June 10,2010

China's Stronger Than Expected Exports: Stronger Case for renminbi Appreciation

By CSC staff, Shanghai

In May China's export surged and trade surplus sharply widened. China's export competitiveness has not been eroded by the euro deprciation. 


Strong-than-expected trade data in May: Export growth surged to +48.5% YoY in May surprisingly from +30.5% YoY in April, beating market consensus of +32% YoY by a big margin. Imports decelerated to +48.3% YoY (vs. +49.7% YoY in April), stronger than market consensus of +44.7%. On a seasonally adjusted MoM basis, exports leapt +10.9%, while imports slid 0.9% in May. The trade surplus widened to US$19.5 bn from US$1.7 bn in April, suggesting that the deficit in March was a short-lived temporary phenomenon and that underlying structural factors remain intact. May trade data indicated that on the back of the cyclical recovery in the global economy, China's exports remain in strong shape, despite the problems of sovereign debt in Euroland, providing strong support to imports (processing trade) and domestic industrial production amidst a moderation in domestic demand, according to Qing Wang, the chief China Economist of Morgan Stanley.


The stronger-than-expected export growth can be explained mainly by the extraordinarily strong demand from G3. Shipments to the US surged to +44.3% YoY from +19.1% YoY in April, in line with the solid recovery under way in the US. Defying the sovereign debt problems, demand from the EU remained robust (+49.7% YoY in May vs. +28.5% YoY in April). The US and EU alone contributed 18pp (9.7pp and 8.3pp) to headline growth. Exports to ASEAN countries rose to +48% YoY in May from +42.6% YoY in April, indicating that emerging market economies have grown into important alternative markets for goods made in China.


Imports of machinery and hi-tech products, the biggest categories in value terms, strengthened to +50% YoY and +50.2% YoY (vs. +43.9% and +41.7% YoY in April), and their contributions to headline growth rose to 23.8pp and 15.1pp (vs.21.4pp and 12.8pp in April). Owing to weakening domestic demand and noticeable price corrections, imports of crude oil fell remarkably to +69.2% YoY in May from +112.8% YoY in April. In sharp contrast, iron ore imports jumped to +70.1% in May from +39.8% YoY in April, due to higher prices charged by Australian and Brazilian suppliers.


The data show that export recovery remains on track: While the Rmb has appreciated noticeably on a trade-weighted basis in recent months, due to the weak euro, the competitiveness of China's exports has not been eroded too much, as other EM economies' currencies have also strengthened synchronously. Moreover, while Euroland accounted for about 20% of China's exports, the four countries that are experiencing fiscal stress accounted for only about 3%. Qing Wang has been one of few economists in China making case for RMB appreciation.


"We believe the contractionary impact from the fiscal consolidation of troubled countries will take time to play out. All these help to explain the strong growth in shipments to the EU in May," said Qing Wang.


Moreover, the solid recovery witnessed in the US and China's efforts to diversify away from G3 in recent years may also help to cushion the potential shortfall in Euroland. "In this context, we expect China's exports to remain in good shape in the remainder of this year. However, owing to gradual filtering-in of the high base of last year, we expect export growth to moderate in 2H10 and to see our annual forecast of 22% (revised up from 15%) materialize. Meanwhile, against the backdrop of policy exit and gearing-down of processing export growth, import growth will likely decelerate meaningfully in the remainder of the year to close the gap with export growth, which will boost the trade surplus substantially," predicted Qing Wang.


Tao Wang, head of China economic research of UBS securities, predicts that rmb will depeg from US dollar and accompanied by a 3% appreciation in couple of weeks.


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