China's Trade Surplus With US Hits All Time High At Worst Possible Time

Overnight China reported its June trade data, which showed that export growth moderated modestly from 12.3% Y/Y in May to 11.3% in June, above the 9.5% consensus, however imports decelerated meaningfully, sliding from 26.0% Y/Y in May to just 14.1% in June, well below the 21.3% estimate, which may be related to the imports tariff cuts on automobiles and selected consumer goods effective on July 1.

In sequential terms, exports increased 0.4% M/M, at the same pace as in May, while imports declined -3.2% M/M slowing from +2.8% in April. As a result of the decline in imports, the trade surplus widened to US$41.6bn from US$24.2bn in May. Tariff changes from the US and China in July can potentially distort June trade data.

"Both imports and exports have seen robust growth in the first half as companies front-load orders ahead of the trade war, resulting in nice-looking year-to-date trade data, but the momentum is hardly sustainable in the future," said Ding Shuang at Standard Chartered Bank. He said China still has solid domestic demand despite the decline in import growth.

Echoing the concern about the economy, Goldman said that "momentum of exports has slowed notably in recent months in 3m/3m terms. This has been against the backdrop of slowing global growth momentum so far this year, with the trend probably continuing in the near future, while appreciation of CNY over the past several months (at least before April) should have also contributed."

Broken down by commodity type, imports declined notably across the board in volume terms, with iron ore imports declining 12.1% yoy, vs. +2.9% yoy in May; crude oil imports contracted 4.9% yoy, vs. +5.0% yoy in May; steel products imports decreased by 8.0% yoy, vs. +1.8% yoy in May. In value terms, iron ore imports continued to contract, at -5.1% yoy, vs. -6.8% yoy in May; crude oil imports grew by 42.2% yoy, vs. +41.3% yoy in May; steel products imports increased by 2.1% yoy, vs. +17.4% yoy in May.

In terms of exports to major destinations, the trade surplus with the European Union rose to the highest level since 2011, while the deficit with Japan shrank, as exports growth to Japan slowed while going up modestly to other major trade partners. Specifically, for major DMs, exports to US and EU inched up to +12.6% yoy and +10.4% yoy from 11.6% yoy and 8.5% yoy in May, while that to Japan slowed to 6.9% yoy from 10.2% yoy in May. For major EMs, exports to ASEAN grew by 19.3% yoy, up from +17.6% yoy in May.

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But the most notable part of the trade report is that despite the modest slowdown in trade - and the latest development which may potentially add more fuel to the US-China trade war fire - China’s monthly trade surplus with the U.S. rose to a record in June at the worst possible time, as the number is sure to further infuriate Trump (and certainly Peter Navarro) and underlines the imbalance at the heart of an escalating trade war between the world’s two largest economies.

Specifically, China's customs reported that the trade surplus with the U.S. stood at $28.97 billion, the highest on record going back to 1999. Curiously, imports from the US rose at the same time as exports also climbed to $42.62 billion, also a new high.

Commenting on the data, Wang Jian, economist at Shenwan Hongyuan Group, said that "the record bilateral surplus shows exactly that the U.S. economy is robust while that of China is weakening. China’s domestic investment is softening due to funding strains, while consumption is not particularly strong either."

And as Bloomberg adds, while multiple factors will have influenced the data, including a rush by some manufacturers to sell goods before tariffs imposed this month hit, there’s little sign that the U.S. deficit with China will improve any time soon. As tax cuts fuel the U.S. expansion and a slowing Chinese economy may cool domestic demand, the almost-$340 billion annual gap will continue to provide the backdrop to the standoff.

The commentary from UBS' chief economist Paul Donovan was also notable:

Data showed that China's imports from the US rose. However, data also showed that China's trade surplus with the US hit a record. A lot of what China exports, it first imports; so rising imports and exports are not unusual. There may also have been a desire to stockpile goods in the US and China before new taxes are imposed.

The burst in US exports may have also been prompted by the yuan, whose decline in June was the worst in any month since 1994, dropping more than 3% against the dollar. And while that ought to help exporters in the longer run, the yuan’s fall now is a sign of growing concern as the trade war arrives at a time when the economy is already slowing. In other words, President Xi Jinping may ultimately have to choose between softening his multi-year campaign to control debt levels, or letting growth dip below the target of 6.5 percent.

The trade data comes ahead of the gross domestic product report for the second quarter, which should give a more complete picture of how the world’s second biggest economy did in the first half of this year. That is scheduled for release on Monday, with economists forecasting a slight slowing of the quarterly growth pace to 6.7 percent from 6.8 percent.

In a separate report, China’s broadest measure of new credit expanded far below expectations in June, with further evidence of a contraction in shadow banking emerging. Aggregate financing stood at 1.18 trillion yuan in June, the PBOC reported, badly missing estimates of a 1.4 trillion increase, while China's M2 growth slowed from 8.3% to 8.0%, missing estimates of 8.4%, and a new all time low.

The data confirms what we already know: China's economy is rapidly slowing down and the trade war with the US comes at the worst possible time for Beijing. Investment, factory output and retail sales growth all slowed in May. The tighter credit tap will also subtract from infrastructure and property investment for the rest of the year, as local governments cut borrowing and property developers have less access to shadow financing channels, according to Bloomberg.

"Import growth declined due to fewer purchases of oil and iron ore last month, indicating industrial production is easing moderately, especially in upper-stream sectors such as smelting and chemicals," said Gai Xinzhe, analyst at Bank of China Institute of International Finance in Beijing. That’s a "worrisome sign" for the second half of this year as domestic demand was already showing signs of a slowdown in previous months."

Said otherwise, those looking for the catalyst of what happens next to the global economy and world markets, it will be all up to China - if it is unsuccessful in dragging itself out of its current economic slump, the next global recession may come much faster than most expect. Which is also why Goldman concludes that "with less strong support from external demand clouded by the trade tension, and still ongoing financial regulations which could continue to weigh on credit supply, we expect the government to ease policy to avoid a meaningful slowdown, through both further RRR cuts and lower interbank rates as we have forecasted, and more direct measures such as support from policy banks."

In other words, the fate of the global economy is once again in China's hands.