Weak Renminbi Continues to Weigh on China Trade Growth

China’s July trade activity was weaker than the market had expected, especially for imports, according to a report from CCB International Securities.

On a year-on-year basis, renminbi weakness against the US dollar continued to weigh on trade growth in US dollar terms. In renminbi terms, exports accelerated slightly, but imports fell from a year ago, pointing to slowing momentum behind import demand.

In particular, iron ore and crude oil import volume slowed. Meanwhile, imports of copper ore continued, rising 43% YoY in July.

For exports, sales in US dollar terms to Australia and the US rose the most, at 10% and 9% MoM. Demand from Asia was soft. Exports to Thailand and Taiwan fell 2.0% and 1.5% MoM in July, respectively. By product in volume terms, exports of autos rose 15.9% MoM and 3.6% YoY in July, but external sales of data processing units and LCDs were soft.

For imports, general imports (a better reflection of domestic demand than total imports) continued to hold up better than processing imports (driven by demand for re-exports). General imports and processing imports rose 2.9% and 0.7% MoM, respectively, in July in US dollar terms. Meanwhile, entrepot imports, representing 12% of total imports, fell 10.0% MoM in July.

Capital outflows continue to stabilize amid wider trade surplus

Meanwhile, headline FX reserves dipped to US$3,201b in July, a US$4.1b decline from June. CCBIS estimates that adjusting for the valuation effect, FX reserves dropped at a faster rate of US$12.5b due to the appreciation of euro and Japanese yen assets.

However, in SDR terms, China FX reserves posted an increase of SDR6.9b, equivalent to US$9.8b. The difference might due to the different currency composition of China FX reserves.

“While the actual composition is not publicly available, we use the survey results from IMF COFER. China’s trade surplus recorded a six-month high of US$52.3b in July, contributing to the stabilization of China’s FX reserves,” explains the CCBIS.

Capital outflows appear to have accelerated in July, possibly reflecting retreating global capital flows in early July amid uncertainties occasioned by the Brexit vote. The CCBIS believes this effect will wane in the coming months as global central banks ease further or delay tightening measures. In recent weeks, the PBoC appears to have become more open to two-way fluctuation in the renminbi.

“We maintain our view that long-term renminbi fundamentals are supportive and we forecast modest appreciation in 2017. However, we see potential for more weakness before the end of 2016, especially as a Fed rate hike by year-end is still on the table,” says the CCBIS in its report.


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