China’s geopolitical balancing act

As such, ANZ Research expects China’s trade surplus to narrow to $US238 billion or 1.2 per cent of gross domestic product (GDP) in 2022, 35.2 per cent of the historical high level of $US676 billion in 2021. Correspondingly, ANZ Research has revised down our forecast for China’s current account to 0.7 per cent of GDP in 2022 from 1.4 per cent prior.

“The crisis could lead to downside risks to China’s trade balance.”

With external risks rising in the near term, China could release some strategic oil reserves to alleviate pressure from rising energy prices. The government has also offered to cut taxes to reduce cost pressures for local manufacturers.

Commodity inflation

The Russia-Ukraine conflict has led to a global surge in commodity prices. ANZ Research’s commodities analysts have revised up forecasts for Brent crude futures to $US125 per barrel in the first quarter and $US130 per barrel in the second quarter. This represents a 52.7 per cent year-on-year rise in oil prices compared with 63.4 per cent growth last year. The rally in commodities was the main reason behind China’s overall import growth in 2021.

China’s imports are closely correlated with global oil prices. According to ANZ Research’s calculation, every 1 percentage point change in Brent oil prices is associated with a 0.25 percentage point change in China’s import growth. About 60 per cent of China’s roughly 30 per cent total import growth in 2021 was due to price effects. According to ANZ Research’s estimates, price effects could contribute 12-15 percentage points to China’s import growth in 2022. Accordingly, ANZ Research expects China’s imports to register double-digit growth this year (22.6 per cent year-on-year). Although this is lower than the 30 per cent growth registered in 2021, it is still the second-highest import growth recorded in the past decade.

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Growth shocks in China’s major trading partners

China-Russia trade flows are small and only account for 3 per cent of the former’s total imports and 2 per cent of total exports. China-Ukraine trade flows are even smaller, at 0.3 per cent of China’s total trade. However, the crisis could lead to a broader slowdown in the global economy, especially in European economies.

The EU is China’s second largest export destination, accounting for roughly 15 per cent of the latter’s total exports. Exports to the EU contributed 16 percentage points to China’s export growth in 2021, the lion’s share. Statistically, the EU’s economic growth has a high correlation with China’s total export growth. If the EU’s GDP growth slows by 1 percentage point, it will drag China’s total export growth lower by 0.3 percentage points. In view of ANZ Research’s recent downgrade of the EU’s GDP growth forecast to 2.9 per cent from 4.4 per cent, the slowdown may reduce China’s export growth by 0.45 percentage points.

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Supply chain disruptions

The Russia-Ukraine crisis has also worsened the global shortage of semiconductors, on which China is heavily reliant for its electronic exports (including electronic parts and machinery exports). The export of electronic items contributed 17.1 percentage points to China’s roughly 30 per cent year-on-year total export growth in 2021. Ukraine plays an important role in the global semiconductor supply chain as it provides purified rare gases such as neon and krypton, both essential in making semiconductors. Ukraine also produces precious metals used in chipmaking, smartphones and electric vehicles. Some international manufacturers have signalled the risk the Ukraine crisis will lead to higher prices and production outages.

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Having said that, ANZ Research had turned less optimistic about China’s export growth in 2022 even before the Ukraine crisis because the uptrend in global semiconductor sales and China’s irreplaceable role in global supply chain, two major drivers of China’s historically high export growth, may not continue in 2022.

Global semiconductor sales, which are used as a proxy for China’s electronics exports, are expected to moderate in 2022. According to the latest estimate by the World Semiconductor Trade Statistics (WSTS), global semiconductor sales growth will ease to 8.8 per cent year-on-year from 26.2 per cent year-on-year in 2021, signalling a retreat in China’s electronic exports.

As more countries start to remove mobility restrictions amid increased vaccination rates, and local production capacities come online, we expect demand for China’s exports to ease. China’s quick rebound from the pandemic during2020-21 was mainly due to its competitive advantage in the global supply chain. On a two-year compound growth basis (to remove the low base effects during the pandemic), China’s export growth surpassed that of its Asian peers like India and Vietnam for the first time in the past 15 years. However, this stellar performance may not be repeated this year as other countries gradually resume local production. ANZ Research expects China’s total export growth to significantly slow to about 5 per cent year-on-year from nearly 30 per cent in 2021.

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Smaller trade surplus points to the need to secure domestic growth

As a result, ANZ Research expects China’s trade surplus to narrow to $US238 billion in 2022, only 35.2 per cent of the size in 2021. This is equivalent to 1.2 per cent of GDP, the lowest since China joined the World Trade Organisation. ANZ Research also revised down the forecast of China’s current account to 0.7 per cent of GDP from 1.4 per cent prior.

The contribution from net exports to overall GDP growth may also decline to around 0.5 percentage points in 2022 from 1.7 percentage points in 2021, posing a bigger obstacle to achieving the government’s 5.5 per cent growth target.

With rising external risks in the near term including surging commodity prices and faltering global demand, Chinese policymakers could respond in two ways at least.

First, they can release some state reserves to smooth oil price volatility if needed. China has expressed such intentions even late last year. Second, policymakers will implement measures such as tax cuts or rebates to support the manufacturing sector. According to Premier Li Keqiang’s government work report, total tax cuts and rebates will reach as much as CNY 2.5 trillion in 2022, doubling the size in 2021. This will help reduce manufacturers’ cost pressures in an environment of rising inflation.

Betty Wang is Senior Economist at ANZ