Chinese Trade Bounces Back

Market Trends - 13/01/2016

On the heels of a rapid devaluation of the Chinese Yuan followed by the orchestration of a squeeze higher in the Yuan during the fix, Chinese trade figures showed vast improvement in comparison to the pervasive weakness experienced over the last year.  The latest data shows the surplus rising to CNY 600.93 billion for December, a marked improvement over the CNY 541.03 billion reported for November.  On the headline the surplus looks quite bountiful, with the figure expanding from $382.5 billion in 2014 to $594.5 billion in 2015.  However, despite the improvement in the surplus, exports and imports both remained firmly in contractionary territory.  Imports in particular have been shrinking for the last 13-months, with the latest reading showing imports fell by a total of -7.60% over the course of 2015.  Exports managed to show a modest improvement, but these smaller losses are more likely to be temporary gains thanks to the extreme accommodation, not permanent advances in the export economy.

While today’s data might be a reassuring sign to some, in general, this upward momentum in the trade balance does mask underlying weakness in international trade and largely resembles a “dead cat bounce”.  Rampant commodity deflation is still evident by rapidly falling crude oil prices and the slump in base metals.  With policymakers in China promising no additional stimulus over the near-term, the surplus resembles a corporate accounting gimmick more than a validation of an economy that is rebounding.  Plagued by spare capacity, Chinese producers could face rising defaults and bankruptcies on the heels of weaker consumption and soft demand for both raw materials and finished goods.  Policymakers have no silver bullet to fix these problems, and a combination of rate cuts, liquidity injections, and direct intervention have only resulted in diminished benefits to financial stability over time.  Restoring confidence in financial markets remains a primary goal, especially as the China tries to taper capital flight from the country.


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