Going forward, there are changes to mind in industry

Why Chinese exports grow

Since last year, the strong recovery in China's industrial sector is related to the ongoing gap between supply and demand in European and North American economies. On one hand, the expansionary policies in Europe and the US, alongside vigorous recovery packages for individuals, have kept total demand at relatively stable levels. On the other hand, the pandemic has disrupted the production and affected supply. As a result, overseas market demand is greater than supply, and Chinese exports continue to grow.

However, the supply and demand gap in overseas markets may narrow in the second half of this year.

First of all, as Europe and the US advance vaccinations in the second half, production and supply capacity will be restored. It is expected that in the second half, the labor force participation rate in Europe and the US will markedly increase－but this does not mean that the unemployment rate will decrease simultaneously－so that the supply and demand gaps in Europe and the US will be significantly reduced.

Take the US as an example. The year-on-year growth rate of its citizens' average disposable income in 2020 was 6.5 percent, the highest since 1989. With the rescue and relief policies, the willingness of individuals to get jobs has declined and the labor force participation rate has continued to decline.

However, as such personal assistance policies are set to expire in September, economic fundamentals in the US will basically return to normal, while the labor force participation rate will also rise significantly so that its supply capacity will be significantly restored and improved.

Second, on the demand side, the expansionary policies of Europe and the US cannot be as strong as last year. On June 24, US President Joe Biden expressed support for the bipartisan infrastructure framework and called on Congress to pass it. The infrastructure plan aims to invest roughly $1 trillion over the next five years, significantly less than the original plan of $2.3 trillion.

At the same time, due to the recent increase in inflationary pressure, monetary policies of many countries such as the US have also been caught in a dilemma to a certain extent. With the gradual and effective control of COVID-19 in major developed economies, macroeconomic policies are therefore returning to a more stable state.

Third, the recovery of demand in Europe and the US in the second half of the year will be mainly in the services sector rather than industrial products.

Still, taking the US as an example, with the strong recovery policies in 2020, services consumption expenditure in the country fell by 5.4 percent year-on-year－a record decline since the Great Depression in the 1930s－while personal consumption expenditure for durable goods and nondurable goods increased on a yearly basis by 5.5 percent and 2.1 percent, respectively. The growth rate of consumer spending on durable goods reached the highest level since 2004.

Once the pandemic is brought fully under control, the recovery of personal consumption will be mainly in services. And such a recovery will provide a rather limited boost to Chinese exports.

Fourth, the recovery of production in Europe and the US may have an impact on China's import-substitution production activities.

A typical industry in this regard is the automobile engine sector. In 2020, China's auto engine imports declined 30.2 percent, while auto engine exports increased 39.2 percent. Under such circumstances, import-substitution production activities in the industry were very obvious. The revenue of the industry was 233.7 billion yuan last year, up 19.7 percent from 2019, which was significantly better than the zero or negative growth rates seen since the data became available in 2018.

Profits from the auto engine sector increased 15 percent in 2020, which was significantly better than the performance of the previous two years. But as production resumes overseas, import-substitution and export activities will both be impacted.

China's share in global exports is currently very high, but it is inevitable that the share will fall in the second half or next year.

We need to stabilize domestic demand to provide a buffer against the decline in export growth in order to avoid impact on domestic economic stability caused by export fluctuations.

The author is a research fellow of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and director of the Research Department of the China Finance 40 Forum.

The views don't necessarily reflect those of China Daily.