China's imports and exports fell much faster than expected in July as weak demand threatened the recovery prospects of the world's second-largest economy, increasing pressure on authorities to unleash new stimulus measures to stabilize growth.

The grim trade data reinforced expectations that economic activity could slow further in the third quarter, with construction, manufacturing and services activity, foreign direct investment and industrial profits all weakening.

Overall import and export analysis

Imports fell 12.4 percent year-on-year in July, below a Reuters poll's forecast of a 5 percent decline, after falling 6.8 percent in June, customs data showed on Tuesday. Meanwhile, exports contracted 14.5%, a bigger drop than the 12.5% expected and the 12.4% decline in the previous month.

Exports fell at the fastest pace since the outbreak in early 2020, and imports fell the most since January, when a new coronavirus infection caused stores and factories to close.

A CNBC analysis of customs data showed that China's exports to the United States fell 23.1% year-on-year in July, and exports to the European Union were down 20.6 percent. Exports to the Association of Southeast Asian Nations fell 21.4%, the data showed.

China's imports from Russia fell 8.1% year-on-year in July, the data showed.

Slowing growth in the U.S. and other major economies has dragged down China's exports this year. Meanwhile, China's domestic demand remains sluggish.

Analysts said that while the weak value of imports reflects weak demand, but also exacerbated the overall decline in falling commodity prices.

Most indicators of export orders point to a much larger decline in foreign demand than has been reflected in customs data so far," said Julian Evans-Pritchard, head of China economics at Capital Economics. "

"The near-term outlook for consumer spending in advanced economies remains challenging, with many economies still at risk of a recession, albeit a mild one, later this year."

Key Commodities

A handful of high-value export categories that grew substantially in the first seven months of the year included automobiles, refined oil products, and bags, suitcases, and similar containers.

On the import side, categories such as pulp, coal products, and edible vegetable oils saw significant year-over-year growth from January through July.

- Soybeans: July imports were 9.73 mmt, up 23.5% year-on-year; January-July imports were 62.3 mmt, up 15% year-on-year.

"The July soybean import data is not surprising. This year's Brazilian soybean harvest and export progress is lagging behind due to the weather, plus China Customs stepped up inspections of soybean arrivals earlier this year, both of which delayed peak arrivals.

Import figures for the remaining four months of the year are likely to taper off as Brazilian soybean sales are largely over and U.S. soybeans are not yet available."

- Crude oil: imports in July were 43.69 mmt, up 17% from a year ago, but down 18.8% YoY

"The year-on-year decline in imports was due to lower imports from three major crude oil exporters - the United States, Saudi Arabia, and Russia - which have reduced their exports in response to lower production targets and/or higher domestic demand."

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- Iron ore: imports in July were 93.48 mmt, up 2.5% YoY

"July imports (of iron ore) fell YoY in full line with our expectations as overseas shipments declined during the month. In addition, (Tangshan) environmental restrictions dampened demand. In addition, steelmakers remained cautious about imports. Purchases improved as margins improved only slightly during the month."

- Copper: imports in July were 451,159 tons, down 2.7% year-on-year

"The decline in imports was due to closed price arbitrage, with prices on the London Metal Exchange outperforming those on the Shanghai Futures Exchange, domestic production running at a higher rate, while imports from Africa have yet to increase significantly due to port logistics constraints."

China suffers from weak global demand

Although the Chinese government abandoned its strict "zero new crown" strategy late last year, many economic problems remain. The export-oriented economy is suffering from the current weak global demand, real estate market problems and low domestic consumption.

China's economy grew sluggishly in the second quarter as domestic and foreign demand weakened, prompting top leaders to pledge further policy support and analysts to lower their growth forecasts for the year.

Fitch said China's first-half exports fell 5 percent year-on-year despite a 10% year-on-year increase in cargo throughput in the second quarter and an 8 percent increase in the first quarter.

Xu Tianchen, senior economist at the Economist Intelligence Unit, explained that the overall import figures were lower than expected because "economists may have misinterpreted the price factor for commodities, which dominate China's imports."

"For example, China is importing more oil at lower prices, leading to an acceleration in the volume of crude oil in July, but a slowdown in imports. A similar logic applies to grains and soybeans."

In addition, geopolitical tensions related to U.S. technology sanctions against China are also putting pressure. Diplomatic tensions over chip technology and China's "risk reduction" intensified, with exports to the U.S., the largest destination for Chinese goods, down 23.1% year-on-year, and to the EU, down 20.6%.

South Korea's exports to China, a leading indicator of China's demand for global goods, fell 25.1% year-on-year in July, the biggest drop in three months.

Beijing is looking for ways to stimulate domestic consumption without unduly loosening monetary policy so as not to trigger massive capital outflows.

State planners said last week that stimulus measures were imminent, but so far investors have not been interested in proposals to expand spending on cars, real estate and services.

Foreign demand falls more sharply

The latest weak import and export data suggest growth may slow further in the third quarter. Declining activity in construction, manufacturing and services, falling foreign direct investment and declining industrial profits all contributed to this development.

Julian Evans-Pritchard, head of China economics at Capital Macro (Capital Economics), said: "Most indicators of export orders point to a much larger contraction in foreign demand than has been reflected in customs data to date. " "The near-term outlook for consumer spending in developed countries remains challenging, with many countries at risk of a recession later this year, albeit a less severe one."

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