Weakening yuan against the dollar will not help, since other currencies have depreciated more
Photo from CFP
By WANG Yu
OUYANG Hong owns two textile factories in Suzhou, making linings for winter jackets. Summer is his peak season, but this year, orders from abroad are only half of what were in the previous two years.
“The global economy is bad. People in Europe and America need to spend more money on gas and heating, so they have less for clothes,” Ouyang said.
Exporters around the country are feeling the same. In the past two years, they have repeatedly beaten expectations, posting strong growth despite pandemic shutdowns, supply chain disruptions and energy shortages. But this time might be different. Export growth is already slowing.
Exports increased only 7.1 percent in August, down from July’s 18 percent and only half of the expected 14 percent. Federal Reserve interest rate hikes and inflation in the west are the main culprits. Their impact will continue or even amplify for the rest of this year. Some analysts believe exports may post negative growth in Q4.
Demand is weak. The Shanghai Containerized Freight Index, usually strongest in August and September due to holiday season buying, has declined for 15 weeks straight. Purchasing Managers Index, an indicator of business sentiment, has dropped to its lowest level since July 2020.
The United States and Europe are on the brink of recession. The US economy posted negative growth in the first two quarters and exports to the US dropped 3.8 percent in August. The Eurozone grew 1.3 percentage points slower in Q2 and also has been buying much less from China. Export growth to the EU was down 12.1 percentage points. Although the troubles in Europe and the US started long ago, the impact on exports has been partially offset by reopening in Q2 and will be more prominent in the coming months.
Economists generally agree that since prices have been falling, volume will be the main driver of export growth for the rest of the year. This is bearish given the waning global demand.
The yuan has fallen 11 percent this year against the dollar but this will not necessarily drive up exports, since other currencies have depreciated even more. The yuan has gained 4 percent against the euro and 12 percent against the Japanese yen this year.
Ouyang Hong quotes in dollars, which makes him expensive to Japanese clients. “If the yuan and yen depreciate by similar amounts, my customers won’t feel much difference. But the yen has dropped 20 percent. And their economy is not doing particularly well. So overall my Japanese customers don’t have much appetite,” he said.
The currencies of competing exporters, such as Turkey, have lost more value against the dollar, making their prices more attractive. On the other hand, currency depreciations are not immediately reflected in exports. Usually, there is a three-month lag.
Some economists argue that a stronger dollar may drive up exporters’ profits in the short run, but overseas buyers may not order more simply because goods are cheaper. Total volume depends on factors such as demand and trade policies.
Different industries are affected unevenly. Historically, telecommunications and electronic equipment have relied on exports and will be hit hardest if the west goes into recession. Non-essential consumer goods, such as clothes, furniture and toys, are also showing signs of slowing.
Labor costs also come into play. Ouyang plans to move part of his operation to Vietnam, and has set up an office there.
“Workers cost a lot more in China. For labor-intensive industries like textiles, the trend is to move to places such as India, Indonesia and Vietnam,” he said.
Chemicals and metallurgy retain their cost advantages and remained strong. Cars and car parts will also keep up the momentum.
Chinese carmakers have taken some market from foreign competitors struggling with supply chain issues. In the long run, the switch to EVs will also create opportunities for car exporters.