When China moved to devalue the yuan on August 11, there was some debate about whether the PBoC was acting to promote renminbi internationalization (thus bolstering Beijing’s IMF SDR bid) or simply attempting to play catch up in the global currency wars.
When you’re the engine of global growth and trade and you’re an export-driven economy, just about the last predicament you want you find yourself in is a situation where your REER is appreciating by double-digits because you’re pegged to a surging currency (yes, that's right, sometimes a better "REER" is a bad thing). Add in the fact that your trading partners are engaged in a global currency war and you have yourself a decidedly untenable scenario.
So, China fired what was perhaps the loudest shot across the bow to date in the ongoing worldwide FX melee and indeed, quite a few analysts and commentators think we haven’t seen anything yet. The ubiquitous of “people familiar with the matter” think Beijing may be targeting a 20% devaluation by the time it’s all said and done.
Still, trillions in DM QE has failed to revive aggregate demand and indeed, lackluster global trade seems to be the new normal, and the weakness appears to be structural and endemic rather than cyclical and transitory. China’s hard landing is both a cause and a symptom of this and given that, it’s not clear that a deval of any size will be enough to jumpstart the Chinese growth engine.
Throw in the fact that declining purchasing power (for a citizenry that's already rattled thanks to social tension and an absurdly volatile stock market) invariably leads to import contraction and one might reasonably suspect that trade data out of China will disappoint for the foreseeable future even if the whole “let’s pray for terrible-er-er imports so the current account doesn’t look too bad” helps the optics.
Sure enough, we got the latest data out of China on Sunday and the numbers confirmed that i) the deval isn’t a cure-all, and ii) global growth and trade are collapsing.
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Here’s WSJ [19]:
China’s exports fell in October for the fourth consecutive month, as a once-powerful engine of the country’s growth continued to sputter in the face of weak global demand.
The world’s appetite for China’s goods—the world’s second-largest economy accounts for nearly one-fifth of global factory exports -- has been lower than expected this year. Meanwhile, weak domestic demand continues to reduce imports. Both are contributing to China’s growth slowdown.
Sunday’s results suggest the export scene is worsening. China’s General Administration of Customs said October exports fell 6.9% year-over-year in dollar terms, after a drop of 3.7% in September. The October figure was worse than the median 4.1% decline forecast by 11 economists in a survey by The Wall Street Journal.
Imports in October fell by a sharper-than-expected 18.8% from a year earlier, following a 20.4% decline in September. China’s trade surplus widened in October to $61.64 billion from $60.3 billion in September.
China’s Commerce Ministry said Thursday in a report that exports are likely to see little increase in 2015, while imports will likely report a “relatively big” decline as falling commodity prices continue to weigh on trade flows.
Exporters at the massive Canton Trade Fair in southern Guangdong province this month said the recent modest depreciation of the yuan has provided little relief.
“A lot of Westerners think this helped us out a lot,” said Chen Shuming, sales manager with Fujian Furniture Industry & Trading Corp. “But the 2% depreciation actually hurt us. It was in every newspaper and customers called us within hours pushing for 6% discount, so we had to give them 4%,” he said.
Right, which means the deval has forced exporters to meet buyers' expectations of what's coming next, even as it depresses mainland demand. Here's Goldman's take:
October export growth was below market and our expectations. Exports by destination data showed that yoy growth of exports to G3 all deteriorated: exports to the US contracted 0.9% yoy, vs. growth of 6.7% yoy in September. Exports to Japan fell 7.7% yoy in October, vs. -4.6% yoy in September, and exports to the Euro area went down 2.9% yoy, vs. -0.2% yoy in September. Exports to ASEAN declined 10.9% yoy, a particularly sharp reversal after a +6.0% yoy reading in September. Growth of exports to HK and Taiwan turned less negative: yoy growth of exports to Hong Kong was -17.4% yoy, vs. -23% yoy in September, and exports to Taiwan fell 6.6% yoy, vs -13.7% yoy in September.
Commodity import data were mixed. Iron ore import volume was down 4.9% yoy, vs +1.7% yoy in September. In value terms imports of iron ore were -32.7%yoy, vs -33.4% yoy in September. Refined petroleum product imports fell 53.6% yoy by value (-11% yoy by volume), vs -43.8% yoy in September (+9.2% yoy by volume in September). In contrast, crude oil imports were -45.2% yoy (but +9.4% yoy by volume), vs -49.9% yoy in September (+1.4% by volume).
Weak import data likely reflect both lower upstream (PPI) prices and sluggish domestic demand growth. Despite a fading of drag from pollution-related shutdowns in northern China and from summer market volatility, and more policy support, the evidence of a domestic demand recovery remains mixed. The shift of the focus of the anti-corruption campaign to the financial services industry, while undoubtedly justified and beneficial over the long term, may add some additional uncertainties to financial conditions in the near term.
And a bit more color from Bloomberg [20]:
China’s exports declined for a fourth straight month in October, adding to signs of mounting headwinds facing the world’s second-largest economy.
Overseas shipments dropped 3.6 percent in October in yuan terms, the customs administration said Sunday, compared with a 1.1 percent decline in September. Imports fell for a 12th straight month, declining 16 percent in yuan terms, after a 17.7 percent decrease the prior month. The trade surplus was 393.2 billion yuan ($61.9 billion).
“Chinese exports continue to face structural headwinds due to weak demand in key markets” such as the European Union and Japan, said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore. "Exports have also been impacted by the more recent growth slowdown in emerging markets, which had become fast-growing markets for Chinese exports in recent years.”
The report signals that the People’s Bank of China is still struggling against economic headwinds even after cutting the main interest rate six times in the last year, most recently in October, and a surprise devaluation of the currency in August. The economy grew 6.9 percent in the three months through September from a year earlier, the slowest quarterly expansion since the first three months of 2009, and full-year output is on pace for the weakest growth in a quarter century.
The latest data - to the extent it's accurate - underscores the notion that China's economy probably isn't growing at anywhere near a 7% clip, but nevertheless, the excess capacity problem means the country can't really adjust to the new global reality and that, in turn, means exported deflation. Case in point:
So get ready world, global demand and trade isn't going to witness a renaissance anytime soon which is horrible news for AsiaPac and for EMs in general. It also means that the global deflationary supply glut is set to persist for the foreseeable future which is precisely the opposite of what the Haruhiko Kurodas and Mario Draghis of the world want to see. So expect to see more of this...
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...and this...
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...and this...
