China’s Export Growth Deceleration Points To More Support For Yuan

AUGUST’S SLOWER THAN expected growth in China’s exports is another sign that the economy’s recovery is losing what little traction it had.

More policy support is likely as a consequence.

Exports grew by 7.1% last month year-on-year in US dollar terms, according to the General Administration of Customs, the slowest since April and almost half the expectation of private economists.

As much as half the growth was accounted for by higher prices, on some estimates, implying the growth in the volume of exports was even weaker than the headline number.

Imports grew 0.3% in value, down from an increase of 2.3% in July, also well below expectations.

Domestic factory output in August also contracted for a second consecutive month due to power cuts and lockdowns in response to worsening Covid outbreaks.

At the same time, weakening global demand is lessening the demand for China’s exports in most of its major markets, except Russia (up 26.5% in August, year on year).

Weaker exports will weigh on the yuan, which is close to breaching seven to the dollar, despite intervention by the People’s Bank of China.

A depreciating currency would be a boon to struggling exporters but not to domestic consumer businesses such as food and retail companies that have to bear the cost of rising commodity imports.

President Xi Jinping will be well aware of the impact on Chinese citizens as he prepares for an unprecedented third term. That implies further currency intervention as well as other measures to stimulate the economy.

China’s Trade Picks Up As Lockdowns Ease

Daily throughput at Shanghai’s container port returned to 95.3% of normal levels in late May, even as China’s commercial capital remained under its two-month lockdown. That goes part of the way to explaining May’s rise in exports, up 16.9% year-on-year that the General Administration of Customs announced today, a marked improvement on April’s 3.9% growth.

Imports rose by 4.1% year-on-year in May, after being flat in March and April, but still a weak pace reflecting the broader second-quarter slowdown in China’s economy as lockdowns suppressed economic activity.

News that the Biden administration is looking to ‘reconfigure‘ tariffs on Chinese imports into the United States to help reduce inflation will boost Chinese exporters but insufficiently to offset the headwinds of slowing global GDP and trade entirely.

Import growth will also remain modest, even as lockdowns ease and authorities provide further fiscal and monetary stimulus to support the domestic economy.

However, lockdown easing is not the same as lifting. New measures were announced for one Shanghai district today and it looks, nationally, as if the country’s anti-virus infrastructure is continuing to be built out so that mass testing and quarantines can be sustained through 2023.

During his inspection tour of Sichuan, President Xi Jinping called for unwavering adherence to its zero Covid policy while at the same time striking a balance with the needs of the economy. His grouping of economic recovery, pandemic outbreak suppression and maintenance of social stability as co-objectives for officials particularly caught this Bystander’s ear.

China’s Export Slowdown Foreshadows Slower Second-Half Growth

EXPORTS REMAIN THE engine of China’s economic recovery, but July’s trade figures suggest their pulling power is easing off.

According to the Customs Administration, exports grew by 19.3% in dollar terms in July from a year earlier, while imports rose 28.1%, boosted in part by the purchase of 25 airliners.

Consensus forecasts had been for a 20% increase in exports and 33.3% in imports. The larger rise in import values reflected higher global commodity prices for iron ore, crude oil, and steel.

Gradual easing of Covid-19 related restrictions around the world and vaccination programmes in advanced economies had supported global demand for Chinese exports in the first half as economies reopened.

A resurgence of the pandemic through the Delta variant has put a brake on that and threatened new bottlenecks in Asian supply chains that were just getting cleared.

Three consecutive months of contraction in manufacturers’ export orders shown in purchasing managers surveys suggest that trade growth will continue to slow into the second half.

Slowing growth to the economy overall in the second half is likely to lead to more official support, albeit on a relatively small scale. Otherwise, the official full year GDP growth target of ‘above 6%’ may be at risk.

Strong Monthly Trade Figures Herald Full-Year Growth

CHINA’S IMPORTS IN September hit their highest levels since the trade war with the United States started in 2018. At $203 billion, imports were up 13.2% year-on-year last month, the General Administration of Customs announced.

Part of that was soya bean imports to help meet the targets of the US-China trade deal signed in January. Imports from the United States overall rose by 24.7% in the month year-on-year. Part of it was also semiconductor stockpiling ahead of Washington imposing further restrictions on the sale of US chips to Chinese companies. Taiwanese, South Korean and Japanese chipmakers were also beneficiaries.

However, part of it was demand for industrial commodities, helped by an appreciating yuan, but also confirming the recent improving industrial activity data and anecdotal reports of the recovery of domestic consumption gaining traction, as evidenced by rising car sales.

Exports, too, were brisk, up 9.9% in dollar terms (8.7% in yuan terms), with demand from abroad for consumer electronics joining that for personal protective equipment and other healthcare products.

As always, this Bystander cautions against reading too much into a single month’s figures. Another turn for the worse in US-China trade relations or the resurgence of Covid-19 in Europe remain potential pitfalls. The slight moderation in the pace of export growth in September from August is a reminder of that. Similarly, China’s share of world trade hitting a new high is because export production elsewhere remains depressed by the pandemic.

However, there does feel to be momentum to the recovery. Third-quarter GDP data due to be released on October 19 should point to China being on track to be the only G20 economy to grow this year.

China’s Trade Gets Ahead Of The Economy

THE LATEST MONTHLY trade figures are a bit of a mixed bag when it comes to drawing broader lessons from them. As our chart above shows, the import and export numbers have different tales to tell.

China’s exports jumped a larger-than-expected 9.5% year-on-year in dollar terms in August, the third successive month of increase and the highest rise this year to date.

Given that most of Chinese exporters’ markets are still in Covid-19-induced recession, it is highly unlikely that global demand rose by anything like the same amount so that pace would be unsustainable until world trade normalises. Backlogs and suppressed demand are more likely the cause of the current uplift. Exports of medical supplies, including personal protective equipment, and electronics goods needed for working at home were also notably up.

China’s trade surplus with the United States rose to $34.2 billion in August, its highest level since November 2018, despite the US-China Phase One trade deal signed in January intended to reduce the surplus. The agreement calls for China to buy $200 billion of US goods and services in 2020-21 over and above 2017’s levels.

The Petersen Institute for International Economics tracker shows imports from the United States running well below the levels needed to be on track with the commitment. It counted, as of July, US exports to China of the products covered by the agreement worth $48.5 billion this year, compared with a prorated year-to-date target of $100.7 billion.

The 1.8% rise in US imports in August will not take much of a bite out of that gap. The target, however, is not annual but covers two years, so there is time for Beijing to catch-up — or perhaps change the terms of the deal with a new US administration, should November’s US presidential elections produce one.

Imports overall in August, fell by 2.1% in dollar terms, confirming earlier data that domestic demand remains weak. State-supported industry benefitting from stimulus measures is driving the recovery. That has yet to work through to retail consumption.

Coronavirus Hits China Trade

ANOTHER ECONOMIC INDICATOR has landed underlying the impact of the coronavirus SARS-CoV-2 on the economy, and why limiting the damage is becoming such a priority for Beijing.

Exports in the first two months of the year fell by 17.2%. Imports were down by 4%, implying that while raw materials were still coming in, the interruption to factory production and transport had prevented much being done with them.

Trade data for January and February should always be interpreted carefully as the Lunar New Year brings seasonal distortions. This year, the holiday was extended because of the outbreak. Nonetheless, the direction of travel for the economy seems clear and reinforces the grim message of the manufacturing purchasing managers’ index for February.

Imports from the United States rose, by 2.5% in the two months, suggesting some effort to fulfil the stipulation of the Phase One trade deal with Washington that China will buy $200 billion more US goods and services than it did in 2017. The public health emergency has made meeting that target even more of a stretch than it already was.

The question now is the pace at which demand will recover, both domestically and internationally. For China generally, if not necessarily Wuhan, the epicentre of the outbreak, and surrounding Hubei, there is a glimmer of optimism that the worst is past, with reported new cases of Covid-19 slowing. That is less so for the rest of the world as the virus continues to spread internationally.

Last week, the Ministry of Industry and Information Technology said that less than one-third of Chinas’s small and medium-sized businesses, which employ four out of five workers, had returned to normal operation.

A raft of measures to support such businesses, from the big state banks making available emergency working capital to pushing back tax deadlines, has already been introduced. Policymakers will be preparing to announce further stimulus, with employment a focus. The first-quarter GDP figures are due to be published in mid-April, so more measures are likely before then to ensure that number does not dent confidence in the Party’s economic management.

Trade Figures Bring No Cheer To Trade War

THERE IS NOT much comfort to be drawn from the latest monthly trade statistics. The 4.4% year-on-year fall in exports for December to $221.25 billion, and 7.6% decline in imports to $164.2 billion were the opposite of the increases on both sides of the ledger that had been expected. The increase in the trade balance, to $57.1 billion from $44.7 billion last month, is just the result of the arithmetic.

The trade dispute with the United States appears to be starting to bite after several months of front-loading of orders to get ahead of tariffs, but there have been plenty of straws in the wind suggesting the economy is slowing, from the first fall in annual car sales in two decades to Apple’s warnings about slumping iPhone sales.

The question is whether this will make the need to strike a trade deal with the United States by the March 1 deadline self-imposed by Presidents Xi Jinping and Donald Trump  more pressing on Beijing’s part. Or will it stiffen the resolve of the leadership to tough it out, knowing that it can only make superficial concessions unless it is willing to make structural changes that it will not?

It may also judge that a slowing global economy and jittery equity markets worldwide impose pressures of their own on the US administration, which has plenty of domestic distrctions of its own right now.

Vice Premier Liu He, Xi’s point man on the trade talks with the United States, is due in Washington before the end of the month. He might arrive with a willingness to make some big-ticket purchases to cut the headline number for the trade surplus with the United States (2018’s was the largest in a decade) and some token concessions on greater market access for US firms. Last week, the sherpas preceding his visit made some if unspecified progress on both fronts.

However, he is unlike to bring significant concessions in the contentious areas such as intellectual property and Beijing’s support for state-owned enterprises. The slowdown in China’s economy may more likely encourage Washington’s China trade hawks to believe that they need to continue to until he does.

China Trade Does America A Service

US PRESIDENT DONALD Trump lambasted cheap Chinese imports for destroying American jobs when he was on the campaign trail last year.

A National Bureau of Economic Research working paper by Robert Feenstra of the University of California, Davis and Akira Sasahara of the University of Idaho, which  recently came across our desk though published in August, suggests the damage may not have been as extensive as previously thought once the gain in jobs from US exports to China are taken into account.

Looking at the impact of trade on employment in the United States from 1995 to 2011, the authors say:

For merchandise exports and imports from China, we have found added demand of 3.7 million jobs and reduced demand of 2.0 million jobs, respectively, giving a net gain of 1.7 million jobs.

Including services trade, Feenstra and Sasahara count a much larger net gain of 4 million jobs.

Different modelling approaches give some variation of results, showing that in merchandise trade the net job gain from the China trade could have been as low as 730,000 jobs or as high as 2.7 million and for trade in all sectors from 4 million to 5.1 million jobs. But all show a net gain in jobs.

At least some of that growth will have been as a result of China’s growth stimulating global growth and thus world trade.

Previous studies have estimated that since China’s accession to the World Trade Organization in 2001, unleashing the ‘China shock’ on world trade, Chinese imports accounted for one-quarter of the decline in U.S. manufacturing employment and have contributed to the unusually slow employment growth following the 2008 financial crisis.

Imports from China — or anywhere — else have twin effects. They create import competition and labour-market dislocation, but also benefit domestic consumers through lower prices. Trump concentrated on the former.

But what Feenstra and Sasahara highlight is the importance of services in the United States’ global trade. Thus Trump’s emphasis on restoring manufacturing jobs, if politically salient, is economically misplaced.

China Uncooks Its Trade Books

That China’s reported trade figures are, to put it mildly, a bit dodgy will come as no surprise. The 21st Century Business Herald has put some numbers on those suspicions.

Quoting commerce ministry sources, the paper says that $75 billion of fake invoicing covering the months of January to April have been uncovered. That is sufficient to change the export growth for that period to 7%, against the 17.4% reported and to cut the corresponding imports number to 6% from the reported 10.6%.

The fake invoicing was part of a scheme by some Chinese companies who were cooking their order books in order to get funds to speculate on the appreciation of the yuan against the dollar. In short, they were disguising hot money as trade payments. This was done by parking goods in Hong Kong and booking them as exports so they could get forex  loans from the banks, or in some cases, it is now clear, by just creating phantom export orders.

Authorities cracked down on the practice in May. The $75 billion figure has been derived by applying May’s trade growth rates to the previous four months for China’s special customs regulation zones, the bonded warehouses in places like Shenzhen on the border with Hong Kong.

Treat China’s January Trade Figures With Optimistic Caution

Caution should be exercised in interpreting China’s newly published trade and inflation figures for January. Next week’s New Year holiday will have caused distortions. Importers and exporters will have tried to get as much business as possible done before work stops for the holiday. In addition, the timing of the festival, which fell in January last year but this month this, will have made year-on-year trade growth appear stronger and inflation weaker. A clearer picture will appear after February’s trade and inflation figures are published in March and the first two month’s numbers can be compared in aggregate.

With that those caveats, on the face of it, the numbers suggest that the calendar year has started with solid growth both in China and abroad. Exports rose a greater than expected 25% from a year earlier, the fastest pace since April 2011, and up from 14.1% in December. Imports increased 28.8%, more than four-times December’s 6% rise. The boom in imports trimmed China’s trade surplus to $29.2 billion in January, from $31.6 billon a month earlier. Inflation also receded, slowing to 2% from 2.5% in December, though food prices spiked.