Need To See Genuine Recovery in China Exports

The bulk of the emerging markets bull run was precipitated on the China story. Aggressive bank lending in China kick started the process. There were other factors including Chinese state firms restocking their inventory and piling up the buying in commodities across the board. Both factors were criticised as being artificial, and may be only temporary. We needed to see Chinese exports stabilising and even growing for the fiscal measures to be worth its salt. If Chinese exports started showing signs of life, it also means the recovery will be more genuine, and also other countries are starting to come to life. As long as genuine demand starts filtering through, the entire process of recovery will be viewed as more solid. Signs are appearing that the China story is becoming more believable.

Overview: Chinese exports have been contracting on a y/y basis for nine months but may now be showing signs of stabilization, growing on a seasonally adjusted monthly basis in June and July 2009. Imports have also begun to increase on a monthly basis, reflecting the increase in commodity prices since the beginning of 2009 but also the increase in production and domestic demand. Export weaknesses are expected to be a drag on growth in H2 2009, after subtracting from growth in Q2 2009.

• Chinese exports contracted 23% y/y in July 2009, slightly worse than the 21.4% y/y contraction experienced in June but an improvement from May's 26.4% y/y. July's decline, the ninth consecutive monthly fall, makes this the longest string of export declines recorded, topping 1995-96. Imports fell 14% y/y in July 2009 from 13% in June (a continued improvement from the 20% rate of contraction in early 2009), leaving a trade surplus of US$10.3 billion, up from the US$8.54 billion of June.
  
• On a seasonally adjusted monthly basis, exports rose 5.2% and imports 3.5%, a continued improvement.
• Other economic data released for July 2009 reflect a deceleration in the pace of investment growth, a significant reduction in bank lending, continued y/y deflation, a slight increase in value-added industrial production and still robust retail sales.
• Exports and imports both rose on a m/m basis in July 2009--increasing by 10% or US$10 billion and 8.5% or US$7.6 billion respectively. Exports to the U.S. increased US$2.5 billion to only 14% below July 2008 levels, indicating that an improved external environment could support trade. Import volumes of oil and products, iron ore and steel rose from June levels, but those of copper and aluminum ores fell.
  
• In June 2009, exports rose 4.5% on a seasonally adjusted basis m/m from May, and imports climbed 2.2%.
  
• Analysts point to the export order sub-index of the purchasing managers' index (PMI) to point to a recovery, but the improvement could be sluggish given weak external demand.

Are Imports Picking Up?

• Raw material imports picked up before manufacturing imports. The volumes of raw materials imports rose substantially after February 2009, even though price declines led to falls in nominal terms. However by May and June 2009, imports used in Chinese domestic economy - so-called "normal" imports began picking up and are now higher than in 2008. Imports of goods for the processing trade continue to be weak however.
• Despite sharp y/y declines, Chinese exports have remained relatively flat or increasing in m/m terms after falling sharply in January 2009. In normal times, y/y figures paint a more accurate picture, but they may obscure trends in fast-changing times.
• Imports have lagged behind the investment rebound. The government extended export incentives again in June 2009, the seventh export tax rebate increase in less than a year.
• Exports have stabilized on a seasonally adjusted basis. China's export rebound supported partial recovery in Asia and boosted Latin America as well. China’s exports appear to have bottomed out as domestic demand picks up. China’s trade surplus is likely to decline substantially, and China’s accumulation of FX reserves should ease markedly.
  

Changing Composition of Chinese Trade

• China has been taking the opportunity to purchase commodities at cheaper prices. The increase in scrap-metal purchases suggests Chinese purchases may be price-sensitive.
• Processing trade has been falling as a share of imports and exports. In Q1-Q3 2008, processing trade accounted for only 40.8% of total trade value, compared with 45.4% in 2007. This trend, which reflected higher prices, was in line with the government’s policy of discouraging the exports of products that are energy- and resource-intensive, highly polluting and both labor-intensive and low value-added. The share of processing trade fell again in Q1 2009 to 40% of trade from 42% in Q4 2008.
  

Leading Indicators of Exports Suggest Stabilization

• The total trade volume in the Canton Fair in early May was US$26.23 billion, down 16.9% from fall 2008, a leading indicator of weaker trade. Trading volume fell 17.5%.
  
• The U.S. and EU still absorb over 50% of total exports and tend to be the final destination of goods in Asia. Intra-Asia trade plunged in Q4 2008 but has rebounded on restocking.

p/s photos: Yu Takahashi