The challenge for China in rebuilding export markets

HONG KONG - While much has been written about the growing dependence on Chinese-made products of consumers and national economies around the world, less attention is given to an examination of the dependence of the Chinese economy on offshore markets.

Nataxis, in a new analysis, makes the point that the importance of external markets for Chinese firms grew from 7% in 2013 to 11% in 2019 - and has since collapsed, especially for China's private-sector firms.

"While industrial output has improved in China after COVID-19 paralysed production, export orders are still sluggish, with positive April 2020 export data mainly explained by pent-up demand for parts and components which could not be sourced before," Natixis says.

"The Chinese Government has so far stepped up export-tax rebates as additional support, and firms have also addressed weak external demand by switching to the domestic market."

But 2019 had already seen China's export growth plunge into negative territory due to the US-China trade war, with the collapse in exports faster for state-owned enterprises (SOEs) and foreign firms than for private companies, Natixis says. These had held up "relatively well".

In 2020, all types of firms are suffering from lower export growth -- with a sharp decline in the private sector, which has become more important due to its surging market share, up from 39% in 2013 to 50% in 2019," Natixis says.

"From the sectoral view, semiconductors and information technology are the most affected, as 49% and 37% respectively of their total revenue came from overseas in 2019.

"Although these two sectors only constituted 8% of total revenue among Chinese listed firms, they generated 29% of overseas sales.

"That said, these two sectors may not look huge in equity indices, but remain important for Chinese exports.

"It should also be noted that semiconductors and information technology will probably be hit beyond the pandemic-related economic slowdown, because they are the target of US pressure on China's technological rise."

Natixis says there are sectors in China that may not be able to cushion "disappeared" foreign income with domestic demand unless there is a big fiscal stimulus.

It points to the automobile sector, which has suffered from negative growth in domestic sales for two consecutive years,as an obvious example.

"The structural problems in slower disposable income growth and front-loaded demand due to subsidies are the key drags," Natixis says.

"With a low share of foreign revenue, it seems possible for some Chinese firms to switch to domestic demand, but only for short-term relief.

"Private firms, especially in the semiconductor and information technology industries, will be hit hard, not only because of their higher share of overseas sales but also tough pressure from the US."

Natixis says external demand is still vital for a full rebound for sectors with a high reliance on foreign sales.

www.nataxisresearch.com (ATI).