stock up on stuff from China before the new year, when tariffs will force up prices even more. “Frontloading,” as this is known, could explain a lot of the export spike, says Serena Zhou, an economist at Mizuho, in a research note.
It’s a whole different story with goods China imports from the US, which shrank nearly 2% compared with October 2017, even while imports from elsewhere surged.
That’s probably because of China’s retaliatory tariffs on American goods, which have made those more expensive, writes Louis Kujis, economist at Oxford Economics, in a note. The decline reduced China’s trade surplus with the US slightly, after it hit a high in September.
Currency movements could also have influenced China’s trade activity. US demand for Chinese exports may be growing because the weakening of the Chinese yuan—it’s fallen around 10% against the dollar—has offset the tariffs, making Chinese goods cheaper.
The yuan has weakened against the currencies of other major trade partners too. So perhaps the cheapening of Chinese exports has increased demand from other trade partners, says Kujis. Indeed, China’s exports to Southeast Asian countries and the EU held up in October. (Also note that while China has raised tariffs on US goods, it’s slashed many on goods bought from other countries.)
It’s hard to know for sure who’s buying more of what, though, because China Customs only reports the value of trade in dollar and yuan terms—and not volumes. And steeper prices can make trade volumes look bigger than they actually were.
The tariffs may also mean non-US suppliers are taking advantage of the higher cost of US goods to raise their own prices, while creating supply-chain bottlenecks and other disruptions. “These data show further signs that tariffs are starting to bite,” according to a research note by Freya Beamish of Pantheon Macroeconomics.
Plus, China is the world’s biggest commodity importer. So the recent sharp jump in commodity prices likely overstated growth in import volumes, which could partially explain the huge surge in the year-over-year figure, says Beamish.
Whatever is behind China’s October trade bonanza, other data suggest it will be short-lived.
Frontloading by US buyers is already fading, says Mizuho’s Zhou. She points to a slump in new export orders in China’s purchasing managers index, as well as the 30% plunge in export orders to the US recorded at the Canton Fair, China’s biannual trade exhibition that is a key venue for Chinese export business. As that drop in demand hits, it will be compounded by the ebbing of the US fiscal stimulus. As for China’s economy, it’s unclear whether the government will be able—or willing—to ramp up lending enough to juice domestic business activity. All that adds up to a strong likelihood that these heady days of booming trade are very likely numbered.