China Poor Export Data Worries Many Officials [ANALYSIS]

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.

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  •  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.

china

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 soft despite strong copper imports

Net crude imports fell to 5.41-mb/d, down 227-kb/d MoM, to around the lows seen in February and March. Net product imports rose a very modest 20-kb/d MoM to 315- kb/d due mainly to lower gross product exports. Product exports fell to 486-kb/d, similar in range to the 2012 average, but down from 650-kb/d seen in May’13 and the Jan-to- May’13 average of 616-kb/d. But the decline in exports may not necessarily mean a stronger rebound in product demand: with YTD crude imports flat YoY but higher product exports, internal demand should be rather lackluster. Indeed, June’s net crude imports were only 129-kb/d higher YoY and the YTD figures nearly flat to 2012, while YTD product exports were higher YoY, averaging 594-kb/d vs. 478-kb/d. Diesel, the largest constituent of Chinese demand, was down 37-k b/d YTD in May and down 86-k b/d y/y for that month. HSBC PMI readings of sub-50 and official data of 50.1 for June, as well as a tightening of credit and a surge in interbank lending rates could point towards stronger headwinds to come in China. In fact, overall exports of all goods fell by 3% in June, with imports down 0.7% YoY, suggesting weak external and domestic demand. With relatively flat crude imports YoY, if commercial crude stocks were to build between May and August or September, similar to the pattern seen over the past three years, then product demand would likely be subdued. But strategic stock fill last year could have clouded this picture.

Copper imports rose to 379.9kt (+5.9% MoM, +9.7% YoY), a nine-month high. But when comparing Jan-Jun imports on a YoY basis, imports in H1’13 are 20% lower. The market will likely remain adequately supplied, copper concentrate shipments to China from the Oyu Tolgoi mine in Mongolia began this week. Freeport McMoran has received permission for resumption of underground operations at the world’s second largest copper mine Grasberg. Our economists believe there is a possibility the 7.5% GDP growth target may be missed, but China should be able to defend 7% growth in the near term. We expect copper imports to ease further, due to a combination of weak demand, prospects for rising supply & risks for investment slowdown as the country moves from an investment based to consumption based economy.

June Iron ore imports fell to 62.3 Mt (-9% MoM,-2% YoY), a four-month low. The fall in imports can be primarily attributed to diminished buying interest, as skepticism over a sustained price recovery remains strong. Weak fundamentals for the steel industry have seen reluctance amongst mills to book fresh cargoes, as they grapple with margins being pressured by lackluster demand. Rain in the north and southwest regions of China has also impacted offtake, as downpours tend to hit steel demand with work on construction projects slowing or coming to a halt. Steel production in China continues to remain strong; there have been no large-scale production cuts. We maintain our cautious outlook on iron ore imports, particularly as we forecast a seasonal ramp up in Chinese domestic production & the vulnerability of the market to steel inventory liquidation feeding back into the iron ore market.

Summary of China Trade

Source: China Customs, Wind, Citi Research

Summary of China Base Metals trade