Although the headline Chinese surplus figure was greeted with optimism amongst market participants, taking a deeper dive into the latest trade numbers tells a starkly different tale. The most recent figures released by the General Administration of Customs showed that the surplus contracted modestly compared to the prior month, printing at $48.11 billion in June versus $49.98 billion during May. While this marks a 6.40% improvement over the prior year’s figures, it still fails to acknowledge the struggles of the broader economy in dealing with more tepid trade. When it came to a breakdown for both exports and imports, both figures missed expectations, with imports suffering a deeper contraction than forecast. Year over year, Chinese exports fell by -4.80%, outpacing the -4.10% drop in May and highlighting the challenges of a weaker trade environment and stronger US dollar. Imports collapsed at an even faster pace after improving considerably during earlier readings, shrinking by -8.40% versus a year ago.
One of the main reasons behind the tremendous drop in trade is the weak global economic backdrop, but furthermore the value of the Chinese Yuan. With the Chinese currency still pegged to the US dollar, the momentum higher in the US currency is dragging the Yuan higher in tandem, creating a headache for exporters looking to price their products competitively in global export destinations. While the People’s Bank of China has taken several steps towards promoting Yuan weakness, mainly by directly intervening to devalue the currency, it is a costly maneuver that creates troublesome problems in other areas, such as foreign currency reserves. Now that US labor data is picking up once more, threatening the possibility of a rate hike before the end of the year, US dollar momentum to the upside may accelerate, forcing the PBOC to react with more liquidity and further Yuan depreciation. Conditions are so extreme, that some analysts have forecast the possibility of a 20.00% Yuan devaluation. Considering the global backdrop, without greater price competitiveness and a higher USDCNH exchange rate, China’s trade woes are unlikely to fade over the medium-term.
Chinese Trade Suffers Another Setback
Andamento del mercato - 13/07/2016