Everyone was shocked by yesterday's Chinese March trade update which showed that while imports slid largely as expected, it was the 15% drop in exports, the largest in over a year, that prompted many to wonder just how big the global trade slump really is, masked by what has now become pervasive, global QE. This was the worst performance, exports and imports combined, since late 2009.
Based on the released breakdown, the weakness in exports was broadly based on all destinations: exports to the US went down 8% yoy in Mar (Jan-Feb avg. at +21% yoy); exports to Japan contracted 24.8% yoy (Jan-Feb avg. at -4.4% yoy); exports to the Euro area fell 19.1% yoy (Jan-Feb avg. at 12.6% yoy); and exports to ASEAN declined 9.3% yoy (Jan-Feb avg. 38.2% yoy). Exports to HK was down 18.3% yoy in Mar, (January to February on average, exports to HK contracted 5.6 % yoy). Breakdown by commodity also showed broad weakness: agriculture product export went down 18.1% yoy in March
As Bloomberg's Richard Breslow put it "they were open for business and nobody came to shop." The usual explanations didn't cut it - "didn’t we all know that Chinese New Year came late this year? Actually, it was right on time, but lunar calendars don’t remain static to solar ones. Whether you look at regions or products, the data were weak across the board."
Indeed, even Goldman admits that "when the Chinese New Year is very late as it was the case this year, February exports data would be distorted on the upside and vice versa for March data. But analysis of historical data suggests a fall from 48.3% in February to around 0% in March would be expected because of the timing of the festival, not the -15% yoy we actually observed."
The best way to strip away New year distortions is to look at Q1 data in its entirety and even that was ugly: looking this way, 1Q yoy exports growth was just 4.6%, down from 8.6% in 4Q. Qoq was -4.2% sa (non-annualized), much lower than the -0.7% qoq sa growth in 4Q.
Below is a selection of responses by Wall Street analysts trying to justify how - with global equities, if only in local currency terms, at all time highs - China can be doing so badly.
Goldman, Yu Song:
Although observers including the government may be at risk of over interpreting March data if they assume it is free of distortions, they nevertheless have legitimate reasons to be highly concerned about the trend of export growth and its impact on the wider economy.
As we highlighted in the latest Asia Economics Analyst, one of the key drivers of the slowdown in exports growth is the rapid appreciation of the CNY TWI since mid-2014 (the index has gone up by 13% during the period). Given the government is very eager to boost exports growth as can be seen from Deputy Prime Minister Wang Yang’s comment that “the government must take immediate actions to stop the falling trend in foreign trade growth and prevent such slowdown in growth from becoming a continuous speed loss”, it is likely that the exchange rate policy will be allowed to depreciate again after a period of brief rebound which started in mid-March, especially if the USD strengthens as our global team is forecasting. The massive fall in the level of March trade surplus to almost balanced level makes it easier to do this as well politically, particularly considering China is in the negotiations to join the IMF SDRs (though in Q1 as a whole, trade surplus is US$123.5 bn, vs US$17.6 bn in Q1 2014).
The weakness in import growth reflected continued weakness in domestic demand growth and muted import prices. Although the government has stepped up efforts to support growth, it takes time to show its effect on import data. We expect the government to continue to step on the accelerator in the rest of 2Q at least, until there are clear signs of growth recovery. This loosening package will likely include a combination of tools including lower RRR, exchange rate, market and benchmark interest rates, administrative pressures on local governments to take action (this can be seen from the latest visit by the Prime Minister to Jilin), and fiscal supports (faster expenditure allocation and more local government bond issuance). A sequential recovery in 2Q is very likely-- though yoy growth may not rise significantly because it is not clear if the magnitude of the sequential recovery will be able to exceed that during 2Q last year.
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Citigroup, Minggao Shen
This is the worst performance, exports and imports combined, since late 2009. So far this year, exports achieved 4.7% year-on-year growth and imports were down 17.6% year on year. That is weaker than the 6% and 0.7% respective annual growth in 2014. The strong yuan probably weighed on exports while weak imports were mainly driven by falling commodity prices, in our view. Despite much weaker exports, the trade surplus remained sizable for the quarter. The weak trade data in March represents not only monthly volatility but also adds uncertainties to economic recovery in the second half of the year, particularly when the base effect of commodity prices disappears.
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HSBC, Xiaoping Ma
Recovering external demand can't offset the impact of a strong Chinese currency on China's exports . The main reason behind the surprise drop in March exports is the yuan's recent strength. It normally takes between three to six months for changes in yuan rate to be reflected on exports. That helps to build up the expectations the yuan rate is going to remain firm in the near term. I think while the central bank is focusing on accelerating the opening of the capital account, it should also increase the flexibility of the yuan and reduce its interference in the market.
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ANZ Ltd., Li-Gang Liu and Hao Zhou
The extremely weak import growth suggests that China's first-quarter growth could have fallen to below 7.0%. We forecast China's economy to grow 6.9% in the first quarter 2015, possibly one of the lowest in six years. The yuan exchange rate strengthened somewhat in the past few weeks in spite of a strong US dollar. We believe that the yuan is likely to remain steady, leading up to the IMF's Special Drawing Rights review in May.... However, the weak trade data could add some uncertainty to the yuan exchange rate in the short term. We continue to see increasing volatility in the yuan exchange rate in the foreseeable future.
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Barclay's, Jian Chang
Subdued inflation and trade, together with weak real activity levels over the January-February period, suggest strong headwinds to first quarter 2015 GDP growth. We see downside risks to our first quarter GDP growth forecast of 7.1% year-on-year growth, which would be the lowest growth rate since the first quarter of 2009 if realized. The latest leading indicators point to relatively stable external demand but still-weak domestic demand, hence, we believe the economy still faces significant cyclical challenges in the near term.
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Louis Kuijs, RBS
Although in part the result of bumpiness in trade data at the start of the year, the fall in exports in March underscores our concerns about the state of global demand. Global import growth decelerated to 2.7% on year in real terms in January, the latest data point available, with emerging-market import demand particularly subdued . While we do not want to read too much into one month of data, the March export data may also feed concerns in Beijing about the impact on competitiveness of the appreciation of China's trade-weighted exchange rate due to the appreciation of the US dollar.
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Bloomberg's Richard Breslow summarizes the market's response
Whether you look at regions or products, the data were weak across the board. So what happened afterward? Asian currencies have all weakened against the USD. Makes sense. USD is strong anyway and this is a downside surprise. As Goldman Sachs said in a research note with the title “Chinese growth and inflation are significantly impacted by the exchange rate” published before the data release, “changes in the RMB’s effective exchange rate can have significant impact on export growth." AUD/USD was the biggest mover but that was really giving up its post-RBA bounce. May, here we come. Bonds didn’t do much of anything. QE, crazy levels. Pimco lightening up. Asian 10-year bonds were mixed and China’s benchmark unchanged. Par for the course. Birdies had all migrated to August.
And then there were equities. China and Hong Kong stocks continue their meteoric rise. The Hang Seng Index is up over 12% this month alone (and it’s only the 13th). But this is only the most startling example of a region where equities have been on fire. Liquidity, like location in real estate, can overwhelm any other story line. Not to mention, strong equities make sovereign wealth funds patient with their government bond holdings which the world can’t afford them to dump.
But what happens if China decides to increase stimulus, but not by building up more supplies of commodities they already own too much of? What if they have grown tired of building ghost cities? Posit this: China might very logically begin to broadly expand spending on health care and other sectors designed to address what is rapidly becoming a middle class social nightmare
If this comes to pass, then the knee-jerk reaction to further stimulus of buying commodity currencies may be very misguided. This will have ramifications in Latin America as well as up and down the Pacific Rim. Overnight, the Chinese govt made sure their three large development banks understand that their mission is to carry out central policy, not pursue merely economic activities
Later this week China reports IP and GDP. Both important. The World Bank has once again lowered its GDP forecast for the country to 7.1%. This week’s 1Q GDP expected at 7% y/y. Could be a little better than that
Incidentally, the rush to buy Chinese equities has pushed the HKD to its upper boundary. This of course leads to discussions about the sustainability of the USD peg. Let’s be clear about one thing. The peg will go only when the Chinese government wants it to. If there is one thing the Chinese have, it is the wherewithal to defend their peg.
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In short, virtually everyone is now agreeing with what we said over a month ago in "How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable"