Can China's strong export growth last in 2021?
By Wang Tao

Editor's note: Wang Tao is the chief China economist at UBS Investment Bank. The article reflects the author's opinions, and not necessarily the views of CGTN.

China's November exports far exceeded expectations. Export growth surged from 11.4 percent to 21.1 percent year-on-year in November. Both processing exports (2.2 percent to 16.8 percent) and ordinary exports (17.1 percent to 23.7 percent) rebounded notably. In particular, exports of electronics picked up pace visibly during the month, with shipments of cell phones jumping from minus 20 percent year-on-year previously to 29 percent, while that of LCD panels (20 percent), ADP machines (34 percent) and electronic ICs (26 percent) all accelerated by 10-16 percentage points from the previous month. The UBS tech team sees an upcycle for DRAM, expecting supply growth to trail demand in 2021 in the memory space. Meanwhile, exports of autos (15 percent y/y to 38 percent y/y against high base) and auto parts also gained strength in November. Shipments of consumer goods improved across the board as well, most notably toys (up 50 percent y/y), suitcases, furniture, and lamps, indicating strong holiday demand overseas, though exports of footwear softened.

Exports to the U.S., EU and Japan jumped sharply in November despite the worsening pandemic – by 17 percentage points to 32 percent y/y – contributing over half to the headline export growth improvement. In particular, exports to the U.S. surged 46 percent y/y, while those to the EU accelerated to 26 percent, both helped somewhat by a low base last year. This export strength is probably as a result a recovery in activities in the U.S. and EU in the fall before the pandemic worsened more recently. PMI readings and labor market indicators suggested improvements in Q3 and early Q4 before slowing more recently. In addition, a reduction in holiday travel and dining out might also have helped to divert more consumer spending on goods and for stay-at-home uses and the holiday season.

China has gained global market shares since Q2 2020

China has gained market share globally since Q2, especially in the EU and Japan. As it entered into and exited from COVID-19-related shocks and lockdowns earlier, China's production came back online quickly in Q2 and was able to meet global demand when the rest of the world was hit by the pandemic. As a result, China gained market share since Q2 after a notable decline in Q1. Its share of global exports increased to 16.7 percent in Q2 2020 (+3.5ppt y/y), before a modest retreat in Q3 to around 16 percent (+2ppt y/y).

Protective gear and stay-at-home demand were the main contributors. In the U.S. and EU markets, the biggest driver of market share gain has come from textiles and apparel (including masks and PPE) and electronics, which explained 2.4 ppt and 2.1 ppt out of overall market share gain of 5.3 ppt in Q2, respectively.

China's Asian neighbors also gained market share while Mexico and Canada lost. China's share of U.S. and EU imports picked up by 5.3ppt y/y to 23 percent in Q2, while those of Vietnam and South Korea also rose, by 0.6ppt and 0.4ppt, respectively. Market shares of Malaysia, Thailand and Indonesia also improved slightly. In contrast, Canada and Mexico lost market share by -2ppt y/y and -1.6ppt, respectively, in the U.S. and EU markets. These trends continued in Q3, though the difference in market share gains between China and other Asian economies narrowed, presumably as production resumption improved elsewhere in Asia. The divergence between China/East Asia and elsewhere may be partly due to better pandemic controls in Asian economies, and hence more supply chain resilience.

Can China sustain strong export growth in 2021?

Global demand may soften in the near term but is expected to recover strongly in 2021. Demand may weaken in the short term considering softer U.S. ISM and Eurozone PMI indicators in the face of a worsening pandemic situation and renewed tightening of mobility restrictions. This may mean weaker exports in the next couple of months. However, for 2021 as a whole, UBS expects global GDP growth to rebound to about 6 percent from an almost 4 percent decline this year, and see global industrial production rebounding from minus 5.8 percent to 6.2 percent in 2021. We thus expect global demand would also rise sharply overall next year as some pent-up demand is released and as activities and labor markets improve.

Work resumption in other economies may limit the upside of China's export rebound. In recent months, exports of other EMs, especially emerging Asia excluding China, have recovered rapidly, thanks to gradual activity normalization. For instance, Vietnam's export growth picked up to 10-11 percent y/y during July-November, so did the Taiwan region (6 percent in Q2 and 10 percent in October-November). Going forward, with the help of vaccines, we expect increased work resumption in developed and emerging economies alike (for example, textile and apparel industry in India and Bangladesh), which will likely create more competition for China's exports and cap the rebound. That said, vaccine distribution is likely to be gradual, especially in EM, and demand in DM may pick up faster than supply competition in EM in 2021.

Change in demand structure may also weigh on China's export growth in 2021. According to our analysis, anti-COVID and stay-at-home-related products have contributed to most of China's export growth and market share gain since Q2, especially in developed economies. Looking ahead, as the global pandemic is contained in 2021, especially in the U.S. and EU, demand for face masks and protective gear is likely to fall, and that for some small home appliances and electronics may weaken. In addition, as travel, dining out and related services spending recovers, consumers may reduce their expenditure allocated to goods. This may be especially true in the U.S., where UBS Economics expects a modest decline in consumer spending on goods and a significant increase in services. Such a change would also likely weaken Chinese exports to the U.S. in 2021.

Further yuan appreciation may also start to hurt exports in 2021. The yuan has appreciated notably since the end of May 2020, rising by 8.4 percent against the dollar and 3.6 percent against the CFETS basket. However, the appreciation had been more modest at the beginning of the year, and export orders have been stronger than expected partly due to production disruptions elsewhere. In 2021, we expect the RMB to face further appreciation pressures against a weaker dollar. Our forecast is for USDCNY trading at around 6.4 at the end of 2021 as China eases capital outflows, but the CNY may appreciate more in the course of the year. The strength of the CNY may bring some negative effects on China's exports, especially if other competitor currencies do not appreciate as much against the dollar.

Strong export growth but no market share gain in 2021

We think the expected sharp rebound in general consumer goods globally and an upcycle of the tech sector should more than offset the headwinds from improved work resumption elsewhere and a downturn in demand for protective gear and stay-at-home products. As projected earlier, we expect China's merchandise exports to rebound 11-12 percent in 2021, though it is unlikely to be the best export performer globally. China's export growth may be exceptionally strong in Q1 2021 thanks to a low base, and slow to low-to-mid single digits in the second half of the year. The downside of our baseline forecast mainly comes from a weaker than expected global demand rebound, a much sharper drop in pandemic-related products, a faster production resumption elsewhere, and a significant shift of DM spending away from goods toward services. While we expect China's export growth to recover to 9 percent in real terms next year, the risk is more on the downside, especially given the recent export strength.

(Cover: A view of a busy dock in east China's Shenzhen. /CFP) 

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