China's exports to keep cooling despite spike in heater sales to Europe and still-weakening yuan

China's export outlook appears muddled as the world's major economies brace for a global recession, while a weakening yuan and a spike in heater exports to Europe are doing little to boost orders at large.

China's appeal as being "highly investible" is also fading, and the trade boom it experienced in the past two years looks unlikely to continue.

As families in Europe weigh up how they will cope with winter temperatures amid an intensifying energy crisis, they have been buying large numbers of electric heaters and heated blankets from China.

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In the first eight months of this year, the number of heated blankets exported to the European Union, Britain, Iceland and Norway surged 62 per cent compared with the same period last year, while the number of heaters exported to the EU jumped 47 per cent, according to the Post's calculations using China's customs data.

But the orders of small household appliances are minute compared with the vastness of China's export industry and can serve to offset only a modicum of the dwindling demand momentum, experts say.

"Similar to what we saw during the pandemic, pockets of consumption resilience could provide a pillar of support to Chinese exports," said Nick Marro, lead analyst for global trade at the Economist Intelligence Unit (EIU).

However, European economies are now being constrained by tightened discretionary household spending, higher inflation, and likely shocks to routine factory operations and supply-chain disruptions, and the subsequent slowdown in business activity will dampen demand for many Chinese goods next year, Marro added.

A weaker Chinese yuan also will not significantly drive up exports, as the trade outlook is much more tied to global demand dynamics, rather than what is happening in currency markets, according to analysts.

The Chinese currency has continued to depreciate against the US dollar, with both the offshore and onshore levels breaching 7.2 on Wednesday, while the onshore level dropped to its weakest point since early 2008 and offshore trades hit a record low.

Although currency depreciation tends to have a positive effect on exports, the impact of demand tends to exceed that of price competitiveness, and the impact of a weaker currency on exports is only marginal as global demand weakens, said Louis Kuijs, chief economist for Asia-Pacific at S&P Global Ratings.

"More importantly, at the moment virtually all major currencies have depreciated against the US dollar, and many have weakened more against the [US dollar] than the [yuan] has. Indeed, in trade-weighted terms, China's exchange rate has not weakened much, if at all, this year," he added. "In the coming months, it won't be easy to offset the impact of slowing export demand and continued weak domestic demand."

China's export growth fell to 7.1 per cent in August, year on year, from 18 per cent in July, while exports to major trading partners all slackened last month.

The rapid fall in global freight rates also reflects the reduced demand, especially during what is supposed to be the peak shipping season before seasonal Western holidays.

According to Drewry's global container index, spot rates for sending a 40-foot container from Shanghai to Los Angeles fell to US$3,779 last week - half of what it cost three months ago, and 11 per cent less than it was a year prior.

Shipping agents and logistics companies across the country are lamenting their losses while fearing that the worst may be yet to come.

"We're expecting a recession in the EU next year, while the best case for the US economy is one of general stagnation," added the EIU's Marro. "We expect the global economy to be at its weakest state since the pandemic, reversing much of the recovery momentum" since the start of last year.

Wang Shouwen, China's vice-minister of commerce, conceded on Tuesday that the outlook for the next six months was not promising, while trade uncertainties abound as growth in major economies slows.

"The falling external demands are not just felt by Chinese companies; companies from Southeast Asia and other countries have also felt the decrease in orders and demands - this is the big backdrop for global trade," Wang said.

Hi-tech and high-value-added exports, meanwhile, continue to grow increasingly competitive, he said, citing a 57.6 per cent rise in automobile exports and 92.6 per cent increase in solar battery exports in the first eight months of this year.

In addition to the slowing external demand, the relocation of supply chains, especially those of low-value-added products, to countries with cheaper costs, such as in South and Southeast Asia, has also been a major challenge for Chinese manufacturers.

Zhang Zhiwei, chief economist at Pinpoint Asset Management, said that offshoring will not be a major concern in the near term, but the threat still needs to be fully acknowledged, and China must focus on enhancing its competitiveness and ensuring that its business conditions and environment are favourable for foreign investment.

"International business travel has become quite easy for foreigners to travel to, say, India and Vietnam, while it is still very hard for them to come to mainland China, and it has been like that for three years," he added.

Looking ahead, reviving private consumption and business investment will be key as export growth slows, but this in turn depends heavily on China's zero-Covid policy, which is one of the most consequential factors for the Chinese economy, said Marro with the EIU.

"Sudden lockdowns, transport suspensions and other supply-chain disruptions don't simply disrupt normal business operations, they also shatter consumer and investor confidence," he said. "Given everything else happening in the global economy, easing these restrictions would remove a largely artificial source of stress for China's manufacturing sector."

To expand its own demand, China needs to spend more on infrastructure to counter the dropping orders, said Iris Pang, chief China economist with ING.

"We have seen infrastructure expenditures going up, but they are not growing fast enough to address all of the economic pressure - from Covid, real estate incidents and slowing external demand."

Additional reporting by Ji Siqi

This article originally appeared on the South China Morning Post (SCMP).

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