The China dilemma

China has certainly thrown a very large spanner into global markets; the almost unabated appreciation has been stopped dead in its tracks.

Source: Bloomberg

The March trade balance figures were expected to be a ‘rebalancing’ after the surge figures seen in February. However, what we got was a massive collapse rather than a rebalancing in exports, which has raised several questions about demand globally and China’s next move.

The USD-weighted exports declined 15% in March; consensus expectations were for a 10% expansion (massive miss). The major concern here though is that all export destinations have declined significantly.

US exports declined 8%, European exports decline 19.1%, Japan declined 24.8% and ASEAN exports were down 9.3% (all year-on-year figures). US and European consumption data has been showing clear signs of decline and the data from the trade balance confirmed that shift is now translating into actuals.

If you average out the seasonally-biased Lunar New Year read in February of 48% by averaging the January and February data export growth, in the first two months of 2015 it is 15.1%. Adding in yesterday’s read and Chinese exports for the first quarter, it falls to 4.7% and shows how weak yesterday’s print actually was. Quarter-on-quarter that’s a 3.9% decline from this time last year.

The export declines have seen a trade surplus of a mere US$3.08 billion down from last month’s record print of US$60.6 billion.

China will be grappling with how to handle this current decline in export - it has already begun to support growth with tweaks to monetary policy here and there over the first quarter of 2015. The thing is, changes to policy (monetary or fiscal) is a slow moving ship and the true effects of these tweaks will take time to filter through to the actual economy. Therefore, I expect further changes to policy in the coming month to pick up the remaining slack that is currently translating in the figures.

Further loosening is likely to come in the form of lower reserve requirement ratios, lower CNY, lower market and benchmark interest rates, further fiscal support and pressure on local administrations to act in their respective jurisdictions.

This will likely see a recovery in growth for the second half of the year; however it will not save China from tomorrow’s GDP read that is likely to show further declines in growth. The consensus estimates have now fallen to 7.0% year-on-year from 7.1%; there are plenty that believe China will have a GDP read in the 6% handle – something that hasn’t happened in 25 years.

I suspect the second quarter to be flat before the support packages translate to growth in the third quarter (which may just overshoot on the upside). What I need to make clear is China has plenty of levers to pull and will do so as it moderates the declines. The issue from a market side is that the data in the interim will show signs of worsening rather than growth, and that is likely to transpire into some negative moves in the next four months.

On the import side of the trade balance and therefore an Australian centric view, there is real concern. Iron ore import volume increased a mere 2.8% year-on-year, yet the import value has declined 43.8% over the same period. However, supply side remains unabated and the cat-and-mouse game miners are playing with each other is locked in and price will get lower still.

However, it is coal and copper that is a bigger concern for Australia. Coal import volumes declined 41.3% year-on-year; the value of the coal imports is down 52.5%. Copper volumes are down 17.1%, with the value of imports down 28.3%. Demand just isn’t there currently, and is likely to be subdued from a period to come. We remain underwhelmed by Australian mining even at severely depressed prices.    

The news from China yesterday has put the brake on the global appreciation binge and this is going to flow through to trade in Asia today as investors position themselves ahead of tomorrow’s GDP read.

We are calling the ASX 200 down 12 points to 5947 as again the ASX can’t seem to break the 6000 point level.


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