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

Three days after the US reported a record trade deficit with China, overnight Beijing confirmed this record print when the General Administration of Customs announced that China's trade surplus with the U.S. hit another record monthly high in August, rising to $31.05 billion from $28.09 billion in July, and surpassing the previous record set in June as the world’s second-largest economy faced the threat of more tariffs from the Trump administration.

A key reason for the latest record print was the sharp slowdown in US outbound trade, as China’s imports from the US grew only 2.7% in August, a big drop from the 11.1% growth in July. At the same time, China’s exports to the United States accelerated, growing 13.2% from a year earlier from 11.2% in July, even as U.S. tariffs targeting $50 billion of Chinese exports took full effect for their first full month in August.

Over the first eight months of the year, China’s trade surplus with the US - its largest export market - has risen nearly 15% arguably at the worst possible time, as the number will surely add to tensions in the trade relationship between the world’s two largest economies which culminated with Trump's announcement on Friday that he is planning to slap tariffs on virtually all Chinese goods entering the US.

Behind China's export boost a combination of factors: i) the weaker Chinese yuan and ii) exporters’ frontloading of shipments in anticipation of more tariffs, both of which contributed to the worsening trade imbalance according to Liu Xuezhi, an economist with Bank of Communications.

Chinese officials acknowledged Chinese exporters have been rushing out shipments to beat new U.S. tariffs, artificially buoying the headline growth readings, while some companies such as steel mills are diversifying and selling more products to other countries. "In the short term, it is difficult for the trade gap to narrow because American buyers cannot easily find alternatives to Chinese products," Liu said. This suggests that the trade war, which has been escalating, won’t be resolved quickly, the Shanghai-based economist said.

A more optimistic take came from Zhang Yi, an economist at Zhonghai Shengrong Capital Management, who told Reutersthat "there is still an impact from front-loading of exports, but the main reason (for still-solid export growth) is strong growth in the U.S. economy."

Whatever the reason, for Trump the growing trade deficit with China is confirmation that his trade policies have failed to yield results in boosting trade; this has prompted the US president to roll out increasingly more aggressive tactics to pressure Chinese trade. A summary timeline of the trade tensions between the US and China is laid out below.

President Trump said Friday the administration is ready to announce tariffs on another $267 billion in Chinese goods, on top of levies on $200 billion of Chinese products it has been preparing. If enacted, the third round of tariffs would bring the total amount of goods subject to levies to more than the $505 billion of products the U.S. imported from China in 2017, according to the U.S. Census Bureau.

Aside from the US, overall Chinese trade in August posted a modest slowdown, as China reported a trade surplus of $27.91 billion in August, narrowing from a surplus of $28.05 billion a month earlier, and below the $31 billion consensus estimate. 

Exports growth for China moderated to 9.8% from 12.2% in July, below the 10% estimate. Imports growth decelerated as well to 20.0% yoy in August, from a strong increase of 27.3% yoy in July, but above the 18.7% consensus estimate, boosted by the cut in import duties for some consumer goods from July 1, 2018.  In sequential terms, exports momentum weakened to a contraction of 0.8% M/M non-annualized, the first time since April, from +0.2% in July. Imports declined as well by 1.0% M/M non-annualized, down from +5.6% in July.

And here a curious observation: China's trade surplus with the United States was larger than China’s total net surplus for the month, which means China would be running a deficit if trade with the world’s largest economy was excluded.

While no one has predicted a sudden, sharp blow from U.S. tariffs, China’s official export data has been surprisingly resilient so far, with growth exceeding analysts’ expectations for five months in a row.

Yet while economists have noted that disruptions in supply chains are likely to be more company specific, and will take time to be reflected in broad economic data and corporate earnings reports, anecdotal evidence of mounting trade damage on both sides of the Pacific is on the rise. Official and private manufacturing surveys for China show global demand for Chinese goods is clearly on the wane, with export orders shrinking for months in a row.

“Risks have increased due to the negative impacts of China-U.S. trade friction. The impact on exports may gradually start to show up, with future export growth possible declining,” said Liu Xuezhi said.

For now however, the tenuous stalemate remains: while Trump is winning the trade war as represented by the capital markets, China continues to win in what really matters: a growing trade surplus with the US.