China's trade weakens to worst since first Covid lockdown as demand falls

China’s exports and imports both contracted at steeper paces in November as external demand continued to weaken and a worsening Covid outbreak disrupted production and cut demand at home. 

Exports in dollar terms fell 8.7% in November from a year earlier to $296 billion, the General Administration of Customs said Wednesday. That was the lowest level since April, when the lockdown of Shanghai closed factories, shut roads and stopped companies from putting goods on ships. 

The contraction was the biggest since February 2020 when trade was hit by the first Covid lockdown, and comes in a month when exports would normally be rising strongly ahead of the Christmas and holiday season overseas. The decline in imports also widened to 10.6%, leaving a narrower trade surplus of $69.8 billion last month, the data showed. 

“Weakening domestic and foreign demand, Covid disruptions and a rising comparison base lead to a perfect but well-expected storm to China’s exports and imports,” said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc. 

The worsening trade performance is undermining a strong pillar of China’s economy over the last two years, where the rise in exports to record levels have provided Chinese firms with stable demand, even as domestic spending has struggled due to a housing collapse from last year and then increasing Covid outbreaks and lockdowns this year. 

The government is now looking to loosen the Covid Zero policy to reduce its impact on the economy, but policymakers may need to add more stimulus. The Politburo, the ruling Communist Party’s top decision-making body, said it would seek an economic turnaround next year by pledging to keep fiscal policy active and monetary tools targeted and “forceful,” according to a readout of its latest meeting Wednesday.

The uncertainty in how much net exports will contribute to economic growth next year is why the Politburo “vowed to focus on expanding domestic demand and give full play to the fundamental role of consumption and the key role of investment,” Pang said.

Stocks in Hong Kong and China had a volatile morning session Wednesday. The Hang Seng Index was up 0.1% as of 11:45 a.m. while the onshore benchmark CSI 300 was lower by 0.2% before closing for a lunch break. The offshore yuan pared gains to trade 0.1% higher around 6.97 per dollar.

China’s economy likely slumped in November on a worsening Covid outbreak, a set of early indicators tracked by Bloomberg showed, and that may continue into this month if disruptions to movement and production continue. Economists now see the economy expanding by just 3.2% this year. 

External demand is set to continue weakening as the world economy slows and major economies hike interest rates to battle still-high inflation. In addition, competition from factories in Southeast Asia is rising as they return to a new post-pandemic normalcy, while China is still facing disruptions from virus control measures and outbreaks.

The fall off in demand has been seen clearly in the slump in the cost to ship goods from China, where prices are back at the level of mid-2020, before they spiked due to the surge in exports and the tangled supply chains of the last two years.