China's Economy Faces Deflation for the First Time Since 2021

In a concerning development for China's economy, the country has experienced deflation for the first time since 2021. This comes as the country's exports took a sharp dive in July, experiencing their biggest decline in over three years. The sluggish demand abroad and the economic slowdown within the country have put thousands of businesses at risk. Historically, exports have been a key driver of growth for China, and this situation is directly impacting employment in a sector that is now operating at a slow pace.

Decline in Chinese Exports Hits Record Low

According to figures released by the Chinese Customs on Tuesday, sales of Chinese products destined for foreign markets dropped by 14.5% year-on-year last month. This marks the largest decline since January-February 2020, when the Chinese economy was virtually brought to a standstill by the onset of the Covid-19 pandemic.

Analysts surveyed by Bloomberg had anticipated a decline, but not to this extent (-13.2%). In June, Chinese exports had already contracted by 12.4% year-on-year.

Last month, exports to Western countries were in the red compared to the previous year (-18.6% with the United States, -8.9% with the European Union). However, they remained strong with Russia (+73.4%), confirming the acceleration of economic cooperation between the two neighbors since the start of the war in Ukraine.

Challenges in China's Economic Recovery

Apart from a brief rebound in March and April, China's exports have been consistently declining since October 2022. Last year, the "zero-Covid" health restrictions severely impacted export-oriented businesses due to sudden factory closures and difficulties in transportation and travel.

China finally lifted most of its stringent measures in December 2022, paving the way for a gradual recovery of economic activity. However, the long-awaited rebound has been slow to materialize, hampered by weakened domestic consumption due to a gloomy economic outlook and a record youth unemployment rate.

As demand dwindles, imports into China have logically declined in July (-12.4% year-on-year). This marks the ninth consecutive month of decline. Despite this, the country's trade surplus, the world's second-largest economy, reached $80.6 billion, up from $70.2 billion the previous month.

These trade figures are the latest in a series of indicators reflecting a slowdown in China's post-Covid recovery. According to official figures, Chinese growth only increased by 0.8% between the first and second quarters of 2023.

As economists advocate for a comprehensive stimulus plan, authorities in Beijing are currently favoring targeted measures and intentions towards the private sector, which have yet to yield significant results. To "facilitate the recovery," Beijing may resort to a "depreciation" of its currency against the dollar to "support exports," according to analyst Ken Cheung from Mizuho Bank. This measure would technically make Chinese goods more competitive abroad. On Tuesday afternoon, one dollar was exchanged for 7.20 yuan, its lowest level since November 2022.

Words of the day

exports : exportations

decline : déclin