China export boom fades as spending shifts, cheaper rivals gain

The slump in demand for Chinese goods is a blow to the economy. PHOTO: AFP

BEIJING (BLOOMBERG) - After two years of record exports, Chinese manufacturers are turning downbeat as consumers in their biggest markets curb spending and Covid-19 lockdowns drive customers to competitors in the region.

With most of the world now living with the coronavirus and travel and other leisure activities resuming, consumers are cutting back on spending on Chinese-made laptops, phones and other work-from-home goods that propelled the nation's exports and fuelled the economy's recovery from its pandemic slump in 2020.

On top of that, soaring inflation in the United States and Europe means households are tightening their belts, while costs of raw materials and logistics remain excessive, eating into exporters' profits.

Those are just some of the challenges that businesses like Shenzhen Teanabuds Electronics have been grappling with. An exporter of wireless earbuds, headsets and speakers to the US, Europe and the Middle East, the company has seen orders plunge by about 50 per cent compared with last year.

"They will only continue to decline in the rest of this year because we are losing our advantage," said Mr Zhang Wanli, the company's global marketing director.

Some of Teanabuds' clients have recently shifted their orders to South-east Asian countries as suppliers there offered lower prices, given that their supply chains are less stressed, Mr Zhang said. High raw material and shipping costs have narrowed the company's profit margin to 15 per cent from 30 per cent in 2019, he added.

The slump in demand for Chinese goods is a blow to the economy, which is already forecast to grow at the slowest pace in decades this year due to a property market slump and the government's aggressive Covid-19-related restrictions.

After surging 30 per cent in 2021, exports are likely to grow just 1.6 per cent this year, according to Nomura Holdings. Exports accounted for more than a third of China's growth last year and 20 per cent in 2020, the bank estimates.

Trade will likely get a temporary boost as Shanghai reopens from its two-month long Covid-19 lockdown - economists expect data on Thursday (June 9) to show exports grew 8 per cent year on year in May, up from 3.9 per cent in April. Still, the trend for the rest of the year is down.

"The export boom caused by Covid is behind us," said Mr Larry Hu, head of China economics at Macquarie Group.

Exports may contract this year in volume terms even if nominal growth could be positive due to price increases, said Mr Thomas Gatley, a senior analyst at Gavekal Research. A drastic slowdown would put Beijing's economic growth target of about 5.5 per cent further out of reach.

"This is really not a good time for exports to weaken as well," said Mr Gatley. "This is why policymakers are increasingly panicking."

Even though global consumers remain cashed up, fading government fiscal support and rising interest rates are impacting their disposable income. And with shoppers pivoting their spending back to services from goods, demand is sliding.

Major US retailers like Walmart and Target are also sitting on inventories of US$45 billion (S$61.8 billion), up 26 per cent from a year ago, which they bulked up during the pandemic to overcome shipping delays. That means they are under no pressure to place new orders.

Guangzhou GL Supply Chain, which makes everything from gardening products like watering cans to tablecloths to Christmas-themed storage bags, says orders from US and European customers have declined by half from the same period last year.

Even products for the Christmas season are selling poorly compared with 2021, "perhaps because people have to spend more money on basic necessities" due to higher inflation, said Mr Chen Zijian, the sales manager.

"Last year, the pandemic was more serious," he said. "But we sold gardening products, and the business wasn't impacted much, perhaps because people stayed at home and gardened." Compared with last year, "our orders have declined quite a lot", he said.

Losing out

More broadly, analysts say that a shift in supply chains for cheaper manufacturing in South-east Asia is accelerating after a brief pause in the past two years. About 7 per cent of Chinese orders for furniture were lost to countries like Vietnam between September 2021 and March 2022, as well as 5 per cent for textile products and 2 per cent for electronics, according to an estimate by Everbright Securities.

That challenge is being compounded by elevated raw material prices and freight rates. The raw materials sub-index under China's producer price index surged 17.4 per cent in April, keeping costs elevated. The Shanghai containerised freight index is still at over four times pre-pandemic levels despite a retreat of 17 per cent so far this year.

Even those exporters that are doing well are worried about what's ahead as the Federal Reserve and other central banks raise interest rates.

Mr Hermann Zhai, general manager of Shandong-based Kinghike Vehicle, which exports electric golf carts to the US, is enjoying a surge in orders, thanks to more clients switching to electric instead of petrol-powered carts in the face of skyrocketing energy prices.

"I hope the measures the Fed is taking will be effective to contain inflation," he said. "If it worsens and becomes hyperinflation, that could damage our sales significantly."

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