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China needs to do something about its domestic demand and soon

Autor: Article based upon analysis from Reuters Breakingviews | Link: China’s foreign customers leave at worst time
Timp de citit: 2 minute

Would the Chinese Communist Party be ready to admit defeat and abandon zero-Covid policy in order to save the economy?

What about the embarrassment that could follow in reckoning that internal consumption is a too bigger deal to be ignored? And what if the economy, despite relaxing the Pandemic rules, is still in difficulty? These questions, although tough, have to be addressed sooner than later.

Chinese exports shrank 0.3% in October for the first time since May 2020.

Shipments to the United States and Europe fell 13% and 9% year-on-year, respectively, and imports fell too.

And that could mean more than something since exports’ contribution to annual growth rose to 1.7% in 2021, and its share of national output rebounded to 20%.

In July the People’s Republic recorded its highest surplus on record at $100 billion.

Practically, in March 2021 China’s share of world exports touched nearly 16%, a level not enjoyed by any country since the United States in the 1970s, according to Reuters.

But it seems that a softening demand in key U.S. and European markets finally took its toll. That sector alone had done much to offset weak domestic demand and tanking property.

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Now if foreign markets don’t do well, you have to turn inward. Except that China still has harsh Covid-19 controls that could accelerate a downward spiral if left in place.

These are the same controls that kept retail spending weak, as services and manufacturing activity slump.

At the same time, a sliding retail market brought a serious negative impact, since it comprises about a quarter of the Chinese economy.

Maybe October figures are just an isolated case. After all, China’s export sector proved its strength throughout the Covid-19 pandemic.

Especially its supply chain. Despite U.S. tariffs and darkening relations with Western trading partners, foreign consumers kept buying Chinese goods.

Overseas sales’ contribution to growth was flat or negative in the years before the outbreak. But the pandemic showed how important offshore markets can be.

Now, for the economy to keep on going, domestic consumption must be revived.

It has suddenly become a struggle between the Chinese officials’ ambition to continue with Covid-19 lockdowns, and the country’s need to increase the business investment appetite.

The outcome has to please both sides, but such an idyllic scenario has no real ground.