Difficult macroeconomic conditions in China

China has experienced the biggest decline in its exports since 2020 with data showing exports falling by 14.5% in the 12 months to July 2023. Chinese imports also fell by 12.4%. This trade data highlights the challenging macroeconomic conditions the Chinese economy is facing.

Chinese exporters have been constrained on both the demand and supply side. The country’s exporting businesses have seen a significant decline in demand in the US and the EU. Exports to the US are down 23.1% and down 20.6% to the EU.

Many of China’s exporters are struggling to sell in these overseas markets because firms and households in the EU and the US are being constrained by rising interest rates, higher inflation and low consumer and business confidence.

On the supply side, Chinese export businesses have also been adversely affected by localised lockdowns that occurred last year in response to the covid19 pandemic. The lockdowns reduced manufacturing output in China and this adversely has affected the country’s ability to export.

Domestic macroeconomic conditions have also affected China’s trade from an import perspective.  Sluggish domestic consumption because of slow economic growth in the world’s second-biggest economy has significantly reduced the country’s imports. China’s economic growth over the last 12 months is 3% which is significantly below its long-term trend rate.

The decline in China’s imports and exports along with its slow economic growth are factors that have contributed to the country’s CPI index turning negative with an inflation rate of -0.3 % or deflation. Whilst China’s official unemployment rate is only slightly higher over the last 12 months at 5.2% its youth unemployment rate is an eye-watering 21%.

This recent macroeconomic data paints a picture of a country that faces serious economic headwinds which have implications for its citizens and also for the rest of the world economy.

Possible points to discuss with a class

1. How do exports and imports affect aggregate demand?

2. How does falling consumption in the EU and US affect Chinese exports?

3. Why might slow economic growth in China reduce its imports?

4. Why do you think the economic conditions in China might lead to deflation?