BEIJING (Reuters) – China’s exports contracted much faster than expected in May, while imports extended their decline as a bleak outlook for global demand, particularly from developed markets, raised doubts about a fragile economic recovery.

The world’s second-largest economy grew faster than expected in the first quarter thanks to strong consumption of services and a backlog of orders after years of COVID turmoil, but factory production slowed as interest rates and inflation squeezed demand in the United States and Europe.

Data from China’s customs office on Wednesday showed exports fell 7.5 percent year-on-year in May, much larger than expectations for a 0.4 percent decline and the biggest drop since January. Imports contracted 4.5%, slower than the forecast for a decline of 8.0% and a drop of 7.9% in April.

“Weak exports underscore that China needs to rely on domestic demand as the global economy slows,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “There is more pressure on the government to increase domestic consumption in the rest of the year, as global demand is likely to weaken further in the second half.”

In highlighting the extent of the vulnerability, the data shows that trade was even worse than when the port of Shanghai, China’s busiest, was closed due to strict COVID restrictions a year ago.

The numbers also add to a growing list of indications that China’s post-COVID economic recovery is rapidly losing steam, strengthening the case for more policy stimulus.

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Asian stocks fell into the red after the data and so did the yuan and the Australian dollar, a commodity currency very sensitive to fluctuations in Chinese demand.

China’s post-pandemic stock rally faded as small investors turned bearish on stocks and instead doled out on safer assets amid a faltering economic recovery.

The economy suffered a double blow from fluctuating demand at home and abroad, with repercussions felt in the region.

South Korean data last week showed that shipments to China fell 20.8% in May, marking a full year of monthly declines, with exports of Korean semiconductors down 36.2%, indicating weaker demand for components for downstream manufacturing.

China’s semiconductor imports fell 15.3%, as the consumer electronics export market that includes such parts declined.

Raw material demand weakened broadly as coal imports fell from a 15-month high in March, amid weak appetite from the power and steel sectors. Copper imports fell 4.6% in May from a year ago.

China’s official Purchasing Managers’ Index (PMI) released last week showed that factory activity contracted faster than expected in May.

PMI sub-indices also showed factory output swinging to contraction from expansion while new orders, including new exports, fell for a second month.

While economic growth exceeded expectations in the first quarter, analysts are now lowering their forecasts for the rest of the year, as factory production slows.

The government has set a modest GDP growth target of around 5% for this year, after sorely missing the 2022 target.

“Looking ahead, we think exports will decline further before bottoming out later this year,” said Julian Evans-Pritchard, head of China economics at Capital Economics. “Although interest rates outside of China are near a peak, the delayed impact from sharp interest rate increases is set to dampen activity in advanced economies later this year, leading to a mild recession in most cases.”

Reporting by Joe Cash; Editing by Sam Holmes

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