China’s exports top forecasts, imports fall on weak demand

China’s exports grew at their fastest in fifteen months in June, suggesting manufacturers are front-loading orders ahead of tariffs expected from a growing number of trade partners, while imports unexpectedly shrank amid weak domestic demand.

The mixed trade data keeps alive calls for further government stimulus as the $18.6 trillion economy struggles to get back on its feet. Analysts warn that the jury is still out on whether strong export sales in recent months can be sustained given major trade partners are becoming more protective.

“This reflects the economic condition in China, with weak domestic demand and strong production capacity relying on exports,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“The sustainability of strong exports is a major risk for China’s economy in the second half of the year. The economy in the US is weakening. Trade conflicts are getting worse.” Outbound shipments from the world’s second-biggest economy grew 8.6% year-on-year in value in June, customs data showed on Friday, beating a forecast 8.0% increase in a Reuters poll of economists and a 7.6% rise in May.

But imports hit a four-month low, shrinking 2.3% compared with a forecast 2.8% increase and a 1.8% rise the previous month, highlighting the fragility of domestic consumption.

Stronger-than-expected exports have been one of the few bright spots for an economy otherwise struggling for momentum despite official efforts to stimulate domestic demand following the pandemic. A prolonged property slump and worries about jobs and wages are weighing heavily on consumer confidence.

Still, as the number of countries stepping up curbs on Chinese goods increases, so too does the pressure on its exports to prop up progress towards the government’s economic growth target for this year of around 5%.

China’s trade surplus stood at $99.05 billion in June, the highest in records going back to 1981, compared with a forecast of $85 billion and $82.62 billion in May. The United States has repeatedly highlighted the surplus as evidence of one-sided trade favouring the Chinese economy.

Washington in May hiked tariffs on an array of Chinese imports, including quadrupling duties on Chinese electric vehicles to 100%. Brussels last week confirmed it would impose tariffs on EVs as well, but only up to 37.6%.

Chinese exporters are also on edge heading into US elections in November in case either major party tips fresh trade restrictions.

Turkey last month announced it would impose a 40% additional tariff on Chinese-made EVs, and Canada said it was considering curbs.

Meanwhile, Indonesia plans to impose import duties of up to 200% on textile products, which come mainly from China; India is monitoring cheap Chinese steel; and talks with Saudi Arabia over a free trade agreement have reportedly stalled over dumping concerns.

The miss on imports might not bode well for exports in the coming months, as just under a third of China’s imports are parts for re-export, particularly in the electronics sector.

China took in only slightly more chips in June in volume terms than it did a year earlier, suggesting China’s heavy investment in expanding production of older chips - known as legacy chips and which can be found in everything from smartphones to fighter jets - is warping supply and demand.

The European Commission has reportedly began canvassing the bloc’s semiconductor industry for its views on China’s expanded production of legacy chips, which could constrain the Asian giant’s strong export performance in electronics.

Further signalling weak domestic demand, China’s steel exports in the first half of the year jumped 24% from a year earlier, pointing to a faltering construction sector, which is a heavy user of the metal.

China stocks tracked regional markets lower, with the mixed trade data weighing on sentiment.

Analysts expect China to roll out more policy support measures in the short term, and a government pledge to boost fiscal stimulus is seen helping kick domestic consumption into a higher gear.

“It appears that the stronger government bond issuance since May has not yet fed through to increased infrastructure spending and demand for commodities,” said Zichun Huang, a China economist at Capital Economics.

“But we expect this to occur soon, boosting the import-intensive construction sector,” she said.

Economists and investors are awaiting for the Third Plenum to be held on July 15-18, with hundreds of China’s top Communist Party officials gathering in Beijing for a meeting that comes every five years.

Separately, China’s central bank is widely expected to leave a medium-term interest rate unchanged and drain some cash from the banking system when rolling over such maturing loans on Monday, a Reuters survey showed.

While the economy continues to sputter, a weak Chinese currency has remained the key constraint limiting Beijing’s monetary easing efforts, as that could further widen the yield gap with other major economies, particularly the United States, and trigger more capital outflows.