China experienced a larger-than-expected decline in exports in May, while imports also contracted, albeit at a slower pace. Manufacturers struggled to find demand overseas, and domestic consumption remained sluggish. Exports from the world’s second-largest economy dropped by 7.5% compared to the previous year, marking the largest decline since January. This decline followed 8.5% growth in April. Imports contracted by 4.5%, showing a slower rate of decline compared to the 7.9% decrease in the previous month. These figures contrasted with economists’ forecasts, as a Reuters poll predicted a smaller 0.4% decline in exports and an 8.0% fall in imports.
The poor export performance reflects weak demand for Chinese goods, while the weak import performance reflects China’s reliance on imported parts and materials for the assembly of finished products for export. Recent South Korean data also showed a decline in shipments to China, with a 20.8% decrease in May, indicating a sustained trend of monthly declines. Korean semiconductor exports experienced a significant drop of 36.2%, indicating weak demand for components used in final manufacturing.
Following the release of the trade data, Chinese stocks pared their gains, and the Australian dollar, which is sensitive to fluctuations in Chinese demand as a commodity currency, fell. Zhiwei Zhang, chief economist at Pinpoint Asset Management, commented that the weak exports confirm the need for China to rely more on domestic demand as the global economy slows. Zhang further emphasized the pressure on the government to boost domestic consumption in the remaining months of the year, as global demand is expected to weaken further in the second half.
China’s factory activity also contracted more than expected in May, as indicated by the official purchasing managers’ index (PMI). Factory output shifted from expansion to contraction, and new orders, including new exports, declined for the second consecutive month. Analysts, who had initially anticipated a stronger performance in the first quarter, are now revising their expectations for the country’s economy for the rest of the year. Factory output continues to decline due to persistently weak global demand.
In light of these economic challenges, the Chinese government has set a modest GDP growth target of around 5% for this year, a downgrade from the 2022 goal that was missed.
