MNI EXCLUSIVE: Strong Yuan to Drag China Export Growth

China's export growth will remain strong in the short-to-medium term but increased competition from global manufacturers restarting their businesses and a rapid appreciation of the yuan will eventually exert brakes, policy advisors told MNI.

Exports rose by 9.5% y/y in August in dollar terms, the most since March 2019 and jumping 2.3 percentage points from July. For the first eight months of the year they grew by 0.8% y/y, pushing China's trade surplus up 13.2% to USD289 billion.

Overseas sales growth should remain strong over the next one or two years as international manufacturers will be reluctant to expand production while the pandemic persists, said Song Hong, a senior fellow of the Institute of World Economy and Politics at Chinese Academy of Social Sciences. China's exports are being supported by a rapid factory recovery, particularly in products related to Covid-19, he said. A developing international rail network, such as the China-Europe Railway Express, also countered pandemic disruption to sea and air transport.

In addition, China-US trade tensions have eased slightly as a Phase-One deal between the two countries has pushed forward, improving market confidence, just as the Covid-19 pandemic helped to stabilise China's supply chains as manufacturers suspended plans to relocate production away from the country.

—CHALLENGES

But there are risks to this outlook, one being uncertainty over U.S. demand for Chinese goods. The ability of the U.S. to get Covid-19 under control, the outcome of U.S. presidential elections and the pace of recovery in the world's largest economy are all hard to predict, Li Gang, vice-chairman of the China Association of International Trade under Ministry of Commerce, told MNI. China would be unable to find a replacement market if exports to the U.S fell dramatically, he added.

Another negative sign comes from imports into China, which are performing more weakly than exports. In August, imports contracted by 2.1% y/y, after falling 1.4% in July due to sluggish domestic demand. Weak import figures reduce the likelihood of long-term robust export performance, Li said, as China needs to import a large amount of intermediate goods for its own production.

The strengthening yuan is also a concern for advisors. USDCNY has fallen 6% since May against the dollar, touching 6.7501 Thursday, the lowest since April 2019. The PBOC set its daily fixing at 6.7591 on Friday, the lowest since the start of last May.

The central bank should be cautious over further yuan appreciation, which may choke some exporters and burden employment particularly when the economy is still recovering, Li warned.

Yuan appreciation could also fuel capital inflows, further pushing up the currency, said Xu Hongcai, deputy director of the Economic Policy Commission of the China Association of Policy Science. While reasonable levels of inflows could be beneficial to China as it attempts to open its financial sector, they should not be allowed to trigger sharp yuan rallies, Xu said.

The trade surplus is likely to moderate gradually as domestic demand recovers, Xu said, noting that the government has moved to boost consumption and the strong yuan would boost imports. GDP growth should reach 2%-2.5% this year and jump to 7% next year, based on growth of about 10% in Q1 and 7% in Q2, Xu said. The economy should be back to normal in five years, with growth slowing to about an annual 5% by 2025, he said.

China took a record-high 17.2% share of global exports in the second quarter compared with 13.9% in 2019, according to Oxford Economics. Zhu Baoliang, chief economist at China's State Information Center, said China's contribution to global trade will keep rising, and predicted that GDP growth would be about 5% in Q3 and 6% in Q4.