Chinese Trade Crashes, And Why A Yuan Devaluation Is Now Just A Matter Of Time
... and in a dollar-denominated cases, has even gone into reverse.
Nowhere has this trend been more visible than in the IMF's own admission that global trade, growing at 7% in 2011, has nearly halved its growth rate, and in 2016 global commerce is expected to rise at the slowest pace since the financial crisis.
Overnight we got another acute reminder of just who is lying hunched over, comatose in the driver's seat of global commerce: the country whose July exports just crashed by 8.3% Y/Y (and down 3.6% from the month before) far greater than the consensus estimate of only a 1.5% drop, and the biggest drop in four months following the modest June rebound by 2.8%: China.
It wasn't just exports, imports tumbled as well by 8.1%, fractionally worse than the -8.0% consensus, and down from the -6.1% in June as China's commodity tolling operations are suddenly mothballed.
Goldman breaks down the geographic slowdown:
- Exports to the US contracted 1.3% yoy, down from the +12.0% yoy in June.
- Exports to Japan fell 13.0% yoy in July, vs -6.0%yoy in June
- Exports to the Euro area went down 12.3% yoy, vs -3.4% yoy in June.
- Exports to ASEAN grew 1.4% yoy, vs +8.4% yoy in June
- Exports to Hong Kong declined 14.9% yoy, vs -0.5% yoy in June.
Slower sequential export growth likely contributed to the slowdown in industrial production growth in July. Weaker export growth is likely putting more downward pressure on the currency, though whether the government will allow some modest depreciation to happen remains to be seen.
As CA's Valentin Marinov summarizes:
"the collapse in exports seems to be driven by renewed weakness in the EU demand. Not great overall and highlights one distinct risk for the global asset markets we have been highlighting repeatedly of late. In particular, we were stressing the link between slowing global trade (both in manufacturing goods as well as commodities) and the recent sharp drop in central bank FX reserves. That drop should over time erode the sovereign demand for stocks and bonds. The resulting imbalance between supply and demand for global stock and bonds is still not fully reflected in equity risk premia (VIX is still quite law) as well as bond term premia (these are still low for the UST). A correction higher, presumably on the back of Fed liftoff, should weigh on a broad range of risk-correlated currencies."
All of the above, of course, is something Zero Hedgers have known since last November when we wrote "How The Petrodollar Quietly Died, And Nobody Noticed." More are starting to notice.
And while the above should not be news, neither should anyone be surprised that such ongoing trade collapse for the world's largest mercantilist, spells doom for the Politburo's 7% GDP target. From Bloomberg:
Along with weak domestic investment, subdued global demand is putting China’s 2015 growth target of about 7 percent at risk. The government has rolled out fresh pro-expansion measures, including special bond sales to finance construction, but has held off weakening the yuan as China seeks reserve- currency status.
“Exports are no longer an engine for China growth -- no matter what the government does, it’s just impossible to see strong export growth as in the past,” said Bank of Communications economist Liu Xuezhi. “It means additional slowdown pressure, and it requires the government to be more aggressive in the domestic market.”
So while one can repeat that the PBOC will have to lower rates again until one is blue in the face (even as out of control soaring pork prices make it virtually impossible for the local authorities to ease any more), the realty is that, as we warned in March, a Chinese QE is now inevitable. Why? Because while the government is already clearly buying stocks thereby validating the "other" transmission mechanism, the only thing the PBOC still hasn't tried is to devalue the Yuan. As global trade continues to disintegrate, and as a desperate China finally joins the global currency war, it will have no choice but to devalued next.
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