- China’s exports continued to decline in October, while imports appear to be firming slightly. In particular, a significant drop in exports to Europe weighed on China’s exports in October, underlining that growth in Europe is deteriorating sharply. Firmer imports suggest that domestic demand in China remains resilient and China’s current account surplus is poised to drop substantially below 4% of GDP for 2011 as a whole.
- We expect fiscal and monetary policy in China to turn slightly more growth supportive in the coming months. However, without signs of a significant deterioration in growth, we do not expect major easing moves on a similar scale as in late 2008. But a cut in the reserve requirement looks increasingly likely early next year.
Details
China’s exports continued to face headwinds in October, increasing 15.9% y/y (consensus: 16.1% y/y) compared with 17.1% y/y in September. The sequential trend in exports remains weak. Seasonally adjusted exports declined 2.2% m/m in October after declining 3.4% m/m in September (using our own seasonal adjustment). October was the third consecutive month with a month-on-month decline in exports. The decline in exports in October was largely driven by weaker exports to the EU (down 5.1% m/m). This is another indication that growth in Europe is currently slowing substantially.
On a positive note, China’s import growth was stronger than expected in October. Total imports increased 28.7% y/y (consensus: 22.2% y/y). Seasonally adjusted imports increased 5.0% m/m in October after declining 4.4% m/m in September (again using our own seasonal adjustment). On balance, China’s import growth appears to be firming after having slowed substantially since the start of the year.
With continued weakness in exports and imports firming, China’s trade balance surplus at just USD17bn (consensus: USD25.8bn) was substantially less than expected. The seasonally adjusted trade surplus according to our calculations in October dropped to just USD5bn from USD15bn in September. This development suggests that China’s current account surplus for 2011 will be substantially less than 4% of GDP.
On a positive note, China’s import growth was stronger than expected in October. Total imports increased 28.7% y/y (consensus: 22.2% y/y). Seasonally adjusted imports increased 5.0% m/m in October after declining 4.4% m/m in September (again using our own seasonal adjustment). On balance, China’s import growth appears to be firming after having slowed substantially since the start of the year.
With continued weakness in exports and imports firming, China’s trade balance surplus at just USD17bn (consensus: USD25.8bn) was substantially less than expected. The seasonally adjusted trade surplus according to our calculations in October dropped to just USD5bn from USD15bn in September. This development suggests that China’s current account surplus for 2011 will be substantially less than 4% of GDP.
Assessment & Outlook
The Chinese economy faces some headwind from weaker exports. However, the weakness in exports at this stage does not appear to be intensifying and the slowdown in exports is far from as severe as in the wake of the Lehman Brothers collapse in late 2008. Firmer imports are consistent with our expectation that GDP growth could pick up slightly in the current quarter.
We expect policy to become slightly more growth supportive. This is largely becoming possible because of a substantial decline in inflation. However, without signs of a significant deterioration in growth, it is unlikely to be across-the-board easing moves as happened in late 2008. Nonetheless, a cut in the reserve requirement looks increasingly likely. We also expect the pace of appreciation of CNY against USD to slow to c3% annually. The main reason is the drop in inflation, although slower export growth is an additional argument for the Chinese leadership.
We expect policy to become slightly more growth supportive. This is largely becoming possible because of a substantial decline in inflation. However, without signs of a significant deterioration in growth, it is unlikely to be across-the-board easing moves as happened in late 2008. Nonetheless, a cut in the reserve requirement looks increasingly likely. We also expect the pace of appreciation of CNY against USD to slow to c3% annually. The main reason is the drop in inflation, although slower export growth is an additional argument for the Chinese leadership.