ANZ RESEARCH
8 MAY 2013 QUICK REACTION CHINA’S TRADE REMAINED STRONG ON ‘HOT MONEY’ INFLOWS
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China’s trade growth remained strong in April, following a surge in the past two quarters. Today’s trade data also defies the weak trade data reported in other regional economies, suggesting capital inflow imbedded in trade remains unchecked.
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Meanwhile, the port throughput data remained soft for the past few months, suggesting that the real demand has not yet fundamentally recovered. The inconsistency between port throughput and the headline trade growth shows that many Chinese exporters could have over-invoiced their trade value to take advantage of the interest rate differentials between onshore and offshore markets, and the RMB’s steady appreciation since July last year.
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China’s FX regulator recently posted a new regulation (effective on 1 June) to crack down on these speculative capital inflows embedded in trade, which may help China’s trade growth return to its true level.
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In our view, the RMB exchange rate should see weakening bias going forward if the ‘hot money’ inflows were under control. We reiterate our view that an overly strong RMB, especially amid a weak economic recovery and a sharp yen depreciation, is not in China’s interests. If it is the strong RMB that attracts such speculative capital inflows, the PBoC will need to de-peg with the USD and return to its exchange rate policy back to referencing to a basket of currencies. ADDITIONAL DETAILS
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Export growth increased 14.7% y/y in April, compared with market expectations of a 9.2% gain and March’s 10.0%.
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By destination, exports to the US declined 0.1% y/y, following a 6.5% contraction in March. Exports to the EU fell by 6.4% y/y, from -14.0% in the prior month. Exports to Hong Kong, ASEAN and Taiwan rose 57.2%, 37.2% and 49.2% respectively.
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Imports grew 16.8% y/y in April, following a 14.1% gain in the previous month, and higher than consensus of a 13.0% gain.
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On a volume basis, imports of iron ore grew 16.4% y/y in April, up from 2.7% in March. Imports crude oil increased 3.7% y/y, from -2.1% previously. Soybean and copper imports declined 18.4% y/y and 21.2% y/y, respectively, from -20.5% and -30.8%. Imports from Australia grew 11.1% y/y, compared with 18.4% in March, reflecting lower iron ore prices.
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Notably, China’s April trade with the rest of the world gained 12% y/y, while trade with Hong Kong surged by 55%, suggesting that the China-Hong Kong-China trade continued to contribute significantly to China’s trade growth.
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On a seasonally adjusted basis, exports rose 7.7% m/m while imports fell 6.6%, respectively.
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China registered a trade surplus of USD18.2bn, compared with a deficit of USD0.88bn in March. If we exclude Hong Kong, China ran a USD20bn trade deficit with the rest of the world in April.
MARKET AND POLICY IMPLICATIONS
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In our view, it is clear that the Chinese authorities are fully aware of the rising discrepancy between China’s trade growth and Hong Kong’s exports to the rest of the world. Capital controls regarding inflows are being re-enforced with more stringent regulations. We view this is a necessary policy move and will help us understand better the real performance of the trade sector.
ANZ RESEARCH
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We believe the recent measures to tighten regulations on capital inflows, together with allowing the RMB to follow a basket of currencies with possibly enlarging the trading band, will increase the RMB/USD volatility, and will likely push the RMB to the weak side.
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That said, China’s exchange rate policy still faces tremendous challenges. While domestic financial repression remains and capital controls have become less and less effective, the macroeconomic policy independence has also been significantly eroded. As large capital inflows have diminished the effectiveness of monetary policy, the risk of a major asset bubble continues to build, and China’s firms and financial institutions are running increasingly larger currency and maturity mismatches. In the current global financial environment, we believe the authorities will need to have clear sequencing policy in terms of its domestic and external financial liberalization. The policy priority should focus on accelerating domestic financial reform via interest rate liberalization, allowing more competition, and deepening capital markets, while keeping a tight lid on capital inflows, and rapidly phasing out incentive policies to favor capital inflows at the expenses of capital outflow and encouraging exports at the expense of imports.
Trade GrowthApr 13Mar 13Feb 13Jan 13Dec 12Nov 12Oct 12
Exports, y/y nsa14.710.021.825.214.82.911.6Imports, y/y nsa16.814.1-15.228.86.00.02.4Exports, m/m sa7.711.8-12.4-8.712.2-3.2-2.3Imports, m/m sa-6.620.20.2-9.39.1-6.62.8
Exports by Country, y/yApr 13Mar 13Feb 13Jan 13Dec 12Nov 12Oct 12
USA-0.1-6.515.714.510.3-2.69.0Japan-1.2-10.0-6.55.7-7.3-3.81.1EU-6.4-14.016.55.22.3-18.0-8.1ASEAN37.211.627.748.627.819.344.8
Key Import Commodities (value), y/yApr 13Mar 13Feb 13Jan 13Dec 12Nov 12Oct 12
Crude Oil-9.9-6.0-14.37.15.56.818.0Iron Ore16.63.5-17.2-2.9-10.7-30.5-32.5Copper-24.5-33.2-38.3-11.8-30.4-16.6-16.6Soybean-10.2-8.1-9.524.633.0-9.427.9
Key Import Commodities (volume), y/yApr 13Mar 13Feb 13Jan 13Dec 12Nov 12Oct 12
Crude Oil3.7-2.1-12.17.48.03.013.8Iron Ore16.42.7-13.210.510.72.513.0Copper-21.2-30.8-38.5-15.2-33.0-19.2-16.1Soybean-18.4-20.5-24.33.78.7-27.05.8
China - Trade Developments
-80-60-40-20020406080Apr10Jul10Oct10Jan11Apr11Jul11Oct11Jan12Apr12Jul12Oct12Jan13Apr13-40-30-20-10010203040
Trade Balance, $bn (RHS)Exports, y/yImports, y/y
China - Trade with HK vs the Rest of the Word
(y/y)
-40-20020406080100Apr11Jun11Aug11Oct11Dec11Feb12Apr12Jun12Aug12Oct12Dec12Feb13Apr13Trade (Exports+Imports) with ROWTrade (Exports+Imports) with HK
ANZ RESEARCH
USD/CNY
6.106.156.206.256.306.356.406.45Mar12May12Jul12Sep12Nov12Jan13Mar13May13Spot Trading band Fixing
China - CNY Basket
6.106.206.306.406.506.606.706.80Jan11Apr11Jul11Oct11Jan12Apr12Jul12Oct12Jan13Apr13ANZ Basket Track CNY Spot
China - Import Iron Ore Price 62% Fe
(USD/ton)
8090100110120130140150160170Nov11Jan12Mar12May12Jul12Sep12Nov12Jan13Mar13May13
CFR Tianjin Port
China - Iron Ore Inventory at Ports (mn tons)
50556065707580859095100105Nov09Feb10May10Aug10Nov10Feb11May11Aug11Nov11Feb12May12Aug12Nov12Feb13May13
Iron Ore Inventory
Sources: CEIC, ANZ
Regards,
Liu Li Gang
+852 3918 7730
Zhou Hao