The growth of Chinese exports in March offset decline in the first two months thanks to a combination of political, seasonal and economic factors. However, this recipe was useless to support imports, which is led by a prolonged decline in domestic consumption due to a fall in consumer confidence in China.
Exports in RMB increased by 21.3% YoY against 6.3%, effectively putting an end to anxiety after consistent decline by 1.4% and 16.6% in the first two months. The share of exports in China’s GDP has been steadily declining from a peak of 36.05% in 2006 to 19.75% in 2019. However, as can be seen, the composition of GDP remains highly vulnerable to fluctuations in foreign demand. For comparison, in the United States, the share of exports is about 12% of GDP.
The rebound of exports into positive territory reinforces the conviction that the slowdown in the first two months was a fall in trade after the “tariff rush” in 3Q and 4Q of 2018, the Lunar New Year celebration, as well as the gradual effect of the Central Bank and the government’s measures to maintain economic activity and their postponed impact behavioral benchmarks such as corporate confidence. The Chinese Central Bank urged that economic indicators be viewed not as separate readings, but in a trend, in order to get a correct idea of the causes of individual episodes of a short-term recession. As you can see, such a call was not unreasonable, although it was difficult not to succumb to the temptation to add disastrous exports on an already existing series of negative readings from China and rest of the world.
It is important to note that the progress in trade negotiations has stimulated exports from a completely non-obvious side – the strengthening of trade relations with the second largest trading partner – the EU. This can be perceived as a compensatory effect of US pressure on its main trading partners, who had no choice but to unite. During the period January-March 2019, imports from the United States fell by 28.3% in China, while exports fell by 3.7%, despite the fact that in December Trump and Xi concluded “non-aggression pact” for three months and for those three months the trade teams were busy talking up the expectations, declaring “fruitful “and “constructive” talks progress. It is difficult to consider such a decline in trade the result of a truce. However, in trade with the EU over the same period, China exported 14.4% more than during the same period last year, while imports grew by 7.3%:
The yield on 10-year Chinese government bonds rose on a positive report to 3.32%, the highest level for this year. Bond futures declined for the first time in three days. All this suggests that traders are pricing in increase in risk appetite and the effect of monetary easing measures.
Given the export price inflation, which probably remained at elevated levels after a 6.2% increase in February, real export growth in March could turn out to be more moderate. In addition, the rebound after the Lunar New Year will have to go into stabilization, so the effect of data on market expectations will be very limited.