M UpdateChina Economics | Asia PacificTrade Stabilizing, Domestic Consumer Demand Remains Weak Imports and exports are both stabilizing, thanks to a better tech cycle and strength in commodity imports. But persistent consumer deflation pressure means an active rebalancing towards consumption is critical. Morgan Stanley Asia LimitedZhipeng CaiEconomist Zhipeng.Cai@morganstanley.com +852 2239-7820 Robin XingChief China Economist Robin.Xing@morganstanley.com +852 2848-6511 Jenny Zheng, CFAEconomist Jenny.L.Zheng@morganstanley.com +852 3963-4015 Chen KanEconomist Chen.Kan@morganstanley.com +852 3963-0975 Morgan Stanley appreciates your support in the 2024 Institutional Investor All-Asia Research Team Survey. Request your ballot here. Exhibit 1: Trade Summary TableDec-23Nov-23Oct-234Q233Q23Exports, YoY%2.30.5-6.6-1.3-9.9Exports, MoM SA, %0.80.2-0.30.2-0.2Imports, YoY%0.2-0.63.00.8-8.5Imports, MoM SA, %1.6-3.46.11.40.4Trade Balance (USD Bn)75.368.456.066.674.1 Source: China Customs, CEIC, Morgan Stanley Research. Quarterly data are monthly averages Exhibit 2: Imports inflected in July and have been on a recovery path in 2H23, led by commodities and tech processing trade110130150170190210230Dec-15Dec-16Dec-17Dec-18Dec-19Dec-20Dec-21Dec-22Dec-23Seasonally Adjusted Imports, USD Bn Source: China Customs, CEIC, Morgan Stanley Research Exhibit 3: Labor-intensive consumer goods exports further stabilized10,00015,00020,00025,00030,00035,00040,00045,0002005200620072008200920102011201220132014201520162017201820192020202120222023Exports of Labor-intensive Consumer Goods, seasonally adjusted, US$mnReversal of post-Covid market share gain has been largely completed Source: China Customs, CEIC, Morgan Stanley Research. Including clothing, textile, shoes, suitcases, and toys.Improving imports do not contradict an overall domestic demand deficiency: Imports inflected in July and have been largely on a recovery path in 2H23, led by commodities (amid gradual fiscal easing on infrastructure) and tech products (rising processing trade amid a better tech cycle). In fact, ¾ of the sequential improvement since July was driven by these two factors, pointing to still soft consumer demand.Exports have stabilized, but is unlikely a strong growth driver in 2024: Exports stabilized in 2H23 amid stronger tech exports and a slight improvement in labor-intensive consumer goods, in line with the exports performance of Korea and Vietnam. While competitiveness in the green supply chain and global consumer demand (resilient real income growth) can lend support to exports, an overall slower global growth (MS expects 2.8% in 2024 vs. 3.1% in 2023) means China's exports may grow at a modest 2% in 2024 (vs. -4.6% in 2023).More decisive easing needed to break the debt-deflation loop: Given today's inflation data, we estimate that 4Q23 GDP deflator may reach -1.3%Y (vs. -1.4%Y in 2-3Q23), marking the third quarter of deflation, the longest since 1998-99....
