China: Trade imbalances and weak demand – Rabobank

Rabobank strategists highlight growing pressure on China’s trade model as US-led restrictions target links with Iran and Venezuela. They note China’s large trade surplus and weak domestic demand, with mixed Purchasing Managers' Index (PMI) signals suggesting either an exacerbated exportable surplus or mounting risks to the official growth target. Policy-driven barriers increasingly threaten China’s ability to export its way out of slowdown.

Export surplus and policy headwinds

"Combined with the US’s systematic shutting down of China’s low-cost energy flows from Iran and Venezuela, the promulgation of barriers to entry for Chinese goods is starting to look like death by a thousand cuts for China’s economy. Bessent yesterday pointed to China’s trade surplus equivalent to 1% of global GDP, saying that China is trying to export its way out of a problem of weak domestic demand. Official PMI figures released yesterday showed a slight improvement in China’s manufacturing sector but further deterioration in non-manufacturing, and both sectors remained below the threshold between contraction and expansion."

"Unofficial figures released today showed manufacturing expanding and at a faster rate than anticipated by surveyed economists. If that is a true reflection of what is going on, China’s problem with weak domestic demand and a large exportable surplus that needs to be soaked up by demand elsewhere is only exacerbated. If it is not a true reflection, even the export engine is seeing the walls closing in and the official growth target is in serious question."

"Even without US pressure, the realisation seems to be dawning that Ricardian comparative advantage isn’t actually a utility-maximising strategy when not everyone plays by the rules. Ursula von der Leyen recently said that if trade negotiations do not materially reduce the EU’s record trade deficit with China, the former will need to solve the problem via regulatory tools, including its famed ‘trade bazooka’ anti-coercion instrument. There are no free traders in a foxhole."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)