At the yearbook At the World Economic Forum meeting in Davos, Switzerland this week, China’s economic czar Liu He met a number of “old friends” he hadn’t seen during his country’s long battle with Covid-19. In a caring speech, he acknowledged the importance of personal encounters, lamented the fragmentation of the world and called for economic “re-globalization”. In a philosophical aside, he also emphasized the “duality” of things.
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China’s recently abandoned “zero Covid” policy cuts the country off from the rest of the world and contributes to fragmentation, Mr. Liu lamented. But China’s period of isolation had a remarkable duality of its own. Although the movement of people across China’s borders was severely restricted, the movement of goods from China to the rest of the world was spectacular. Despite all the disruptions, China’s exports grew by nearly 30% in dollar terms in 2021 and another 7% in 2022, according to figures released Jan. 13. Maybe face-to-face meetings are overrated.
China’s episodic lockdowns proved less damaging to trade than feared at the time. When Shanghai ground to a halt in April and May, many feared it would clog international supply chains and push up global inflation. But much trade passed through nearby Ningbo instead. An index of global supply chain pressures compiled by economists at the Federal Reserve Bank of New York peaked in late 2021, before China had tense battles with Omicron last year. The decline in the index has since been interrupted by the lockdown in Shanghai and Russia’s invasion of Ukraine, but not for long (see chart). Prices tell a similar story. In June, when the headline inflation rate in the United States peaked at 9.1%, the average price of Chinese imports to America rose just 3.3% year-on-year.
With the abrupt lifting of China’s zero-Covid policy, the flow of people like Mr. Liu across the mainland’s borders has increased again. The number of passengers on Air China’s international routes rose by a third in December compared to the previous month. Other parts of the economy will also improve as the year progresses. Retail spending, which fell last year, is expected to recover, which would have been even weaker had it not been for fearful food and drug stockpiling. The outlook should also improve for home sales, which shrank by more than a quarter in 2022, the sharpest drop on record. The government has given property developers “blood transfusions,” Mr Liu reported in Davos, to help them raise finance. It has also taken steps to speed up the pulse of the market, which it hopes will help developers generate much-needed revenue.
But the glaring exception to this better outlook is exports. They will likely do worse in China’s reopening year than they did last year of lockdown. In fact, the monthly numbers have been negative for the last three releases. After ubs, a bank, overall goods exports will contract by 4% in dollar terms in 2023. This would be only the fifth such fall since 1980. The re-globalization of the Chinese people will be accompanied by a de-globalization of their commodities. China will attract many more foreign visitors and fewer foreign sales.
In one important respect, China’s reopening has made life harder for its exporters. The turnaround in China’s zero-Covid policy has helped revive the yuan, which has risen 8% against the dollar since early November, making Chinese exports less competitive. Mr. Liu invited his audience in Davos to revisit China. But even before the global capitalists arrive, global capital has rushed to reacquaint itself with Chinese assets and inflate the price of its currency. Exporters have also converted more of their dollar earnings into yuan.
However, the main reason for the slump in exports lies outside of China. The slowdown in the global economy will reduce demand for its goods. And the landing will not necessarily be soft. In December, for example, China’s sales to America that EU and Japan fell 17% year-on-year. Ting Lu of Nomura, another bank, fears that China will suffer from the so-called bullwhip effect. A small slump in consumer demand can lead to a significant slump in orders from upstream suppliers, just as a small manipulation can lead to a violent crack of the whip.
Even if global spending levels prove resilient, the mix is turning less supportive for China. In America and other rich countries, consumption has shifted from the types of electronic goods valued by people who work from home to the services people enjoy when they can move and be entertained. China’s global shipments of computers and their parts have shrunk by 35%, according to the latest trade numbers. As the threat of lockdowns loomed over global supply chains, people worried that China’s exporters were a source of vulnerability for the global economy. Instead, the global economy is proving to be a source of vulnerability for China’s exporters. ■
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