China’s export growth slid into negative territory, down 3.1% YoY in June, compared to Bloomberg consensus of 3.7% YoY and 1.0% for May.

See Kyle Bass: China Could See ‘Full-Scale Recession’ Next Year

Dong Tao and Weishen Deng Research Analyst at Credit Suisse note:

  •  Import growth remained negative for the second consecutive month, contracting 0.7% YoY in June, compared to 6.0% positive growth expected by consensus; we expected no growth.
  •  The export figure was a disappointment. The weak figure was partially due to the government’s anti-data-falsification campaign, but also reflected the softness of global demand and weakened export competitiveness.
  • The Chinese RMB appreciated along with the USD, up 5.6% in real effective exchange rate since the beginning of this year. We would not be surprised to see a minor policy-driven RMB depreciation against the USD in the coming months, though the magnitude seems to be constrained by the fear of capital outflows.

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Both Exports And Imports Showed Negative Growth In Jun: China

China’s export growth slid into negative territory, down 3.1% YoY in June, compared to Bloomberg consensus of 3.7% YoY and 1.0% for May. Earlier survey data also warned about tough conditions faced by China’s exporters, with new export orders index of the NBS PMI dropping 1.7 pp to 47.7 in June and that of the HSBC PMI falling to 44.9—the lowest level since March 2009.

Import growth remained negative for the second consecutive month, contracting 0.7% YoY in June, compared to 6.0% positive growth expected by consensus, while we expected zero growth. The trade balance widened to US$27.1 bn from US$20.4 bn in the previous month. Accumulated trade balance reached US$108 bn for the first half of the year, up 58.5% YoY, though data for the first four months was distorted by carry trade activities. On a 12-month rolling basis, trade balance was at US$269 bn in June.

China Export figure disappointed

The export figure was a disappointment. The weak figure was partially due to the government’s anti-data-falsification campaign, but also reflected the softness of global demand and weakened export competitiveness. The Chinese RMB appreciated along with the USD, up 5.6% in real effective exchange rate since the beginning of this year. This has accelerated since May, after the Fed made it clear about tapering, when most EM currencies depreciated against the USD while the RMB strengthened further. We would not be surprised to see a minor policy-driven RMB depreciation against the USD in coming months, though the magnitude seems to be constrained by the fear of capital outflows.

Headline CPI inflation increased to 2.7% YoY in June, against its prior of 2.1% YoY. This CPI reading surprised the Bloomberg consensus of 2.5% YoY on the upside, however closer to our above-consensus forecast of 2.8% YoY.

  • Food inflation shifted up to 4.9% YoY. Pork prices jumped by 4.6% sequentially. The turning around of pork price inflation is not a surprise to us and we expect pork prices to continue to bring upward price pressure in the coming months.

  •  This set of data exceeded consensus expectations, and more importantly, probably exceeded the government’s expectation as well. At 2.7% CPI inflation is not particularly high, so policy tightening is not an imminent threat yet.
  • There is limited room for monetary easing (unless China gets into a crisis situation). We believe that there is some room for fiscal stimulus, though the size of that should be much smaller, in comparison to the package launched in 2009. The new administration prefers improving the efficiency of fiscal spending to fiscal expansion for the sake of boosting GDP.

Summary of June inflationPork prices showed the first positive YoY change

More from Anthony Yuen of Citi Research

Headline CPI Rebound Exceeds Market Expectation

Headline CPI inflation increased to 2.7% YoY in June, against its prior of 2.1% YoY. This CPI reading surprised the Bloomberg consensus of 2.5% YoY on the upside, however was closer to our above-consensus forecast of 2.8% YoY.

Food inflation shifted up to 4.9% YoY from 3.2% YoY in the prior month. Food inflation contributed 1.59% directly to the headline. Pork prices showed the first positive YoY change in 14 months at 1.1% after jumping by 4.6% on a MoM basis. The turning around of pork price inflation is not a surprise to us, and we expect pork prices to continue to bring upward price pressure in the coming months. As the H7N9 fears faded away and dietary consumption returned to normal, meat and poultry prices gained 2.5% on a MoM basis. On the other hand, fresh vegetables and fresh fruit prices showed negative sequential changes, declining by 5.2% MoM and 2.0% MoM respectively, which helped the overall sequential food price to remain unchanged.

Non-food inflation remained at 1.6% YoY for the third consecutive month, and sequentially the price for the non-food basket remained flat in June. Services inflation was at 2.7% YoY in June against its prior of 2.8% YoY. However, the price for the services basket went up by 0.2% on a MoM basis. The residential services cost increased by 0.3% MoM, for the first half of 2013, and the price of residential services jumped by 9.4% YoY. In addition, rental cost increased by 0.3% sequentially and went up by 4.1% YoY in June.

Limited Room For Monetary Easing

This set of data exceeded consensus expectations, and more importantly, probably exceeded the government’s expectation as well. We noticed that in the latest speech at the State Council, Premier Li set the policy targets as structural adjustment, growth stabilisation and enhancing social well-being. The third priority has been quietly changed from holding back inflation to enhancing social well-being. The authorities seem to believe that inflationary pressure is abating amidst the growth slowdown. At 2.7% CPI inflation is not particularly high, in our view, so policy tightening is not an imminent threat yet. However, inflation becomes a constraint for monetary easing during the summer time, as we expect food-led pricing pressure will drive headline CPI even higher. China is in an awkward position where growth is slowing, inflation is on the rise and the Fed starts tapering.

As we stated before, there is limited room for monetary easing (unless China gets into a crisis situation). In fact we expect CPI to reach 4% by the end of 2013 and 5% around the middle of 2014. That may lead to interest rate hikes and tighter liquidity conditions, creating further stress on various segments of the economy. We believe that there is some room for fiscal stimulus, though the size of that should be much smaller, in comparison to the package launched in 2009. The new administration prefers improving efficiency of fiscal spending to fiscal expansion for the sake of boosting GDP.

China Preliminary Trade Data: Commodities

June crude oil and iron ore imports stay

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