Hidden Gems in Chinese Trade Data

Investing Daily Article of the Week

by Ben Shepherd, Investing Daily

There’s little room for debate as to whether China’s economy is growing, since June’s trade report was released earlier this week. Exports fell by 3.1 percent from a year earlier and imports declined by 0.7 percent.

At the same time, the Japanese yen remains weak vis-à-vis the Chinese renminbi, so Japanese-made goods currently command a significant price advantage in the global market place, denting demand for Chinese-made goods.

Chinese goods have become more expensive in Japan, one of China’s three largest trading partners, knocking exports to Japan down by 5.1 percent. The yen has depreciated by more than 20 percent versus the renminbi over the past several months.

Exports to the European Union are still at stall speed, falling 3 percent in the first quarter of the year, then 8.3 percent in the second. Inexpensive consumer goods produced in Eastern Europe not only have a production cost advantage, transportation costs are also much lower giving them an extra edge. As the region remains mired in recession, production and transportation costs are a critical consideration for European businesses.

Exports to the US also declined by 5.4 percent, which we find a bit perplexing since Bernanke & Co. continue to proclaim that our recovery is on track.

The slipping export numbers bear some concern, since they signal the potential for a dip in employment, particularly for migrant factory workers who are a crucial source of funding for China’s more rural regions. However, we don’t find it particularly troubling.

Even Chinese manufacturers that have proven capable of blistering growth can’t create demand out of thin air. Moreover, after the recent disasters in Bangladesh that resulted in the deaths of hundreds of sweatshop workers, the European Union has been more aggressive enforcing standards aimed at ensuring the region’s companies only trade with partners that have due concern for worker safety and don’t use banned chemicals in manufacturing processes. That’s a tough certification process for many Chinese manufacturers to successfully navigate.

The slow down also lends credence to the Chinese government’s aim to rebalance the country’s economy and shift it away from a dependence on exports to more domestically focused, service-oriented activity.

Unfortunately, other emerging market nations only account for about 15 percent of Chinese exports. The Big Three — Japan, the US and the EU — remain China’s largest trading partners. Still, that’s a great indication that domestic demand in many other emerging market nations is holding up well, even as demand for natural resources is slackening. For China, that’s another tick mark in the column for economic maturity.

What we do find troubling, though, is the 0.7 percent decline in China’s June imports. That’s a solid indication that domestic demand and consumption are becoming increasingly sluggish, a bad sign for the country’s economy. Even crude oil imports fell in the first half of 2013, the first such contraction since 2009.

Nonetheless, bright spots emerged in the export data, as demand picked up from Brazil, South Africa and even India, a country suffering from growing tensions with China. Exports to other ASEAN countries also showed particular strength.

Another positive sign for the Chinese economy is that copper imports hit a nine-month high last month, signaling an acceleration in global economic activity. It’s likely that some of that growth was due to arbitrage trades — copper in Shanghai traded at a premium to that in London for much of the month, making it cheaper to import the metal than buy it domestically. However, copper supply has been tightening in recent months, as the industry works through its stockpiles.

The Chinese government also recently implemented restrictions on copper financing deals in a move to curb dubious trading and capital flows. Consequently, the increased buying should be directly related to legitimate business, another potential positive sign for the economy.

So while China’s economy is clearly slowing, it’s still not down for the count. The most recent data also underscored some bright spots in other parts of the world.