China’s worst fears come true, its exports have declined to a severe low

xi Jinping, china, Exports

Around two weeks ago, China held an annual meeting of the lower and upper house of the rubber stamp parliamentary body. The weeklong meeting, popularly known as ‘Two sessions’, is held one a year- unlike the parliament of other democracies, where legislators meet regularly- and the annual budget is presented during this meet.

The economic growth target set in the budget is the most significant feature of these sessions, as the Chinese government as well as the Chinese people take the GDP growth target very seriously.

Every year, the Chinese Communist government is under pressure to accomplish the economic growth target, as it signifies the Communist government’s efficiency. But in the sessions held two weeks ago, the government had not set the target for GDP growth- a first in many decades.

This was because the Chinese Communists feared that growth rate would be most likely in the negative territory, and any optimistic target would result in an embarrassment for the party in case the government couldn’t accomplish it.

As the data for the exports in the month of May were released, the Chinese government’s worst fear came true with contraction in exports, and imports falling to their lowest in 6 years. Imports declined by 16.7 percent on the worsening domestic demand, but the major problem for the Communist party is- the 3.3 percent decline in exports.

The contraction in imports for two consecutive months would actually help the country to increase its foreign exchange reserves, which already amount to around 3.1 trillion dollars. But, what the Communist government fears most is- decline in exports, as it shakes the fundamentals of China’s economic model.

China built its economy in the last four decades with a focus on one single factor- exports. With the help of exports economy, it became the second-largest economy in the world and gave employment to millions of citizens.

Today, China exports goods and services worth more than 2.2 trillion dollars, or 20 percent of its GDP. It is the largest exporter in the world, ahead of even United States (1.57 trillion dollars) – the largest economy in the world- by 600 billion dollars. The country built foreign exchange reserves worth 3.1 trillion dollars- more than the GDP of India in 2019, thanks to its export prowess.

In the last four decades, China established itself as a “factory of the world”, providing cheap labor to western countries for contract manufacturing. The entire growth story of China was built around cheap manufacturing and exports.

But, with the protectionist governments in power in countries around the world, the free movement of goods started decelerating, and China’s status as a factory of the world is under strain. The outbreak of Coronavirus, which originated from China, made the countries realize that doing business with a country like China, with the glaringly opaque system, is dangerous to humanity.

The most powerful countries have now come together under the leadership of Donald Trump, with a single aim- the restructuring of the global supply chain and weakening of China. In the last few months, countries around the world increased tariff on Chinese goods, and are incentivizing their companies to shut down manufacturing units in China.

Most of these companies are shifting to South Asian and Southeast Asian countries, which have labor cheaper than China and a huge market to cater to. The shift of companies would result in a decline in exports and millions of jobless people in China.

If the southward movement of exports goes on for a few years, it would create a huge risk for the macroeconomy as well as the political stability of the country. The authority of the Communist party derives from its ability to deliver economic growth- GDP grew in double digits in the last four decades- and prosperity to a large number of people in such a short span of time. Therefore, once the economic growth slows down with the fall in exports, the democratic movements would pick pace, and threaten the authoritarian Communist party. The signs of the worst fear of China coming true are already visible.

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