China trade defies Iran war drag as exports, imports beat estimates in May

China’s trade growth performed better than expected in May; because the increase in artificial intelligence-related exports helped protect the economy against disruptions caused by the Iran war.

Exports increased by 19.4% in US dollar terms compared to the previous year. Customs data shown on TuesdayAccelerating from the 14.1% increase in April. Economists participating in a Reuters survey had predicted growth at 15 percent.

The growth momentum in imports continued to increase; It increased by 27.4% in May, surpassing the 25.3% in April and exceeding economists’ forecast for growth of 25%. This increased the trade surplus to $105.4 billion in May.

In the first five months of this year, China’s import growth accelerated sharply, rising 24.5% year-on-year, and exports over the same period surpassing 15.5%. narrowing the trade surplus from a year ago.

The import growth was largely driven by higher input costs and narrowly concentrated in select categories, particularly semiconductor chips and gold, with “little signs of rebalancing,” according to economists at Bank of America Global Research.

“With overall demand weak and domestic substitution continuing, true trade rebalancing remains remote,” BofA economists said, adding that the export boom has reduced the urgency for meaningful policy stimulus from Beijing.

China’s economy showed signs of faltering after a strong first quarter. Growth slowed overall in April, with industrial production and retail sales posting their weakest increases in recent years. In May, the official indicator of manufacturing activity also slowed to 50, the threshold that separates growth from contraction.

Chinese exporters have so far managed to weather the effects of conflict in the Middle East; Overseas buyers are rushing to lock in supply before energy costs rise further. But economists warned that the wind could be short-lived; When the stockpiling momentum abroad decreases, stagnant domestic consumption will not be able to fill this gap.

“We expect the AI ​​boom to support manufacturing and trade,” said Xiangrong Yu, chief China economist at Citi Bank, as higher prices in technology and semiconductor products boost headline growth. “Domestic demand may indicate continued weakness,” Yu added.

Yu predicts that retail sales growth, a gauge of consumption, could fall to zero in May as the impact of exchange subsidies fades, further slowing from a three-year low of 0.2% in April.

The ever-weakening employment market has also increased pressure on consumer spending. “The number of manufacturing jobs continues to decline despite rising exports,” said Frederic Neumann, chief Asia economist at HSBC Bank, as productivity gains from automation reduce demand for workers.

The Chinese yuan’s continued strength this year has put some pressure on the country’s exporters, who have held large amounts of dollars over the years; because increasing foreign exchange losses began to put pressure on profits.

“China has delivered strong export growth this year despite global economic uncertainty and the appreciation of the renminbi,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, adding that strong export growth could strengthen policymakers’ tendency to delay meaningful stimulus until July.

According to LSEG data, the offshore yuan increased by 2.8% to 6.7802 against the US dollar this year, while the offshore yuan gained 3% to 6.7787. Both were little impressed following the release of trading data on Tuesday. CSI 300 index rose 0.6 percent.

China’s economy has developed in what economists call the “K-rate” growth paradigm; The boom in manufacturing and export sectors contrasts with persistent weakness in real estate markets and consumer spending.

Exports remain a bright spot for the world’s second-largest economy, driven by strong global demand for artificial intelligence technology and renewable energy products.

While demand remains weak, rising commodity costs due to disruption of energy flows across the Strait of Hormuz have helped ease deflationary pressures that have plagued the Chinese economy for years.

Economists expect the country’s producer inflation to rise to 3.8% in May, the strongest level in nearly four years, on Wednesday as manufacturers absorb higher input costs, according to a Reuters poll. Consumer inflation is expected to rise moderately by 1.3%.

According to Fitch Ratings, China, which held about 15 percent of global oil stocks before the war started, could deplete its oil reserves by the end of October if it had to reduce stocks to cover any supply shortfall.

“Although China’s stable energy supply acts as a buffer, the supply shock as a result of the energy crisis will still harm the Chinese economy due to shortages and high prices,” said Nomura China Economist Jing Wang.