A Word on China's Gangbusters July Exports

Chinese exports soared 7.2% y/y in July, shattering expectations for a -0.6% drop and beating June’s 0.5% rise.^[i] We would love nothing more than to write about how this is a stellar sign of rebounding demand in post-lockdown America and Europe, and that is true to some extent, but a gut check is also in order. Not because we are pessimistic, but because we think investors benefit from taking a measured view of any and all available data.

As we write, China’s customs administration hasn’t updated its English language website with July data, and our trusty data software tools have only the headline results—not a detailed product breakdown. So much of what we say here relies on professional China-watchers. Universally, they point to strong global demand for tech-related goods and components, which probably stems at least partly from people continuing to beef up their work-from-home setups. Shipments of personal protective equipment (masks and gowns) were also strong, though analysts noted demand in this category has tapered off lately. So yes, the West’s virus-related misfortunes did boost Chinese exports to an extent, but they probably don’t deserve credit for the surprise.

More telling, in our view, is the geographical breakdown, because Chinese exports weren’t strong worldwide. Shipments to the EU fell -3.4% y/y.^[ii] Exports to Japan? Down -2.0% y/y. Shipments to India fell a whopping -21.2% y/y. Closer to home, exports to Hong Kong rose a respectable 6.6% y/y, and exports to Taiwan rose 3.9%. But exports to the US rose—wait for it—12.5% y/y. That seems like a weird outlier until you consider the geopolitical backdrop, which included tough talk from both of November’s presidential candidates, embassy closures and other sabre rattling. This strongly suggests businesses were trying to front-run their collective fears of new tariffs and sanctions, in essence pulling late-summer and early-autumn demand into July. As a result, whether or not the US or China backs their recent words with new policy, we would expect July’s surge to be a one-time (or close to it) event, with exports tapering off later on.

On the bright side, these geopolitical matters have dominated headlines for weeks, sapping their surprise power for investors, in our view. Expectations on this front are also quite low, which should set a rather easy bar for reality to clear. Moreover, we think there is a lot of evidence markets are looking far beyond the here and now—beyond China sabre rattling as well as all things COVID—and weighing corporate earnings over the next year, two or three. So how China policy evolves over the next several weeks is probably not terribly relevant for markets, for better or worse. What we think matters more is that, further out, we will likely have reached a point where the world has learned how to live with the virus, enabling global commerce—including China trade—to continue apace and overcome the small obstacles politicians occasionally throw in its way, as it did throughout the Trump administration’s tariff adventures.