China's exports surged in June, driven by orders for chips to feed the global AI boom and automobiles, while policymakers in the world's No. 2 economy still haven't found a way to boost demand at home. The numbers look strong from the top. Down below, domestic weakness keeps grinding on.
Exports climbed 27% from a year earlier in U.S. dollar value terms, customs data showed on Tuesday, their best performance in four months and well above the 18.2% rise forecast by economists. Imports jumped 36%, a five-year high, compared with 27.4% growth the month before. The trade machine kept moving, even as the people and firms inside it face slowing growth in major economies and trade frictions with Washington.
Who Gets the Orders, Who Gets the Bill
China's monthly car exports topped 1 million for the first time in June, data showed, a milestone that risks heightening tensions with partners such as the European Union. China also sold to the world 32 billion integrated circuits. Those are the numbers that matter to the export bosses and the planners trying to keep the factory system humming. For everyone else, the picture is less triumphant.
China's trade surplus came in at $125.6 billion in June, up from $105.4 billion the previous month. The year-to-date trade gap now stands at $575.98 billion versus $585.96 billion last June, even though imports have grown faster than exports for several consecutive months. That surplus keeps the country on track to post a surplus topping $1 trillion for a second straight year.
Xu Tianchen, a senior economist at the Economist Intelligence Unit in Beijing, said, "Continued export strength, mostly driven by AI, points to a better second half, coupled with a more expansionary policy mix, accelerated fiscal spending and mild monetary easing, as well as a de-escalation of the situation in the Middle East, which will benefit China through lower oil prices." He added, "But domestic demand remains a drag. Retail sales remain pretty flat and fixed asset investment was negative last month."
Domestic Demand Left Behind
With policymakers still short of a fix for a protracted property crisis that has weighed on domestic demand for several years, Chinese manufacturers appear to have few good options beyond selling overseas. A recent report by Gavekal Dragonomics, a consultancy, said the ratio of annual exports to total manufacturing sales hit 24% over the first four months of this year, the highest level since China's accession to the World Trade Organization in 2001. In 2019, the ratio stood at 18.3%, rising to 22.3% last year.
"That would be considered high for a small export-focused country; for the world's second-largest economy, it is remarkable," the report said. That remark lands like a quiet indictment of a system leaning harder and harder on foreign buyers while domestic demand stays weak.
Zhiwei Zhang, chief economist at Pinpoint Asset Management, said, "I think exports will remain strong in the second half of the year." He added, "Meanwhile, it also puts further pressure on the trade tensions between China and its trading partners, Europe in particular."
Chinese stocks rallied following the data, with the blue-chip CSI300 closing up 2%. The market cheered. The factories kept working. The people stuck with flat retail sales and negative fixed asset investment did not get a different economy.
The Energy Squeeze Beneath the Headlines
The surge in global AI investment is helping the world's top manufacturer offset the export hit many had expected from the Middle East turmoil. China also appears to be drawing down energy stockpiles rather than subjecting its producers to higher prices. The world's top energy buyer's June oil imports hit their lowest level since October 2016, according to Reuters calculations. Year-to-date natural gas purchases are also down 3.4% from a year earlier, suggesting China is relying on coal to make up the difference. Coal imports jumped an annual 29% in June.
Julian Evans-Pritchard, head of China economics at Capital Economics, said the strong import figure "should not be taken as evidence that domestic demand is booming." He added, "As with exports, surging semiconductor prices are playing a key role in pushing up import values." The import surge, in other words, reflects the same chip frenzy that props up exports, not some broad-based recovery from below.
Imports from South Korea, a major chip manufacturer, rose 85% from a year earlier last month, the data showed, with purchases from Taiwan, another big semiconductor manufacturer, up 41.1% over the same period. Customs Vice Minister Wang Jun said he was confident the production powerhouse's exports would remain resilient into the second half of the year, despite external pressures, singling out technology exports.
Separate manufacturing activity data for June, released late last month, showed overseas demand was beginning to recover, but factory-gate prices continued to fall as companies cut prices to win business from customers squeezed by higher energy costs linked to the Iran conflict. Sluggish domestic demand is expected to be a drag, with gross domestic product forecast to have grown by just 4.5% year-on-year in April to June, cooling from 5.0% in the first quarter, according to a Reuters poll. GDP data is due to be released on Wednesday. The apparatus will get its numbers. The people at the bottom will get the bill.