China’s Trade Falters as Demand Wanes at Home, Abroad Amid Rising Inflation

China’s exports and imports lost momentum in August with growth significantly missing forecasts as surging inflation crippled overseas demand and fresh COVID curbs and heatwaves disrupted output, reviving downside risks for the shaky economy.

Exports rose 7.1% in August from a year earlier, slowing from an 18.0% gain in July, official customs data showed on Wednesday, well below analysts’ expectations for a 12.8% increase.

Outbound shipments have outperformed other economic drivers this year but now face growing challenges as rising interest rates globally, inflation and geopolitical tensions pummel external demand.

“It seems the export softness arrived in earlier than expected, as recent shipping data suggests that demand from the U.S. and EU has already slowed as shipping prices have been falling significantly,” said Zhou Hao, chief economist at Guotai Junan International.

He expects pricing effects will continue to disrupt trade and said import growth in real terms had already turned negative since the late first quarter, suggesting more headwinds for demand.

The weakening yuan, which recently hit two-year lows, has not boosted China’s export growth, highlighting the subdued external demand.

The slower growth is in part due to unflattering comparisons to strong exports last year, but also worsened by more COVID restrictions as infections spiked and heatwaves disrupted factory output in southwestern areas.

Export hub Yiwu imposed a three-day lockdown in early August to contain a COVID outbreak, disrupting local shipments and delivery of Christmas goods amid the peak season.

Imports were again tepid, rising only 0.3% in August from 2.3% in the month prior, the customs data showed, and well below a forecast for a 1.1% rise. Both imports and exports grew at their slowest pace in four months.

The weak domestic demand, dampened by the worst heatwaves in decades, a property crisis, and sluggish consumption, crippled imports.

Global commodity prices continued to fall in August, though at a slower pace.

“The remarkably slower imports growth indicated the sector has faced a wave of headwinds in recent months, which is not expected to ease anytime soon,” said Bruce Pang, a chief economist at Jones Lang Lasalle.

“COVID outbreaks disrupted supply chains and demand, while the power rationing measures hurt production. The broad dollar strength also brings pressure on imports.” This left a narrower trade surplus of $79.39 billion, compared with a $101.26 billion surplus in July, which was a record for a single-month goods trade balance for any country in history.

Analysts at Goldman Sachs expect China’s large trade surpluses to sustain over the next few years but warned key risks are geopolitical tensions and substantially higher commodity prices over the medium-term.

Assistant Commerce Minister Li Fei said on Monday that China’s foreign trade faces unfavorable factors, including weakening external demand.

The central bank on Monday said it would cut the amount of foreign exchange reserves financial institutions must hold, a move aimed at slowing the yuan’s recent depreciation.

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