• 2024-05-30
• News

Alarm: Big Division Behind Foreign Trade Recovery

Not long ago, the customs released the foreign trade data for the first half of the year, causing joy for some and sorrow for others.

The top city for foreign trade is no longer Shanghai, but a former small fishing village. Shenzhen, with a growth rate of 31.7%, has taken the lead in foreign trade among the top 30 cities.

The six central provinces show a significant divergence. Anhui continues to move forward steadily as always, while Shanxi has become a big dark horse. However, Jiangxi, Hunan, and Henan have taken the last three places in terms of the growth rate of total import and export value in the country.

The border provinces of Guangxi and Tibet have stood out. Guangxi has surpassed Chongqing to become the 12th strongest foreign trade province in the country, with exports of 191.8 billion yuan, which is the first time in history to exceed 150 billion yuan in the same period; Tibet's year-on-year growth rate is 132.4%, and its growth rate has continued to lead the country for six consecutive months.

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However, overall, the first half of this year can still be described as a year when millions of foreign trade practitioners were extremely busy, with orders overflowing.

According to customs statistics, the total value of China's goods trade imports and exports in the first half of this year was 21.17 trillion yuan, a year-on-year (the same below) increase of 6.1%. This is the first time in history that it has exceeded 21 trillion yuan in the same period, setting a new record.

Among them, external demand is significantly better than internal demand. Exports were 12.13 trillion yuan, an increase of 6.9%; imports were 9.04 trillion yuan, an increase of 5.2%; the trade surplus was 3.09 trillion yuan, an increase of 12%.

Looking at it by quarter, the second quarter was better than the first quarter, and the first quarter was better than the fourth quarter of last year, showing a clear trend of strengthening foreign trade scale quarter by quarter.

Looking at it on a monthly basis, the export data for June far exceeded expectations, with an expected growth of 7.4%, but the actual growth was 8.6%, reaching the highest level since April 2023. The trade surplus was 99.05 billion US dollars, a year-on-year increase of 42.4%, breaking the highest record set in July 2022, and once again creating history.

At the same time last year, exports had broken through several values.Why, after a year, has foreign trade seen a collective explosion? Why, under the overall trend of improvement, have some former strong provinces (cities) in foreign trade turned downward?

Behind the seemingly warm surface, the uneven distribution of heat and cold is precisely due to the changes in the rules of trade circulation under the great power game — who will engage in trade of intermediate goods, and who can control the "transit countries," will hold the key to wealth.

Behind the overall warming of exports, there is actually a more noteworthy signal: the recovery of global manufacturing.

In the future, the challenges for those in foreign trade will be greater.

In the first half of this year, China's largest trading partner remains: ASEAN.

This is the fourth consecutive year that ASEAN has been in the top position, and it is expected to be the same this year.

Is it because ASEAN's purchasing power is stronger than that of the old Europe and the United States? Of course not. In terms of total GDP, the combined GDP of the 10 ASEAN member countries can only rank fifth in the world.

The reason behind this requires everyone to pay attention to a concept: intermediate goods.

In recent years, ASEAN member countries, India, and Mexico are transforming into "transit countries," becoming a bridge for trade between China and countries across the ocean.

As Chinese companies move some production processes to transit countries, industrial or export transfers have also driven the export of corresponding intermediate goods.According to a report released by the Bank for International Settlements (BIS), since 2018, the trend of deglobalization in the industrial chain has not been significant, but the length of the industrial chain has been noticeably extended, meaning that intermediate trade has increased.

Let me give an example to clarify this for everyone.

Who is recognized as the world's leading clothing manufacturing country? Since 2010, our country's textile and clothing exports have consistently ranked first in the world, and it has always been the largest clothing supplier to the United States.

However, this year, Vietnam has surpassed China to become the largest clothing supplier to the United States and has joined the ranks of the world's three fastest-growing textile and clothing exporters.

But in reality, many of the clothes that Vietnam exports to the United States are imported from China!

Data from Chinese customs shows that in 2023, China exported textiles and clothing worth $49.97 billion to ASEAN countries, an increase of $17.72 billion compared to 2016. Among them, Vietnam accounts for 35.9% of the ASEAN market and 33.0% of the export increment, both ranking first.

So, after all the twists and turns, Uncle Sam on the other side of the ocean is still wearing clothes made from Chinese materials.

In this process, it is the "intermediate goods" such as clothing semi-finished products and textile raw materials that are playing a role.

So, what proportion of China's total exports do "intermediate goods" now account for?

Taking 2023 as an example, the export of intermediate goods was 11.24 trillion yuan, accounting for 47.3% of China's total export value, and their contribution to the increase in foreign trade was close to 60%.The largest "middleman" is none other than ASEAN. In 2023, China-ASEAN trade reached 6.41 trillion yuan, with intermediate goods trade accounting for 4.13 trillion yuan, which is equivalent to more than half of the trade being in intermediate goods.

This trend has been strengthening in recent years. According to the analysis by Su Qingyi and others from the Chinese Academy of Social Sciences, the growth fluctuation of intermediate goods trade between China and ASEAN is the most significant, with a 73% increase over five years.

In addition, the EU and South Korea also show an upward trend, while the United States and Japan are experiencing a decline.

Thus, the world has witnessed such a magical scene: as soon as ASEAN and other middlemen import intermediate goods from China, they process them and then sell the goods to Americans, resulting in impressive trade performance with the United States. The outstanding export performance of Shenzhen, Guangxi, Anhui, and Shanxi this year is inseparable from this.

So, the overall recovery of our exports, after all, is due to the increased demand from the other side of the ocean.

The rise in demand in the United States is due to the start of a new inventory replenishment cycle.

Over the past 30 years, the United States has experienced 8 complete inventory cycles, and in 7 of them, when the United States entered the end of destocking, the growth rate of imports from China would increase (whether directly or indirectly).

A report from Huachuang Securities shows that since the second half of last year, the United States has entered a passive destocking phase. From January to March of this year (the latest data updated to March), actual sales have fluctuated year-on-year, and actual inventory has bottomed out from 1% to 1.3% year-on-year.

That is to say, starting from the first quarter of this year, the United States may have entered the inventory replenishment phase.According to historical experience, the restocking cycle generally lasts around 8-12 months, so the restocking is expected to continue for at least half a year. Meanwhile, the tariff "race to the top" caused by elections across the ocean may bring disturbances of "import rush" restocking in the second half of the year.

Specifically, products such as mechanical and electrical equipment, electronic components (such as integrated circuits), textiles and garments, and furniture are more likely to benefit from this round of restocking.

A typical example is Shenzhen. In the first half of this year, Shenzhen overtook Shanghai with a growth rate of 31.7% and became the growth champion among the top 30 foreign trade cities.

The export of Shenzhen was driven by the above categories:

The export value of mobile phones, computers, and home appliances, the "old three items", was 142.29 billion yuan, with a growth of 20%;

The export value of electronic components was 113.36 billion yuan, with a growth of 31%;

The export value of labor-intensive products such as textiles and garments, and furniture also increased by 82.6%, to 158.62 billion yuan;

These performances are not inferior to the driving effect of the "new three items" on foreign trade.

What is more worth our attention in this wave of strong exports, apart from across the ocean, is actually the recovery of global manufacturing industry.Chief analyst Xu Chi and others at Zhongtai Strategy mentioned that the recovery of the manufacturing industry since 2024 has distinct characteristics:

- The PMI of manufacturing in Europe and America shows signs of improvement;

- Japanese manufacturing activity has expanded for the first time in a year;

- South Korean manufacturing has expanded at its fastest pace in two years;

- China also shows preliminary signs of rebound;

- The world seems to have entered a cycle of manufacturing expansion.

This also partly explains why in the first half of this year, our country's export products, machinery and electrical products as a whole increased by 8.2%, accounting for nearly 60% of total exports.

The underlying logic is that the economic construction of world powers is gradually shifting from a priority on efficiency to a priority on security.

For example, whether it was during his previous tenure or in his current bid for office again, Trump has been vigorously advocating for the revitalization of industry and manufacturing. He describes the Democrats as "only seeing self-interest and money games, ignoring the tears of American workers and the sighs of farmers," and he is determined to "lead the United States out of the quagmire and restore the glory of industry." He believes that only in this way can the global status of the United States be maintained.

Historical experience also tells people that a country's security requires the protection of industry, military, and manufacturing. The establishment and maintenance of American hegemony also rely on strong industrial and military strength.An article from "Li Xunlei on Finance and Investment" mentions:

In 1941, the Japanese Navy launched a surprise attack on Pearl Harbor, leading to the United States' formal entry into World War II. Relying on its formidable military production capabilities, a rich industrial base, and abundant resources, the U.S. was able to swiftly transition to a wartime production mode, mass-producing military equipment such as warships and aircraft. The United States rapidly mobilized its industrial and military forces, not only repairing the damaged fleet but also constructing a vast array of new military equipment, becoming one of the pivotal forces that altered the stalemate in World War II.

From this perspective, it becomes clear why in recent years, the loud voices from across the ocean are no longer about the "Wall Street style" of light assets and high profits, but rather a call for the resurgence of manufacturing and an anticipation for the reconfiguration of supply chains.

For us, in such an expansionary cycle, opportunities are also plentiful. As a global manufacturing powerhouse, China leads the world in production of 40% of the 500 main industrial products.

The expansion of manufacturing by world powers is bound to drive demand for upstream and midstream resource products, which implies that China's export of construction machinery, equipment, and non-ferrous resources will remain strong in the short term.

However, the shift in the development logic of Western powers from an emphasis on efficiency to a greater focus on security will also presage the strengthening of trade protectionism and the intensification of trade frictions.

In the future, the survival wisdom of those in foreign trade will be increasingly tested.

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